In India's constantly evolving business environment, entrepreneurs are evaluating what is likely the best structure to support their business. Many businesses begin with a Limited Liability Partnership or LLP because of its simplicity, its cost-effectiveness, and more limited fiddling equity or requirements to comply with the multiple compliance obligations. However, as the business grows and the owners and/or partners want to grow their business, some owners will convert their Limited Liability Partnership to a limited liability company (commonly referred to as a Private Limited Company) under the Companies Act, 2013, to provide themselves capacity to expand, raise funds, and build their brand. But the big question is whether a LLP can be converted to a Limited Liability Company without legal hassle. Let's take a look at what is required.
Understanding the Two Structures: LLP vs. Limited Liability Company
Before diving into the conversion process, it’s essential to understand the key differences between an LLP and a Limited Liability Company (LLC).
Aspect
Limited Liability Partnership (LLP)
Limited Liability Company (LLC / Private Limited Company)
Legal Framework
Governed by the LLP Act, 2008
Governed by the Companies Act, 2013
Ownership
Partners own and manage
Shareholders own; directors manage
Liability
Limited to agreed contribution
Limited to the extent of shareholding
Compliance
Less compliance burden
More compliance and reporting requirements
Fundraising
Difficult, as LLPs can’t issue shares
Easier, as shares can be issued to investors
Perception
Suitable for small/medium firms
Ideal for startups and growing enterprises
As businesses scale, the LLP model might feel restrictive particularly for those planning to raise venture capital or expand internationally. This is where the conversion of LLP to Limited Liability Company becomes relevant.
Is Conversion of LLP to Limited Liability Company Allowed in India?
The brief answer is yes a LLP can be converted to a Limited Liability Company (private limited company) in India. However, neither the Companies Act of 2013 nor the LLP Act of 2008 provides a direct conversion provision into a Limited Liability Company. The business will have to follow the provisions of Section 366 of the Companies Act of 2013, which deals with the conversion of existing entities (LLPs, partnerships, cooperative societies) into a company. It is perfectly legal but must be followed up complying with all proper processing and documentation. If proper procedures are ignored, it could lead to problems or lost time with the Registrar of Companies (ROC) and legally.
Why Businesses Choose to Convert LLP to a Limited Liability Company
Transitioning from a limited liability partnership to a limited liability company can bring several strategic and operational benefits:
1.Ease of Raising Capital
Private limited companies are attractive to investors and venture capitalists because they can easily offer equity shares and ownership can be tracked through shareholding patterns.
2. Increased Credibility
In the market, limited liability companies have more credibility and are more likely to attract clients, investors and strategic partners due to the fact that the governance structure is more transparent.
3. Better Opportunities for Growth
A corporate structure provides opportunities for expansion outside of the states or nationally, which is optimal for startups looking to scale quickly.
4. Separation of Legal Identity
Limited liability companies, like limited liability partnerships, offer a separate legal identity, but limited liability companies also offer perpetual succession, allowed for easier transfer of ownership and typically more regulatory recognition.
5. Tax and Compliance Benefits
While compliance requirements are higher for corporations, companies may take advantage of different tax planning, funders terms of capital, and government schemes that are beyond just an LLP.
Legal Requirements for Conversion of LLP into an LLC
In India, to change an LLP into an LLC without any legal complications, the following factors must be fulfilled:
1.Minimum Number of Members
There must be a minimum of two members after conversion for the company, as per the Companies Act, 2013.
2. Partners’ Consent
All may partner on the LLP must give consent to the conversion and become shareholders of the new company.
3. No Pending Litigation or Liabilities
The LLP must not have any pending litigation case or have any accrued liability, or dues to creditors to be paid back. If there is, it must be paid prior to conversion.
4. Evidence of Registered Office
Valid evidence of the company’s registered office (ownership/ lease documents, utility bills, and NOC from the owner) of the registered office is required.
5. Name Approval
Proposed company name must include ’Private Limited’ and must be approved on the MCA portal using the RUN (Reserve Unique Name) application.
Eligibility Criteria for Conversion of LLP to a Limited Liability Company
Your LLP will need to meet certain requirements in accordance with the Ministry of Corporate Affairs (MCA) before converting:
1. The LLP shall have two or more designated partners who, upon the conversion, will be designated as the first directors of the new company.
2. All the partners to the LLP must agree to the conversion.
3. The limited liability partnership shall be up to date on its annual filings with the Registrar of LLP.
4. The proposed name of the company shall not conflict with other entities.
5. All the assets and liabilities of the LLP will be transferred to the new company.
After your LLP meets all the requirements above, you may begin to process of Conversion of LLP into LLC.
Step-by-Step Procedure for Conversion of LLP to Limited Liability Company
Here’s a clear breakdown of the convert LLP to Limited Liability Company process under Indian law:
Step 1: Obtain Name Approval
Submit an application to the Ministry of Corporate Affairs (MCA) through the RUN Service for name approval.
Step 2: Draft Necessary Documents
Prepare all key documents required for the conversion:
Step 3: File Application for Conversion
Once documents are ready, file an application under Section 366 of the Companies Act, 2013, along with prescribed forms:
Step 4: Obtain Digital Signatures (DSC) and DIN
All proposed directors must obtain:
Step 5: ROC Verification and Approval
The Registrar of Companies (ROC) will review your documents. If satisfied, the ROC issues a Certificate of Incorporation, officially recognizing the entity as a Limited Liability Company.
Step 6: Intimate the Registrar of LLP
Once incorporated, inform the Registrar of LLP about the conversion to ensure records are updated.
