Step-by-Step Process for Converting a Private Company into an LLP

Conditions for Conversion

To convert a private company into a Limited Liability Partnership (LLP), the following conditions must be fulfilled:

1. No Active Security Interest:

   • At the time of application, there should be no active security interest on the company’s assets.

2. Shareholders as Partners:

   • Only the shareholders of the converting company should become partners in the LLP.

3. Pending Forms:

   • There should be no pending e-Forms for payment or processing.

4. Annual Filings:

   • At least one financial statement (AOC-4) and one Annual Return (MGT-7/7A) must be filed by the company.

5. Non-Section 8 Company:

   • The company should not be registered as a Section 8 Company.

6. Share Capital Requirement:

   • The company must have share capital.

Steps to Convert the Company into an LLP

Step 1: Pass Board Resolution

• A Board Resolution must be passed to reserve the name of the LLP.

Step 2: Reserve LLP Name

• File the RUN LLP form to reserve the name of the LLP.

• Attach the following documents: a. Signed application for conversion by authorized directors. b. Consent of all shareholders for conversion. c. Board resolution for conversion.

Step 3: File Conversion Form

• After the name is reserved, file the following forms:

  1. e-Form 18 (conversion form) along with

  2. FiLLiP (incorporation form) and

  3. e-Form 9 (consent of Designated Partners).

• The FiLLiP form is filled in the same manner as for incorporating a new LLP.

Step 4: Attachments in e-Form 18

• Provide the following attachments:

  1. Statement of Assets & Liabilities certified by an auditor (not older than 15 days).

  2. Auditor’s certificate stating no secured creditors exist.

  3. Auditor’s certificate confirming the company does not engage in NBFC activities.

  4. Auditor’s certificate certifying accurate shareholding details.

  5. List of secured creditors with their consent or an affidavit if no secured creditors exist.

  6. Approval from any specific regulatory authority, if applicable.

  7. Latest income tax return.

  8. Declaration from shareholders confirming no secured creditors exist.

  9. NOC from shareholders for conversion.

  10. Statement of Part B for all shareholders.

  11. Additional documents, such as:

      • Most recent Annual Return.

      • Latest audit report.

      • ADT-1 form for the appointment of the statutory auditor.

      • Board or Ordinary Resolution for appointing the auditor.

Step 5: Certificate of Conversion

• Upon successful filing, the Registrar of Companies (ROC) will issue a Certificate of Conversion in Form 19.

Step 6: File LLP Agreement

• File the initial LLP Agreement in Form 3 within 30 days of the conversion.

Exemption from Capital Gains Tax under Section 47

Section 47(xiiib) of the Income Tax Act provides an exemption from capital gains tax on the conversion, subject to the following conditions:

1. Transfer of Assets and Liabilities:

   • All assets and liabilities of the company before conversion must become the assets and liabilities of the LLP.

2. Shareholders as Partners:

   • All shareholders of the company must become partners in the LLP with the same profit-sharing ratio as their shareholding on the conversion date.

3. No Other Consideration:

   • Shareholders should not receive any consideration other than profit share and capital contribution in the LLP.

4. Profit-Sharing Ratio:

   • Shareholders’ aggregate profit-sharing ratio in the LLP must not fall below 50% at any time during the first five years after conversion.

5. Turnover Limit:

   • The company’s sales, turnover, or gross receipts must not exceed INR 60 lakhs in any of the three financial years preceding the conversion.

6. Asset Value Limit:

   • The total asset value in the company’s books must not exceed INR 5 crores in any of the three financial years preceding the conversion.

7. Accumulated Profits:

   • No amount should be paid to any partner from the accumulated profits of the company for three years after the conversion date.

Conclusion 

By adhering to the above conditions and steps, the conversion process ensures compliance with regulatory requirements and provides tax exemptions under the Income Tax Act. This structured approach facilitates a smooth transition from a Private Company to an LLP.

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Article Compiled by:-

~Neel Lakhtariya

(LegalMantra.net Team)