Limited Liability Partnership is a unique form of a legally recognized corporate entity, a partnership in which all partners (depending on the jurisdiction) have limited liabilities. It, therefore, can exhibit elements of partnerships and corporations. In an LLP, each partner is not responsible or liable for another partner’s misconduct or negligence. It is more flexible to organize the internal structure of a Limited Liability Partnership (LLP).
There are various reasons for a Company to convert itself into a LLP. Majorly, the complex compliance formalities and tax overheads are forcing Company’s to get converted into LLP’s. Some of the common reasons for conversion are that the tax rate on LLP’s is much lower than that of Companies. Audit is not required unless the capital and turnover exceeds certain threshold limits. No requirement for payment of Dividend Distribution Tax and Minimal Compliance Level & Cost effective model
Checkpoints which the Company needs to ensure prior and post to its conversion into Limited Liability Partnership (LLP):
A) Checklist before conversion:
To check and ensure that:
- the closure of books of accounts, convening of Annual General Meeting and completion of Annual Filings are done for the concerned financial year.
- there are no long term borrowings as per the latest audited financials.
- all secured loans are cleared or obtain No Objection Certificate (NOC) from the respective bank/financial institution.
- there is no share application money pending allotment which has to be converted into share capital.
- the approval/clearance/license for the conversion from the concerned authority is taken, if applicable.
- the consent of the shareholders of the company is taken and transfer formalities are done.
- the status of assets and liabilities of the Company before they become the assets and liabilities of LLP.
- the authorized and paid-up capital of the Company.
B) Checklist after conversion:
To check and ensure that :
- all shareholders of the existing Company shall become partners of LLP and their capital contribution and profit sharing ratio in the LLP are in the same proportion as their shareholding in the company on the date of conversion.
- post-conversion of Company into LLP, the shareholders of the company do not receive any consideration or benefit, directly or indirectly in any form or manner, other than by way of share in the profit and capital.
- the aggregate of the profit-sharing ratio of the shareholders of the company in the LLP shall not be less than 50 % at any time during 5 years from the date of conversion.
- the total turnover or gross receipts in the business of the Company in any of the three previous years preceding the previous year in which the conversion takes place does not exceed Rs.60 Lakhs.
- the accumulated profits standing on the date of conversion shall not be paid or distributed directly or indirectly to the partners for a period of 3 years from the date of conversion.
- the total value of the assets as appearing in the books of account of the Company in any of the three previous years preceding the previous year in which the conversion takes place does not exceed Rs.5.00 Crore
Procedure for Conversion of an Unlisted Public Company into Limited Liability Partnership (LLP):
A. Obtain Designated Partner Identification Number (DPIN) for all the proposed Designated Partners:
Apply for the Designated Partner Identification Number (DPIN) for all the proposed Designated Partner/s and ensure that their DPIN/DIN is not disqualified.
The requirements for DPIN/DIN application are a) self-attested pan card and b) self-attested address proof, these proofs shall be attached to the DIN Form DIR-3 after the attestation by a Professional.
Note: DIN of the directors who are also shareholders of the company would already be there and they can be appointed as Designated Partners. However, if any shareholder of that company wants to be the Partner in LLP, then he needs to apply for DPIN mandatorily.
B. Forms along with their attachments which are to be filed for the conversion of Unlisted Public Company to Limited Liability Partnership Firm:
—RUN Form: For reserving the required name of proposed Limited Liability Partnership (LLP)
Attachments: Board resolution assenting for the conversion of Company into LLP.
–Form 18: Application and Statement for conversion of a private company/ unlisted public company into limited liability partnership (LLP)
- Statement of shareholders – Consent from all the existing shareholders for conversion
- Statement of Assets and Liabilities of the Company duly certified as true and fair by the Statutory Auditor.
- Copy of Latest acknowledgment of income tax return.
- List of the entire secured creditors along with their consent to the conversion.
— Form FiLLiP: Form for Incorporation of Limited Liability Partnership
- Proof of address of registered office of LLP not older than 2 months.
- NOC from the Owner of Premises to use the premises as registered office address proof
- Subscribers Sheet including consent to act as designated partners.
- Interest in other entity – Detail of LLP(s) and/ or company(s) in which partner/ designated partner is a director/ partner.
- Copy of Board Resolution of the existing company or consent of existing LLP as a proof of no objection.
- Approval of the owner of the trademark or the applicant of such application for registration of Trademark;
- Copy of approval from the competent authority in case of collaboration and connection with the foreign country or place
- Copy of approval in case the proposed name contains any word(s) or expression(s) which requires approval from the central government.
—Grant of Certificate of Incorporation: Upon being satisfied by the submitted documents the Registrar of Companies shall grant Certificate of Incorporation.
—Conversion of Company into LLP: After obtaining the certificate of Incorporation, the LLP needs to file Form 3(information with regard to LLP Agreement and changes if and made therein) within 30 days of incorporation of LLP.
LLP has to mandatorily get its books of account audited, if the total turnover is above Rs. 40 Lakhs or contribution is more than Rs. 25 Lakhs and has to file two annual forms a) Form 8 (Statement of Solvency) and b) Form 11(Annual Return).
The LLP Agreement should cover all the aspects like contribution, responsibilities, operation of accounts, etc and the said contribution of LLP should be the same as that of the paid-up share capital of the Company before conversion.
Mandatory compliances that need to be taken care of post-conversion of an unlisted public company to a Limited Liability Partnership (LLP).
i) The LLP so converted from private company/ public company should ensure that for a period of twelve months commencing not later than 14 days from the date of registration, every official correspondence of the LLP bears
–a statement that as from the date of registration it was converted into an LLP and the name
–name and registration number of the company from which it was converted into LLP.
ii) All the invoices, official correspondence and publications of the LLP should bear:
– the name,
– address of its registered office,
– registration number and
– a statement that it is registered with limited liability
iii) Intimations to the authorities’ viz., banks, customers and changes to be effected on TAN, PAN, etc.
Conclusion: Post conversion of the company into LLP it derives the general benefits as stated below:
- The compliance cost is relatively less.
- The audit is necessary only if turnover and contribution exceeds Rs. 40 lacs and Rs. 25 lacs respectively.
- The partners can distribute the profits among themselves without attracting any further taxation i.e. Dividend Distribution Tax.
- Various stringent provisions that prohibit the Company to take loans from individual or give loans to the respective Director are not there in case of LLP.
- There are no restrictions on related party transactions in the case of LLP.
- On the conversion of an unlisted public limited company into LLP, all assets and liabilities of the company will convert into those of the LLP. However, there is no instance of transfer of instrument which is required. Therefore there will not be any stamp duty implications on such transfers.
- There is no limit on the number of partners.
- There is no compulsion on holding a minimum number of meetings and maintaining statutory records.
As per the above listed out instances, a Limited Liability Partnership is a more convenient form of business organization over a company structure from compliance and taxation point of view. So, it may be more suitable for small entrepreneurs and professionals particularly. The conversion from an existing company can be made to an LLP while retaining the advantages of Limited Liability and a few compliances to adhere to.
The entire contents of this document have been developed based on relevant information and are purely for private circulation. Though the authors have made utmost efforts to provide authentic information, however, the authors expressly disclaim all and any liability to any person who has read this document, or otherwise, in respect of anything, and consequences of anything done or omitted to be done by any such person in reliance upon the contents of this document.