Legal Issues That May Arise During Conversion
Converting an LLP into a Limited Liability Company (“LLC”) is an option; however, certain legal challenges can occur if conversion processes do not follow compliance requirements:
1.Pending Returns and/or Tax Liability
Any unfiled annual return or unpaid tax liability will result in either delaying or rejecting the conversion process.
2. Incomplete or Incorrect Documents
Missing signatures, missing partner approval, or outdated asset statements can create legal issues.
3. Creditors' Objection
Creditors can raise objections if they have not been informed of the conversion or provided a NOC from them.
4. MCA requirements
Not using MCA prescribed uniforms and time frames could result in penalties and an application being rejected.
To mitigate these matters, we highly recommend consulting with a legal or compliance service provider who specializes in LLP to Limited Liability Company conversion.
Post-Conversion Compliance Requirements
After the conversion has been finalized, several post-conversion requirements will need to be met by the new company:
• Register its new PAN and TAN in the name of the company.
• Change its business licenses, GST registrations, bank accounts, agreements, etc. to reflect its new company name.
• File its commencement of business form of INC-20A with the MCA.
• Notify all stakeholders, clients, and vendors of its change in legal structure.
• Keeps statutory registers, minute books, and board resolutions from day one.
Advantages of Converting an LLP into a Limited Liability Company
The key advantages your business will experience following the conversion are as follows:
1. Better Brand Perception – Clients and investors tend to think of private limited companies as more stable and organized.
2. More Frequent Access to Equity Funding – It will be simpler to attract investment and venture funding.
3. Improved Governance Structure – A board of directors is charged with governance, which provides for an additional level of accountability.
4. Limited Liability & Long-Lasting Entity – You retain the advantages of limited liability and long-lasting existence from an LLP, with increased corporate flexibility.
5. Eligible for Startup India and MSME Benefits – Private limited companies are eligible for different government programs.
Benefits of Converting an LLP to a Limited Liability Company
Here’s how conversion can transform your business growth trajectory:
Benefits
Description
Separate Legal Entity
The company gains independent legal status, distinct from its owners.
Limited Liability Protection
Shareholders’ liability is limited to the extent of their shares.
Access to Equity Funding
Easier to attract investors and issue shares.
Improved Corporate Image
Enhances credibility and visibility among clients and investors.
Perpetual Succession
The company’s existence is not affected by changes in ownership or management.
Legal Considerations During Conversion
When making the transition from LLP to LLC in India, you want to be diligent with compliance. Here are some of the important areas of concern:
1.Tax Considerations
The transfer of assets from the LLP to the company should ideally be executed at book value to avoid a capital gains tax. You may want to consult a tax professional to ensure the conversion does not create liabilities you did not intend.
2. Contracts
All contracts, leases, and business agreements that were made under the LLP should all be considered. You will want to receive written consent from your stakeholders, clients or vendors, when necessary.
3. Employees
The LLP will want to transfer its employees to the new company and keep them under the same terms, and conditions of employment.
4. Intellectual Property
If the LLP owns any trademarks, copyrights or patents, those will need to be assigned to the company using a legal transfer of ownership.
5. Regulatory Approvals
If your business is in a regulated industry (such as finance, healthcare, real estate), you should confirm whether you will need prior approval from the relevant authorities before proceeding with the conversion.
Challenges During the Conversion Process
Although converting an LLP into an LLC can be highly beneficial, there are likely to be certain hurdles to overcome. Some of the possible obstacles include:
• Administrative Work: As a new entity is established, there will be a number of registrations, licenses, and bank accounts to open. This can be time-consuming.
• Taxes: There is a desire to make sure that no unexpected tax liability arises as part of the transfer of assets.
• Legal Documents: Drafting a number of legal documents, such as transfer deeds, employment contracts and maybe a new MOA/AOA.
• Regulatory Delays: Depending on the jurisdiction, the time to obtain approval and/or register the new entity can differ.
However, if you have a professional that can help and plan adequately, these challenges could be easily overcome.
How to Avoid Legal Issues During Conversion
To ensure a smooth and legally compliant conversion of LLP to Limited Liability Company, consider the following steps:
Conclusion
Changing an LLP to a Limited Liability Company is a tactical initiative that could enhance the legal status of your venture, its brand image, and funding availability. The law does not provide a direct conversion process, but it is 100% compliant to take the incorporation route per Section 366 of the Companies Act, 2013.Having engaged professional experts to assist you and adequately taking the steps specified, a Limited Liability Partnership can be successfully converted to a Limited Liability Company in India, without any legal issues. At the end of the day, the conversion will increase credibility and foster the framework of corporate governance required for scalability and growth into the future.
FAQs
1. Can every LLP convert into a Limited Liability Company?
Yes, provided all partners agree to the conversion and the LLP meets the eligibility criteria under Section 366 of the Companies Act, 2013.
2. Is there any minimum capital requirement for conversion?
There is no minimum capital requirement; however, the company must comply with the minimum share capital prescribed under the Companies Act.
3. How long does it take to convert an LLP into a Limited Liability Company?
The process usually takes 30 to 45 working days, depending on document readiness and ROC approval timelines.
4. Will the PAN or GST number of the LLP remain the same after conversion?
No, new PAN and GST registrations will be issued in the name of the new company. You must update all tax and business records accordingly.
5. Do I need to inform existing clients and vendors after conversion?
Yes, it’s crucial to notify all stakeholders to ensure seamless business continuity and avoid contractual issues.
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