Conversion of LLP to Pvt Ltd:
The Ministry of Corporate Affairs issued a notification on May 31, 2016, allowing Limited Liability Partnerships (LLPs) to convert into a company. While the Limited Liability Partnership Act of 2008 does not explicitly cover LLP to Pvt Ltd conversions, the Companies Act of 2013 and the Company (Authorized to Register) Rules of 2014 provide provisions for such conversions.
To facilitate growth, expansion, and infusion of equity capital, many LLPs are opting to convert into Private Limited Companies.
Conditions for converting an LLP into a Pvt Ltd company:
- LLP Agreement: An LLP must have at least two partners, and all partners must unanimously agree to the conversion.
- Advertisement: Publish advertisements in both a local newspaper and a national newspaper, in Form URC-2, in the local language of the LLP’s registered office.
- No Objection Certificate (NOC): Obtain a No Objection Certificate from the Registrar of Companies in the state where the LLP is registered.
Conversion of OPC to Pvt Ltd:
The conversion of an OPC (One Person Company) into a Private Limited Company is governed by Section 18 of the Companies Act, 2013, and the requirements specified in the Companies (Incorporation) Rules, 2014. The conversion does not affect the existing debts, liabilities, obligations, or contracts of the OPC.
The conversion of an OPC to Pvt Ltd can be voluntary or mandatory, and certain prerequisites must be met, including changes to the OPC’s Memorandum of Association (MOA) and Articles of Association (AOA) as per the provisions of the Companies Act, 2013, and Section 122 of the Act.
Voluntary Conversion:
- The OPC should have at least two directors and two members for conversion.
- Within sixty days, the OPC must notify the Registrar of Companies of its voluntary conversion using Form INC-5.
Mandatory Conversion:
- Mandatory conversion is required if the OPC’s paid-up share capital exceeds Rs. 50 lakhs and the annual turnover exceeds Rs. 2 crores in the previous three financial years.
- Within six months from the date the paid-up share capital exceeds Rs. 50 lakhs or the end of the relevant period in which the average annual turnover exceeds Rs. 2 crores, the OPC must convert into a private or public limited company.
- Conversion is done by passing a special resolution in a general meeting, which is subject to obtaining a written No Objection Certificate from the creditors and other members.
It is important to note that the specific procedures and requirements may vary based on the jurisdiction and applicable laws. It is advisable to consult with a professional for accurate guidance during the conversion process.
Advantages of Conversion of LLP to Pvt Ltd:
- Shareholder Structure: Pvt Ltd companies have a distinct advantage over LLPs as they allow for the existence of shareholders. This is beneficial for attracting Venture Capitalists and Private Equity Investors who prefer to have a shareholding in the company without direct involvement in its management.
- Foreign Direct Investment (FDI): Pvt Ltd companies have more flexibility in accepting Foreign Direct Investment compared to LLPs. The process and regulations for FDI are generally more streamlined and straightforward for companies.
- Employee Stock Option Plan (ESOP): Pvt Ltd companies have the ability to offer an Employee Stock Option Plan, allowing the company to grant shares to employees at a predetermined price over a specific period. This incentivizes and retains loyal employees by giving them a stake in the company’s ownership, which is not possible in LLPs.
- Recognized Entity: Pvt Ltd companies are the most widely recognized and accepted business entity in India. They enjoy a higher level of credibility and trust among stakeholders, including customers, suppliers, and financial institutions, which can be advantageous for business growth and opportunities.
Benefits of Conversion of OPC to Pvt Ltd:
- Easier Fundraising: Pvt Ltd companies have more options and ease in raising funds. They can issue shares and attract investments from various sources such as private equity firms, venture capitalists, and angel investors. This provides greater flexibility and access to capital for business expansion.
- Taxation Benefits: One Person Companies (OPCs) are not recognized as a separate entity for tax purposes under the Income Tax Act. They are taxed at the same rate as other businesses, which can be a disadvantage as it imposes a higher tax burden. Converting to a Pvt Ltd company can offer tax benefits and better tax planning opportunities.
It’s important to note that the advantages mentioned may vary based on individual circumstances and specific business requirements. Consulting with professionals such as legal advisors, accountants, and tax experts is recommended to understand the implications and benefits of conversion in detail.
Checklist/Requirements for Conversion of LLP:
- Partners’ Information: Provide names, addresses, and occupations of all partners involved in the LLP.
- LLP Agreement: Submit a copy of the LLP Agreement, which outlines the rights, duties, and obligations of the partners.
- Identity and Address Proof: Furnish identity proof (such as Aadhaar card, PAN card, etc.) and address proof (such as utility bills, passport, etc.) of all partners.
- Income Tax Return: Provide a copy of the LLP’s latest income tax return.
- No Objection Certificate (NOC): Obtain a No Objection Certificate from all secured creditors of the LLP.
- Consent of Partners: Gather written consent from the majority of partners for the conversion.
- Newspaper Advertisement: Publish a copy of the advertisement in a newspaper, as required by the relevant regulations.
Checklist/Requirements for Conversion of OPC:
- PAN Card: Provide PAN cards of shareholders and directors involved in the OPC.
- Identity Proof: Submit identity proofs (such as Voter ID, Passport, Driving License) of shareholders and directors.
- Audited Financial Statements: Provide a duly certified copy of the latest audited financial statements of the OPC.
- Certificate of Incorporation: Include a copy of the Certificate of Incorporation of the OPC.
- MoA & AoA: Submit the Memorandum of Association (MoA) and Articles of Association (AoA) of the OPC.
It’s important to note that the specific requirements and procedures may vary based on jurisdiction and applicable laws. Consulting with professionals is recommended to ensure compliance with the necessary checklist for a smooth conversion process.
Key Deliverables for Conversion of LLP:
- Incorporation certificate
- Updated MOA and AOA
- Share certificates (if applicable)
Key Deliverables for Conversion of OPC:
- Incorporation certificate
- Updated MOA and AOA
- Share certificates (if applicable)
What do you want to know?
- High set-up costs (legal and administrative)
- High Compliance
Since Stamp Duty is the subject reserved for the States, the LLP Act does not contain any provision for treatment of stamp duty issues. The stamp duty payable will depend upon the relevant Stamp Act prescribed by the State Government/Union Territory.
The company’s responsibilities, debts, or obligations will not be altered in any manner following the conversion. As a result, the firm is responsible for all of its prior commitments.
The One person Company cannot be converted directly into the Limited Liability Partnership Form. Because an OPC company has only 1 member. Likewise, in case of LLP registration it should have at least 2 persons who shall on conversion and they become partners of LLP.
OPC cannot be incorporated or converted into a section 8 company under the Act. 3. OPC cannot carry out Non-Banking Financial Investment activities including investment in securities of any body corporates.