Even when the partners change, an Limited Liability Partnership (LLP) keeps its authority and independence. This is due to the fact that, as their name implies, LLPs are recognized as separate legal entities, with supporting partners enjoying limited liability.
LLPs are a favored company structure because they offer limited liability benefits as an alternative to corporations while also giving their members the freedom to structure their internal administration according to a mutually agreed-upon agreement, like in a partnership firm.
Here's a closer look at all the information you require for transforming your private limited business into an LLP.
Governance and Benefits
The Limited Liability Partnership Act of 2008 governs limited liability partnerships. The main goal of this Act's creation was to support small and medium-sized businesses. In keeping with that objective, a limited liability partnership company has received a number of benefits:
- Greater opportunity for self-governance
- An LLP must conform to compliance requirements less strictly thanother entities.
- There is no maximum number of partners.
- The law does not specify a minimum number of partner meetings.
- For an LLP, convenient rules on keeping statutory records are set down.
- An LLP is not subject to MAT.
- An LLP's profits are exempt from the Dividend Distribution Tax (DDT)
- An LLP is not required to conduct the audit.
Eligibility for Conversion
Under the following circumstances, a private limited company or an unlisted public company may be changed into an LLP in accordance with the LLP Act:
- There is no security interest on its assets at the time of application
- There are no pending e-forms.
- There are no pending complaints against the business.
- The conversion has received the approval of all shareholders.
- The conversion has received approval from all of the company's creditors.
- The business must have submitted at least one annual return and balance sheet.
- All shareholders have consented to join the LLP as partners.
- The business must have equity.
- The business shouldn't fall under Section 25 or Section 8
Companies That Cannot Be Converted into an LLP
- All businesses operating in the banking, finance, and insurance industries
- Furthermore, any FDI-holding entities where performance-linked criteria apply
- All businesses that borrow money on the commercial market
- All those businesses that obtained FDI through the approval method
Documents Required for Conversion
- The agreement to transform the business into an LLP in the format required from each shareholder.
- Incorporation document
- Application and declaration of an LLP's incorporation
- A tax authority's certificate of no objection
- Statement of the Company's Assets and Liabilities
- A List of all creditors and a copy of their conversion approval
- If necessary, approval from any other nation
- A power of attorney to declare
Procedure for the Conversion of a Company Into an LLP
Step 1 – If they don't already have one, all designated partners must get a DIN.
The identification of the desired designated partners is the first stage in converting to an LLP. These approved partners must quickly acquire their own DINs. Additionally, they must apply for a DSC first because a DIN application must be processed with a digital signature.
Step 2 –Organize a Board of Directors meeting
The business must convene aboard of directors meeting and adopt a resolution authorizing the conversion of the business into an LLP. A resolution of this kind must also receive the necessary majority to pass. The MCA must then be informed of the board of directors' decision along with the required paperwork and applications.
Step 3 – Submit a request to reserve the LLP's name.
The Registrar of Companies must then provide a certificate of authorization and you must reserve a name for the LLP.
Step 4 – File the Incorporation Form (FiLLiP Form)
After the new name has been assigned and reserved, you must submit an application for the LLP's
- Incorporation, along with the following documents;
- Proof of the LLP's office's address
- Sheets of subscriptions
- The designated partners' agreement
- Proof of identity for each partner
- Proof of residency for each designated partner and partner
- Information about the various companies that the LLP's partners are partners in.
Step 5 – Submit a conversion request to become an LLP.
To change an existing company into an LLP, Form 18 must be properly completed and submitted. This form needs to be submitted along with the incorporation paperwork.
The following information must be included on Form 18.
- Consent from the company's shareholders to become an LLP
- Updated tax return for income
- Annual returns and most recent balance sheet as filed with the MCA
- Any judgement or court order in the company's favor or against
- Whether a security interest exists on the company's assets
- Moreover, if the prospective LLP's partners are its current shareholders
- Whether the ROC had previously rejected a conversion application
- Likewise, a list of secured creditors who have authorized conversion
- A set of the company's finances that have been audited by a independent auditor
- Company’s shareholder statement
Step 6 – Obtain the corporate certificate.
When all filing requirements have been satisfied, the ROC verifies the data submitted and, if all conditions are satisfied, issues a certificate of incorporation. The corporation is then transformed into an LLP.
Step 7– Draft the LLP agreement
The authorized partners must create an LLP agreement following incorporation, and it must include the following information:
- Name of the LLP
- List of all partners, including special partners
- The laws of government
- Proposed venture
- Partners' obligations and rights
- Contribution nature
- Ratio of profit-sharing
Step 8 – File E-Form-3 and E-Form-14
In the following phase, two forms, Form-3 and Form-14, must be submitted.
Information on the LLP Agreement can be found in E-Form-3. Within 30 days of your firm becoming an LLP, this form must be submitted along with the LLP agreement.
The Registrar of Companies must be notified using E-Form-14 when a company is changed into a limited liability partnership. Within 15 days of the conversion this form needs to be submitted. Last but not least, the following files must be sent with Form 14:
- Copy of Incorporation Certificate
- Copy of E-Form FiLLiP
Tax On the Transfer of a Limited Liability Firm Into an LLP
We will discuss the tax repercussions of changing a private limited to an LLP in this section. Since the transition from a private limited company to an LLP is not regarded as a "transfer" under the IT Act, capital gain tax is not frequently assessed.
The following requirements must be met for the conversion to be exempt from capital gains tax:
- Assets and liabilities of the company are transferred to those of the LLP.
- The LLP accepts all of the company's shareholders as partners.
- Additionally, the capital ratio, partners' ratio, and profit-sharing ratio are all in the same proportion as the company's shareholding.
- There are little direct or indirect benefits for the company's shareholders in the LLP, except from capital contributions and profit-sharing agreements.
- Moreover, in each of the three years previously to the conversion date, the gross revenues, turnover, and overall sales did not exceed Rs. 60 lakhs.
- The total asset value as recorded in the company's account book for each of the three years prior does not exceed Rs. 5 crores.
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