LLP to Private Limited Company
There are businesses in India that begin their journey as a Limited Liability Partnership (LLP) but now are keen on converting into a private limited company for more growth and prosperity in business.
The Limited Liability Partnership Act, 2008 has no provision related to the conversion of an LLP into a Private Limited Company, but Section 366 of the Companies Act, 2013 and Company (Authorised to Register) Rules, 2014 states that an LLP can be converted into a Private Limited Company.
LLP is good for small businesses with an annual sales turnover of fewer than Rs 40 lakhs and a capital contribution of fewer than Rs 25 lakhs. LLPs that satisfy these conditions do not have to go through an audit every year; on the other hand, a private limited company must conduct an audit of its financial statement each year. Though in case LLP has an annual turnover of Rs 40 lakhs or a capital contribution of more than 25 lakhs, the need for compliance becomes almost similar for both the private limited Company and LLP, making the owners of LLP think about converting into a Private Limited Company.
Reason for Conversion of an LLP into a Private Limited Company
The followings are the reasons for converting an LLP into a Private Limited Company:
- LLP converts into a private company for growth and to extend its existing business.
- LLP can attract only a few types of investors, so to attract more investors, such as foreign investors or equity investors, they go for conversion.
- The LLP is converting for issuing equity share capital in the private limited Company.
- One of the reasons for conversion is to avoid capital tax gain.
- To carry forward all the unabsorbed losses and depreciation of the last year.
- For continuing with the same brand name and goodwill of their LLP, the LLP decides to convert into a Company.
Pre-requisite conditions for the conversion of LLLP into a private company
The conditions to be fulfilled before moving forward towards the conversion of an LLP into a Private Limited Company are as follow:
- The Limited Liability Partnership must have at least two partners who are required for incorporation of a Private Limited company.
- All the partners should have approved the conversion of LLP.
- The LLP should have complied with all the required returns.
- Publication related to such conversion of LLP into a Private Company, in at least two newspapers, one in English Language and another in any regional language newspaper of the place of registered office.
- No Objection Certificate from the Registrar.
Benefits of Conversion of LLP into Private Limited Company
- Conversion of LLP into a Private Limited Company facilitates business entities to continue the brand name without making any further efforts on brand advertisements.
- In a Private Limited company there, 100% Foreign Direct Investment (FDI) is allowed; thus, any foreign investor (entity or person) can directly invest in the Company.
- After the conversion, no expenditure will be incurred on bookkeeping, as the losses and depreciation incurred in LLP will be carried forward on the conversion of the entity.
- Conversion of LLP to Private Company facilitates Companies to offer stock ownership and ESOP plans. Such plans help companies attract efficient employees, as it provides incentive plans for them to work in the Company.
- A Private Limited Company or Public Company can only raise funds from venture capitalists or angel investors, and if the company registration process is strict, it helps the company structure to be more credible, among others. This leads to easy fundraising from external sources.
- Conversion prohibits the liability of the owners only to the capital subscribed and unpaid by them.
- There is no capital gain tax in a private limited company.
- Existing LLP has just replaced y the Private Limited Company by adding the “Pvt. Ltd.” at the end of its name.