Conversion of LLP into Private Limited Company: A Detailed Guide
Converting a Limited Liability Partnership (LLP) into a Private Limited Company is a significant move for businesses aiming for growth, access to capital, and operational scalability. The initial attraction to an LLP stems from its simplified compliance and operational flexibility, especially for startups. However, converting to a Private Limited Company offers numerous advantages, such as easier fundraising and better governance.
Why Convert LLP to Private Limited Company?
While the conversion of LLP into a Private Limited Company offers several advantages, businesses typically begin as LLPs because of fewer compliance requirements and a simpler structure. This form is best suited for professional services like law, architecture, and consulting. However, once a business starts scaling, converting to a Private Limited Company becomes essential for several reasons:
- Fundraising Ease: Investors favor a Private Limited Company due to its structured framework, making it easier to attract funds.
- Ownership Flexibility: In an LLP, ownership changes require modifying the LLP agreement, whereas, in a Private Limited Company, shareholding adjustments are straightforward.
- Investor Confidence: Private Limited Companies are transparent, giving investors a higher degree of confidence compared to LLPs.
The conversion of LLP to Private Limited Company helps businesses align with investor expectations and improve corporate governance, enhancing their market value. Key Requirements for Conversion of LLP into Private Limited Company
Before initiating the conversion of LLP into Private Limited Company, it’s essential to ensure that the LLP meets the following legal requirements:
| Criteria | Description |
|---|---|
| Minimum Partners | The LLP must have at least two partners for conversion eligibility. |
| Unanimous Partner Consent | All partners must agree to convert LLP to Private Limited Company. |
| Compliance Status | The LLP must have filed all statutory returns and LLP agreement. |
| Name Continuity | The LLP’s name stays the same except for the “LLP” suffix replaced by “Private Limited.” |
| Capital Structure | The LLP’s contribution becomes the company’s share capital. |
The conversion of LLP into Private Limited Company is regulated under Section 366 of the Companies Act, 2013.Step-by-Step Process of Conversion
1. Obtain Partner Consent
Begin by securing approval from all partners in a meeting to authorize the conversion of LLP into Private Limited Company. Two partners are nominated to manage the paperwork and compliance requirements for the conversion process.
2. Newspaper Publication
Publish the intent to convert the LLP to a Private Limited Company in two newspapers—one in the local vernacular language and the other in English. The public announcement must be made at least 21 days before filing the form URC-1.
3. Obtain NOCs
Secure No Objection Certificates (NOCs) from the Registrar of Companies (ROC) and creditors. If there are no liabilities in the LLP, a statement signed by all partners confirming this is required.
4. File Name Reservation Application via RUN
Use the Reserve Unique Name (RUN) service on the Ministry of Corporate Affairs (MCA) website to reserve the LLP’s name, which will now carry the “Private Limited” suffix. This ensures brand continuity in the transition from LLP to a company.
5. Submit URC-1, MOA, AOA, and Spice+ Forms
File the necessary forms, including URC-1, the Memorandum of Association (MOA), the Articles of Association (AOA), and the Spice+ form, within 30 days of name approval. Once the forms are processed, the ROC will issue a Certificate of Incorporation for the newly formed Private Limited Company.
Documents Required for conversion of LLP into Private Limited Company
To ensure a smooth conversion of LLP into Private Limited Company, have the following documents ready:
| Document | Purpose |
|---|---|
| List of Partners and their details | Provides particulars of the partners involved. |
| LLP Agreement | Details the terms of the LLP before conversion. |
| Statement of Assets & Liabilities certified by CA | Financial records of the LLP, certified by a chartered accountant. |
| Income Tax Return of LLP | Verifies the financial status and compliance of the LLP. |
| NOCs from Creditors and ROC | Ensures there are no objections from stakeholders or regulatory bodies. |
| DIR-2 Forms | Consent forms from the directors of the proposed company. |
| Proof of Registered Office | Confirm the address of the company’s registered office. |
Benefits of Converting LLP to Private Limited Company
benefits to convert llp into private limited company
1. Retain and Grow Brand Value
Upon conversion of LLP into Private Limited Company, the brand value and reputation built by the LLP are retained. Intellectual Property Rights (IPR) and existing goodwill are seamlessly transferred to the newly formed company.
2. Carry Forward Losses and Depreciation
A significant benefit of converting from LLP to Private Limited Company is the ability to carry forward unabsorbed losses and depreciation under the Income Tax Act, minimizing tax liabilities for the newly converted entity.
3. Ease of Fundraising
Investors prefer investing in a Private Limited Company as it provides more flexibility for issuing shares and private placements. Additionally, the company’s details are easily verifiable via the MCA, making the conversion of LLP to Private Limited Company more attractive to potential investors.
4. ESOP Plans
Companies can offer Employee Stock Options (ESOPs) to retain talented employees. This feature is unavailable in LLPs but becomes an essential benefit upon conversion of LLP to Private Limited Company, especially for businesses in growth sectors like IT.
5. No Capital Gains Tax
No capital gains tax is levied when assets from the LLP are transferred to the newly converted company. This tax benefit reduces the cost of conversion and enhances the financial efficiency of the LLP to Private Limited conversion.
Legal Framework for Conversion
| Law or Form | Description |
|---|---|
| Section 366 of the Companies Act | Governs the process of converting an LLP to a Private Limited Company. |
| URC-2 Form | Newspaper advertisement format for announcing the conversion. |
| RUN (Reserve Unique Name) | For reserving the new company’s name. |
| Form URC-1 | Filed to apply for conversion from LLP to Private Limited Company. |
| Spice+ Form | Used for registering the new company with the ROC. |
| DIR-2 | Director consent forms are required for incorporation of the company. |
Checklist for Conversion
To complete the conversion of LLP into Private Limited Company, ensure the following steps are taken:
- Secure the consent of all partners.
- Publish the conversion intent in two newspapers.
- Obtain NOCs from the ROC and creditors.
- File for name reservation using the RUN service.
- Submit the required forms: URC-1, MOA, AOA, and Spice+.
For those looking to convert their Private Limited Company into an LLP, the steps are similar, requiring unanimous partner consent, NOCs, and legal compliance under the conversion of company into LLP guidelines.
Conclusion
The conversion of LLP into a Private Limited Company is a beneficial move for businesses looking to scale, attract investors, and formalize their operations. Although LLPs provide operational flexibility, they may become limiting as a business grows. The LLP to Private Limited conversion offers several advantages such as easier fundraising, enhanced brand credibility, and tax efficiency.
Whether you’re considering the conversion of LLP to Pvt Ltd or looking for a checklist for the conversion of private company to LLP, it’s crucial to understand the legal, financial, and operational implications. Connect with our experts to make the conversion from LLP to Private Limited Company hassle-free today!
Take the next step to elevate your business. Connect with our experts today to simplify the process of converting your LLP into a Private Limited Company!
