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Conversion of LLP to Private Limited Company - IndiaFilings Last updated: November 30th, 2024 1:10 PM

Conversion of LLP to Private Limited Company 

Many businesses in India that started as Limited Liability Partnerships (LLPs) are now opting for the conversion of LLP to a Private Limited Company to leverage enhanced growth opportunities, access to equity capital, and improved market credibility. Governed by Section 366 of the Companies Act, 2013, and the Companies (Authorised to Register) Rules, 2014, the conversion of LLP to a Private Limited Company requires satisfying specific conditions. These include having at least seven partners, unanimous approval from all partners, publishing notices in local and national newspapers, and obtaining a No Objection Certificate (NOC) from the Registrar of Companies (RoC). Though the process may seem complex, IndiaFilings simplifies every step, ensuring a hassle-free transition so you can focus on growing your business.

What is an LLP?

A Limited Liability Partnership (LLP) is a corporate business structure introduced in 2008 that blends the benefits of traditional partnerships and companies. LLPs offer limited liability to partners, perpetual succession, reduced compliance costs, and the status of a separate legal entity. However, LLPs come with certain limitations, making the conversion of LLP to a Private Limited Company a desirable option for many businesses.

Challenges of LLPs:

  • Higher tax rate: LLPs attract a flat tax rate of 30%, compared to the 22%-25% corporate tax rate for companies.
  • Limited investment opportunities: LLPs cannot issue shares, making them less attractive to private equity investors and venture capitalists.
Recognising these limitations, businesses often opt to convert LLP to a Private Limited Company, enabling enhanced investment and growth opportunities while retaining their existing goodwill.

Legal Framework for the Conversion of LLP to Private Limited Company  

The conversion of LLP to a Private Limited Company is regulated by Section 366 of the Companies Act, 2013, and the Company (Authorised to Register) Rules, 2014. To ensure a successful transition, the LLP must meet specific eligibility criteria, follow a structured conversion process, and adhere to all legal provisions and obligations. Below, we outline the essential requirements and steps to help you navigate the process effectively.

Benefits of conversion of LLP to Private Limited Company 

Converting an LLP into a Private Limited Company offers several strategic advantages, including:
  • Facilitated Growth: Supports business growth and expansion by adopting a structure better suited for scaling operations.
  • Convenient Capital Raising: Private Limited Companies can easily attract investments through equity or debentures, allowing investors to become business partners.
  • Flexible Share Issuance: Enables the issuance of equity shares to raise capital at any time and allows for Employee Stock Option Plans (ESOPs) as bonuses.
  • Lower Taxation: Enjoys a reduced income tax rate of 22%-25%, compared to the 30% flat tax rate for LLPs.
  • Tax Benefits: Conversion is exempt from capital gains tax and allows carryforward of unabsorbed depreciation and losses.
  • Potential for Public Listing: Provides flexibility to transition into a public limited company, enabling larger capital-raising opportunities and expanded operations.
  • Preservation of Goodwill: Retains the established brand name and goodwill of the LLP, ensuring continuity and market recognition.
  • Enhanced Foreign Investments: Fewer regulatory hurdles make Private Limited Companies more appealing to foreign investors.

Eligibility Criteria for Conversion of LLP to Private Limited Company

To qualify for this conversion, the LLP must meet the following criteria:

Minimum Partners

The LLP must have at least two partners to initiate the conversion. After conversion, the Private Limited Company must have:
  • A minimum of two shareholders.
  • At least two directors, with one being a resident of India, as per the requirements of the Companies Act 2013.
Unanimous approval from all partners is necessary to proceed with the conversion process.

No Unresolved Liabilities

The LLP must not have any outstanding unsecured debts.
  • If debts exist, written consent from creditors is mandatory before conversion.
  • The LLP’s financial records must comply with statutory audit requirements to avoid complications during the process.

Approval of Name

  • The proposed name for the Private Limited Company must be reserved and approved by the Registrar of Companies (RoC).
  • Name reservation is a prerequisite and must align with the naming conventions under the Companies Act 2013.

Compliance with Financial Reporting

The LLP must submit its latest audited financial statements, ensuring they are:
  • Prepared in accordance with statutory requirements.
  •  No older than six days from the date of submission to the RoC.

Key Legal Provisions for Conversion of LLP to Private Limited Company

Below are the key legal provisions and obligations that must be adhered to for a smooth and compliant Conversion of LLP to a Private Limited Company:

Vesting of Property upon Registration

As per Section 368 of the Companies Act, all properties, whether movable, immovable, or actionable claims, belonging to the LLP at the time of registration automatically vest in the new Private Limited Company upon conversion.  

Retention of Existing Liabilities

The conversion does not absolve the LLP of its pre-existing liabilities. According to Section 369 of the Companies Act, the rights and liabilities related to debts, obligations, or contracts entered into before registration remain unchanged and binding on the converted Private Limited Company.

Continuation of Pending Legal Proceedings

Any legal proceedings, suits, or actions involving the LLP at the time of its registration are allowed to continue as if the registration has not occurred. Under Section 370 of the Companies Act, this provision ensures no disruption in the legal process during or after the conversion.

Name Approval for the New Company

The LLP must obtain approval for its proposed name from the Registrar of Companies (RoC). This is done by submitting the necessary e-Form, ensuring the new company's name complies with the Companies Act’s naming conventions.

Obligations of the LLP Before Registration as a Private Company

  • Consent from Secured Creditors: Before registration, the LLP must ensure that all its secured creditors have either:
    • Provided their consent to the conversion.
    • Issued a No Objection Certificate (NOC) for the registration.
  • Advertisements for Public Objections: The LLP is required to publish an advertisement about its intent to convert into a Private Limited Company, inviting objections (if any) within 21 clear days from the notice’s publication date. The advertisement must:
    •  Be published in Form No. URC-2.
    • Appear in a local newspaper (vernacular language) and an English newspaper circulating in the district where the LLP is located.
  • Submission of Notice Copies: A copy of the published advertisement and the notice served to the Registrar of LLP must be attached to Form No. URC-1, along with proof of service. This documentation is essential for the conversion process.

