Limited Liability Partnership has become a very popular business type after the introduction of Companies Act, 2013. It is also called an LLP. It is a kind of partnership in which the liabilities of the partners are limited. In this business type, LLP is a separate entity like a company. It is a combination of a partnership firm and a private limited company.
Advantages of Limited liability Partnership
Limited Liability Partnership Act, 2008 was introduced on April 1st, 2008 which governs the operations of Limited Liability Partnership. This act was primarily introduced for promoting small and medium sized organizations. Advantages of the LLP are as follows:
- Liability of the partners are limited: As the name suggests the liability of the partners in Limited Liability Partnership is limited. The main reason for conversion of partnership into an LLP is that liabilities of the partners become very limited. Partners do not face any issues, if they are unable to pay the debts. Unlike Partnership firms, in the case of Limited Liability Partnership; creditors have no rights to take or sell the personal assets of the partners for the repayment of their loans as it is in the name of the LLP.
- Easy transfer of Ownership: In this type of business, ownership can easily be transferred which attracts the individuals to go for the registration of Limited Liability Partnership. 3. Separate legal entity: Limited Liability Partnership is a type of business where the company is an independent and discrete legal entity, and this benefit is reaped by the partners of the company.
- Less Compliance: Limited Liability Partnership has very less amount of compliance in comparison to other types of business in terms of:
- For registration of a LLP, there is no criteria of minimal amount of the capital contribution required.
- The cost of forming a Limited Liability Partnership is very less.
- In Limited Liability Partnership, audit is only carried out when the capital contribution in the LLP is more than Rs. 25 lacs and turnover of the LLP is more than Rs. 40 lacs. D. Limited Liability Partnership can have any number of partners, there is no criteria on maximum numbers of the partners.
- It is not compulsory for an LLP to hold some minimal number of meetings.
- Minimum Alternate Tax (MAT) is not applicable in case of Limited Liability Partnership.
- There are no such stern regulations in LLP in terms of maintaining the statutory records. H. Profits earned and distributed by the Limited Liability Partnership are not subjected under Dividend Distribution Tax (DDT).
Eligibility for conversion of a Private limited company into a Limited Liability Partnership
- The company should not have any security interest in its assets while it is applying for conversion.
- All the shareholders of the company should only become the partners in Limited Liability Partnership and nothing else.
- There should not be any pending e-forms with the company while conversion. 4. Against the company there should not have any open charges.
- After the incorporation, the company should have filed its annual return and balance sheet for once at-least.
- The company should not fall under the category of “Section 25 or Section 8” company according to the Companies Act, 1956 or 2013.
Procedure of converting Private limited company into a Limited Liability Partnership
- Obtain Director Identification Number (DIN): The Limited Liability Partnership should have minimum 2 partners out of which 1 should be a citizen of India. A number that is called DIN is allotted to all the partners in the LLP at the time of incorporation of LLP. Hence, obtaining a DIN is considered as the first step in conversion of a private limited company into an LLP. Before applying for DIN, partners need to apply for Digital Signature Certificate (DSC) as it is required in the DIN application process.
- Hold the board meeting: Company must hold a board meeting for passing the resolution of converting private limited company into a Limited Liability Partnership. The resolution should be passed by the required majority and then the application should be filed at the Ministry of Corporate Affairs (MCA) portal or with the Registrar of Companies along with the required forms and documents.
- Application for reservation of name: Now the company must file an application for the confirmation of the name of the Limited Liability Partnership and approval certificate for the same must be taken from the Registrar of Companies (ROC).
- File Incorporation Form: After the confirmation of the name of the Limited Liability Partnership, then LLP must file for incorporation and the following documents should be attached with it:
- Proof of the registered office address
- Address proof and identification proof of all the partners and designated partners in the LLP.
- Consent should be submitted in the format given in the Rule 7 and Rule 10 (8) in Limited Liability Partnership Rules, 2009 to perform as a designated partner. D. Sheet of subscription.
- Details of all the LLPs or the companies where the designated partners/ partners act as a designated partners or directors or partners.
