When starting a business in India, many entrepreneurs will choose to start up their company as a “Limited Liability Partnership” (LLP). The choice of LLP is typically due to the flexibility and lower level of compliance required to form an LLP compared to other business structures and the ease of forming an LLP. The rapid growth of Indian businesses, attracting investors, plans for future growth may lead to founders considering converting their LLP into a “Private Limited Company”. Founders will ask one of the most common questions about whether they can convert their LLP into a Private Limited Company within 6 months of forming their LLP. This is a question that is both a legal and strategic question, as it will affect how you can raise money from investors, your ownership structure, your compliance obligations, and your long-term growth potential. The goal of this Detailed Information Guide is to assist founders in answering this question through a step-by-step process. It will outline the legal criteria to convert an LLP to a Private Limited Company; the eligibility criteria for conversion; the supporting documents that will be required for conversion; the duration to convert from LLP to Private Limited Company; the advantages and disadvantages of the conversion; and the entire Conversion of LLP to Private Limited Company Process in India.
Understanding LLP and Private Limited Company: A Quick Overview
An understanding of the basic differences between an LLP and a Pvt. Ltd Company is paramount before looking into converting between the two types of structures and timing for conversion. An LLP falls under the Limited Liability Partnership Act, 2008 as governed. LLP's have elements of partnerships as well as Companies, however unlike Companies, they do not require strict compliance with Company Laws and thus provide limited liability for partners of an LLP, along with an opportunity for partners to operate with greater freedom and less burden than a traditional company which has more onerous obligations to comply with Company Legislation. For the Private Limited Company structure which would fall under the Companies Act, 2013, the Private Limited Company will have a distinct governing structure (separate from its members) and as such will be governed by the Company Law and its provisions requiring that the Company maintain statutory records (e.g., Annual Returns) and disclosed financial statements therefore providing greater credibility to potential investors, Banks and large Customers for the Private Limited Company.
Can an LLP Be Converted into a Private Limited Company Within 6 Months?
The Short Answer
Yes; unless you have additional information that I do not have, an LLP can legally convert to a Private Limited Company anytime within 6 months of the date of registration, provided the LLP meets all the relevant statutory requirements. Currently, the Ministry of Corporate Affairs does not establish a minimum period for which an LLP must have been operating before it can apply to convert. Therefore, any new LLP that meets the eligibility requirements of Companies Act, 2013 and the relevant subsidiary regulations can apply for conversion.
The Practical Reality
Although legally possible, there are practical concerns about converting quickly, including:
• A completion of all required initial statutory filings of your LLP
• Agreement between partners
• Asset and liability structure of your LLP
• Availability of financial/legal Records
If all the above are in order, you can begin converting your LLP to a private limited company in India even though it has only existed for on average six months.
Legal Framework Governing LLP to Private Limited Conversion
The Conversion of LLP to Private Limited Company is governed by:
• Section 366 of the Companies Act, 2013
• The Companies (Authorized to Register) Rules, 2014
• The various provisions of the LLP Act, 2008
With respect to the first point mentioned above, it can be inferred that, per Section 366, an LLP qualifies as a ‘body corporate’ and that therefore it is permitted to be registered as a Company Limited by Shares.
Eligibility Criteria for Conversion
In order for an LLP to qualify to be converted into a Private Limited Company, the following four criteria must be satisfied:
1.Consent of All Partners
All partners of an LLP must provide their written consent to the conversion; partial consent is not acceptable.
2. Minimum Membership Requirement
There must be a minimum of two (2) partners of the LLP, as these will become shareholders of the Private Limited Company.
3. No Pending Secured Charge
If the LLP has secured creditors, the conversion cannot be completed without their consent.
4. Compliance Status
The LLP must be up to date on all statutory filings, such as Form 8 and Form 11 (if applicable), and any required filing fees.
5. Partners and Shareholders
All the partners of the LLP must become shareholders of the Private Limited Company and their ownership percentage must be aligned with their capital contribution unless they decide to restructure it differently. When all the above criteria are met, an LLP is legally permitted to be converted into a Private Limited Company in India, even within a relatively short period of time after its incorporation date.
Is There Any Restriction on Early Conversion?
