Conversion of LLP into a Private Limited Company: A Comprehensive Guide
Riteek Baheti
Associate Member, Institute of Company Secretaries of India (ICSI) LL.B.
Proprietor, Riteek Baheti & Associates
(Kolkata-based Practicing Firm)
Registered Valuer, Insolvency and Bankruptcy Board of India (IBBI)
(Security or Financial Assets Valuation Specialist)
In recent years, changes in taxation policies have made Private Limited Companies (Pvt Ltd) more tax-efficient compared to Limited Liability Partnerships (LLPs). With lower tax rates and restrictions on partner
remuneration under Section 40B of the Income Tax Act, many LLPs are opting to convert into Private Limited Companies. This blog provides a step-by-step guide to help LLPs navigate the conversion process smoothly.
Why Convert an LLP into a Private Limited Company?
Several factors make Private Limited Companies more attractive than LLPs, particularly in the current tax regime. Here are the primary reasons businesses are making the transition:
- Tax Benefits: Private Limited Companies enjoy lower tax rates compared to LLPs, making them a more profitable structure.
- Limited Remuneration for Partners: Section 40B imposes restrictions on partner remuneration in LLPs, whereas directors in a Private Limited Company can receive salaries, dividends, and other benefits.
- Easier Access to Funding: Private Limited Companies can raise capital through venture capitalists, private investors, and the stock market, whereas LLPs face limitations in attracting investments.
- Better Credibility: Private Limited Companies enjoy higher credibility in the market, making it easier to secure loans and business partnerships.
- Growth and Expansion: Unlike LLPs, a Private Limited Company has better prospects for growth, scalability, and long-term sustainability.
Step-by-Step Process for Converting an LLP into a Private Limited Company
Step 1: Obtain Consent from Partners
The first step in the conversion process is securing written consent from all designated partners and general partners of the LLP. This is a mandatory requirement because the business structure and its compliance obligations will change significantly.
Step 2: Apply for Name Reservation in SPICe+ (Part A)
Once partner consent is obtained, the next step is to reserve a name for the new Private Limited Company. This is done through the SPICe+ (Simplified Proforma for Incorporating Company Electronically) portal provided by the Ministry of Corporate Affairs (MCA). The name must be unique and comply with MCA naming guidelines.
Step 3: Publish a Public Advertisement
After receiving name approval, the LLP must publish an advertisement announcing its conversion in a widely circulated English newspaper and a vernacular language newspaper where the LLP is registered. This step ensures transparency and informs stakeholders about the change in business structure.
Step 4: Prepare Essential Documents
Before filing conversion application, the LLP must prepare the following documents:
- List of Directors and Shareholders: Details of individuals who will hold directorship and shareholding in the new Private Limited Company.
- Statement of Assets & Liabilities: This document, verified and signed by a Chartered Accountant (CA), provides a financial snapshot of the LLP before conversion.
- Consent from Creditors: Written approval from all creditors, ensuring they are aware of and have no objections to the conversion.
- Registered Office Proof: Documents such as lease agreements, utility bills, or ownership papers verifying the registered office address.
- Directors’ Consent (DIR-2 Form): Each proposed director must file this form to confirm their willingness to take on the role.
- Certificate of Compliance: Issued by a CA/CS/CWA, certifying that all provisions of the Companies Act, 2013, have been complied with.
Step 5: File the SPICe+ Form (Part B) and Other Required Forms
The LLP must now file the SPICe+ (Part B) form along with other necessary forms, which include:
- URC-1: Application for registration of an existing LLP as a Private Limited Company.
- INC-33 and INC-34: e-Memorandum of Association (MOA) and e-Articles of Association (AOA).
- AGILE Form: Application for GST, ESIC, and EPFO registration.
- INC-9: Declaration by subscribers and first directors of the company.
All documents should be signed and certified before submission to the Registrar of Companies (ROC).
Step 6: Approval and Issuance of Certificate of Incorporation
Once the Registrar of Companies (ROC) verifies and approves the application, a new Certificate of Incorporation will be issued. This indicates the official conversion of the LLP into a Private Limited Company, and the entity can now operate under the Companies Act, 2013.
Post-Conversion Compliance Requirements
After conversion, the newly formed Private Limited Company must adhere to the following regulatory requirements:
- Update Bank Accounts and Business Licenses: Notify banks and licensing authorities about the change in business structure.
- Update PAN and TAN: Apply for a new Permanent Account Number (PAN) and Tax Deduction and Collection Account Number (TAN) for the company.
- Issue Share Certificates: All shareholders must receive share certificates as per the company’s authorized capital.
- Maintain Statutory Records: The company must maintain books of accounts, statutory registers, minutes of meetings, and other compliance records.
- Filing of Annual Returns: As per the Companies Act, the Private Limited Company must file annual returns (MGT-7, AOC-4) and financial statements with the ROC.
Conclusion
Converting an LLP into a Private Limited Company offers numerous advantages, including tax benefits, easier funding, and enhanced market credibility. However, the process involves multiple legal and compliance steps, requiring careful execution. By following the outlined steps and complying with regulatory requirements, businesses can transition smoothly and unlock new growth opportunities under a more structured corporate framework.
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