- File application for converting private limited company into Limited Liability Partnership: Along with the incorporation form, company needs to file Form 18 which is filled for converting company into an LLP. Following are the details and attachment required with the Form 18:
- Letter of Consent form the shareholders of the company for converting it into an LLP. B. Certified copy of declaration of Assets and liabilities of the company from the Auditor stating it as true and verified.
- Consent from all the listed secured creditors of the company for conversion. D. Newly filed income tax return acknowledgement copy.
- Acceptance from additional required officials or body.
- Court order if any, for or against the company.
- If any earlier rejected conversion application from the Registrar of the Companies. 6. Incorporation Certificate: If all the documents are correctly submitted and all the requirements are met as per the Act, then the ROC gives a certificate of Incorporation which means the company is now legally registered as Limited Liability Partnership. 7. Filing of Form 14: According to the Third Schedule of the Limited Liability Act, 2008, an application should be made within 15 days of conversion with the Registrar of the Companies informing about the same. Along with the form, Certificate of Incorporation copy, and E-Form FiLLiP copy needs to be submitted.
- Preparing the agreement of the Limited Liability Partnership and filing of Form 3: Once the incorporation certificate is received, the designated partner is required to prepare the LLP agreement which should have the following information:
- Name of the Limited Liability Partnership
- All the partners and designated partner’s name
- Governance rules
- Line of business
- Responsibility and authority of all the partners
- Form in which contribution is made.
- Ratio of profit sharing
Form 3: The form in which all the details are incorporated regarding the LLP agreement is the FORM 3. This form is supposed to be filed within 30 days of the date of conversion of a private limited company into an LLP along with the agreement.
Tax liability after conversion into a Limited Liability Partnership
It is very important to know the tax computation after the conversion. Capital gain tax is not attracted in this conversion as it is not considered as transfer in the Income Tax Act. According to the Section 47 (xiiib) of the Income Tax Act, 1961, converting a private limited company into an LLP does not lead to capital gain tax if the following conditions are satisfied:
- Company’s liabilities and assets should become the liabilities and assets of the LLP. 2. Each and every shareholder of the companies must be converted into the partners of the LLP.
- The capital contribution in the LLP and the profit-sharing ratio of the partners should be the same as it was in the company.
- Except the profit-sharing ratio and capital contribution, partners are not liable to receive any benefits from the LLP.
- The accumulated profit-sharing ratio of the original partners of the LLP who were earlier the shareholders of the company should be more than fifty percent for at least 5 years from the date of conversion.
- Overall sales, turnover and gross revenues of the company should be less than 60 lacs in the previous three years from the date of conversion.
- The total book value of the assets of the company should be less than 5crores in the previous 3 years from the date of conversion.
If the above criteria are not fulfilled, then following are the consequences:
- The shares which are converted into the capital attract the capital gain tax. 2. The amount of contribution is taken as the consideration received against the shares.
- Capital gain tax is calculated on the market value of the capital assets. 4. Other taxes which are applicable is also calculated based on the market value of the capital assets.
Charges paid for Conversion:
Following are the fees which are paid at the time of conversion:
- If the contribution in the LLP is less than or equal to Rs. 1 lac then Rs. 500 is charged. 2. If the contribution in the LLP is more than Rs. 1 lac but less than and equal to Rs. 5 lacs then Rs. 2000 is charged.
- If the contribution in the LLP is more than Rs. 5 lacs but less than and equal to Rs. 10 lacs then Rs. 4000 is charged.
- If the contribution in the LLP is more than Rs. 10 lacs then Rs. 5000 is charged. Consequences of Conversion:
- The private company was dissolved after the conversion.
- The Registrar of Companies removed the name of the private limited company from its register.
- After conversion, all the assets, liabilities, rights, properties, privileges, obligations, and interests of the private limited company are in the name of LLP.
- The conversion does not have any effect on the existing employee, contracts, obligations, liabilities, and contracts.
- Any active license or the permits given to the Private limited company from any authorities prior to the date of conversion is not automatically passed on to the Limited Liability Partnership. So, the LLP needs to apply again for fresh application for the licenses and permits from the respective authorities.