Details & Documents Required for Conversion of LLP to Private Limited

An LLP seeking conversion must attach Form No. URC-1 with the required documents, categorised as follows:

For Registration as a Company Limited by Shares

List of Partners and Shares:
  • Names, addresses, and occupations of all partners.
  • Details of shares held by each partner, distinguishing between:
    • Shares allotted for cash consideration.
    • Shares allotted for non-cash consideration, along with the source of consideration.
    • Share numbers, if applicable.
This list must reflect the partners’ status within six clear days before the application date. List of First Directors:
  • Names, addresses, DINs, passport numbers (if applicable), and expiry dates.
  • Residential addresses and any existing interests in other firms or corporate bodies.
  • Consent to act as directors.
No Objection Certificate (NOC) Obtained from secured creditors and charge holders, if any. Latest Income Tax Return A copy of the most recent income tax return filed by the LLP.

For Registration as a Company Limited by Guarantee

List of Partners: Names, addresses, and occupations of all partners within six clear days of the application date, along with proof of membership.
  • List of First Directors: Names, addresses, DINs, passport numbers (if applicable), expiry dates, and residential addresses. Their consent to act as directors.
  • Resolution for Guarantee Amount: A resolution declaring the amount of the guarantee.
  • No Objection Certificate (NOC): Secured creditors' and charge holders' consent.
  • Latest Income Tax Return: A copy of the LLP's most recent income tax return.

Verification of Documents

The list of members, directors, and any additional particulars relating to the company must be:
  • Duly verified through a declaration signed by at least two proposed directors.
  • This ensures authenticity and compliance with regulatory requirements.

Key Points to Note

  • The required documents must align with the nature of the new company's structure—either limited by shares or limited by guarantee.
  • Form No. URC-1 serves as the central submission form for the conversion process, accompanied by the appropriate annexures.

Additional Obligations for LLP Seeking Registration as Private Company

In accordance with clause (d) of Section 374 of the Companies Act, 2013, an LLP converting into a Private Limited Company must comply with the following obligations and provide necessary documentation: Statement of Accounts:
  • A detailed statement of accounts must be prepared no later than 15 days before the date of applying for registration.
  • This statement should be certified by an auditor and accompanied by the audited financial statements of the previous year, where applicable.
The documents must be submitted along with Form No. URC-1. Declaration of Compliance:
  • The LLP must provide a declaration confirming that all documents required to be filed under the Limited Liability Partnership Act, 2008, have been duly filed with the Registrar (LLP).
  • This declaration should also be attached to Form No. URC-1.
Statement of Pending Legal Proceedings:
  • A statement detailing any ongoing proceedings by or against the LLP in any court or other authority must be included.
  • This statement is also to be attached to Form No. URC-1.
These obligations ensure that the LLP has met all compliance requirements under the LLP Act and that the transition to a Private Limited Company adheres to legal and financial transparency standards.

Process for Conversion of LLP into Private Limited Company

Converting a Limited Liability Partnership (LLP) into a Private Limited Company involves a structured process governed by Section 366 of the Companies Act, 2013, and the Company (Authorised to Register) Rules, 2014. Below is a step-by-step guide to ensure a seamless conversion:

Obtain Name Approval

Submit the Reserve Unique Name (RUN) form to the Registrar of Companies (RoC) to secure the proposed name for the Private Limited Company. Ensure the name complies with naming guidelines under the Companies Act, 2013. The approved name remains valid for 60 days.

Obtain DSC and DIN

  • Apply for a DSC for each proposed director of the Private Limited Company.
  • File Form DIR-3 on the MCA portal to obtain DINs for the directors if they do not already possess one.

Publish Public Notice

Publish a notice of the LLP's intention to convert into a Private Limited Company in Form No. URC-2. The notice must appear in the following:
  • A local newspaper in a vernacular language.
  • An English newspaper is circulating in the LLP's district.
  • Allow for 21 days to receive objections, if any, from the public

File Form URC-1

Submit Form URC-1 to the RoC along with the required documents (as detailed in the section above).

Draft and File MoA and AoA

Prepare the MoA and AoA, which outline the company’s objectives and operational framework. Submit these documents to the RoC for approval, ensuring they align with the approved company name and structure.

Address Objections

The RoC will review the application and objections received during the 30-day notice period. Ensure all objections are resolved to the satisfaction of the RoC before proceeding further.

Issuance of Certificate of Incorporation

Upon compliance with all legal requirements and payment of prescribed fees, the RoC issues a Certificate of Incorporation (Form INC-11). The LLP is officially dissolved under the Limited Liability Partnership Act of 2008, and the new Private Limited Company is deemed incorporated.

Dissolution of LLP upon Registration as Private Limited Company

As per Section 374 of the Companies Act and Rule 4 of the Companies (Authorised to Register) Rules, 2014, upon successful registration as a Private Limited Company, The LLP is deemed dissolved under the Limited Liability Partnership Act, 2008. No further act or deed is required to formalise the dissolution.

Conclusion

The conversion of LLP to a Private Limited Company is a strategic move for businesses aiming for growth, investment opportunities, and market credibility. While the process involves multiple legal and procedural steps, including obtaining approvals, filing forms, and meeting compliance requirements, it ultimately opens doors to enhanced growth opportunities, tax advantages, and greater market credibility.

Ready to Convert Your LLP to a Private Limited Company?

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