While there is no formal legal barrier, there are several practical considerations that should be taken into account prior to conversion. They are:
1.Filing for Initial Compliance of LLP
If an LLP is newly established, certain filings must be carried out prior to its conversion. These include:
• Form 3 (LLP Agreement)
• PAN and TAN allotment
• Opening a bank account
2. The Status of Business Activities
Authorities may conduct a thorough examination of all aspects of business activity if the LLP does not yet have any revenues. Authorities will examine:
• The genuine intent of the business
• The completeness and accuracy of all records and documents
• The absence of any pending debts or claims against the business
3. The Consent of All Partners
All partners in an LLP must either unanimously approve or deny the request to convert.
Why Businesses Choose to Convert LLP to Private Limited Company Early
The majority of the business owners are asking why would they take their businesses from a Limited Liability Partnership to a Private Limited Company after registration so quickly. Some of the most common reasons for doing this are as follows:
1)Fund Raising and Investor Preference:
Private limited companies are favored by Venture Capitalists, Angel Investors and Private Equity Firms; due to the well-defined shareholding structure of these entities and ease of equity dilution.
2) Equity Based Growth:
LLPs do not have an avenue to issue shares, ESOP's or preference shares, therefore its very difficult for Start Ups who plan on being fast growing, as a private limited company would be essential.
3) Brand Credibility:
Banks, government authorities and enterprise clients view Private Limited Companies as more credible.
4) Scalability and Exit Options:
Private Limited Company entities make Mergers and Acquisitions and selling of stakes to be significantly easier than LLPs.
Due to these strategic reasons, many companies are deciding to begin the process of converting LLP to a Private Limited Company shortly after they were established.
Key Benefits of Converting LLP to Private Limited Company
1.Improved Funding Proposals
Companies are often more favorable for VC's, Angels and Private Equity firms because of
2. Higher Credibility for your Business Brand
Private Limited Companies create greater credibility for:
Businesses that are classified as Enterprise Grade Customers
3. Growth and Scale
A structured management system operates best with Private Limited Companies.
4. Globalization and International Expansion
Many foreign clients and investors prefer to conduct business with Private Limited Companies versus Limited Liability Partnerships.
Impact of Early Conversion (Within 6 Months)
Converting an LLP to a Company early has many positive and strategic implications.
Positive Business Operation Implications:
• Speed of Capital Availability
• Better Company Image with Compliance
• Improved Negotiation Strength with Vendors
Tax Implications:
• No Capital Gains Tax when conversion conditions met.
• Continuation of Assets and Liabilities.
Compliance Implications:
While Compliance levels increase after converting, it also:
• Improves Governance
• Creates Increased Transparency
• Prepares the Company for audits and Funding.
Draft Documents Required for Conversion of LLP into a Private Limited Company
The most common question asked during this transition process is:
What are the documents needed to convert an LLP into a private limited corporation?
The major documents necessary for this purpose include:
• All LLP Partners Consent to Convert
• Assets and Liabilities Statement Certified by a CA
• LLP Agreement and Certificate of Incorporation
• List of Partners and Proposed Shareholders
• Proof of Identity and Address for all Partners/Directors
• Documents Proving Registered Office (Lease Agreement, Utility Bill, NOC)
• Draft of the Memorandum of Association (MOA)
• Draft of the Articles of Association (AOA)
• Companies Act Declaration of Compliance 2013
The preparation of these documents will help to ease the approval process and reduce the risk of additional submission requests.
Tax and Compliance Implications Post Conversion
When an LLP (Limited Liability Partnership) converts into a Private Limited Company, it will now have additional compliance obligations at a Company Level. These include the following:
• Annual filings with the Registrar of Companies (AOC-4, MGT-7)
• Statutory Audit (All Companies must carry out Statutory Audits);
• Board Meetings and Shareholder Meetings; and,
• Corporate Taxation.
Note: Any assets, liabilities, contracts or obligations that belong to the LLP will automatically become an asset of the newly formed Private Limited Company and continue the business as usual.
Conversion of LLP to Private Limited Company Process (Step-by-Step)
Timely and error-free conversion requires understanding each of the steps involved in the conversion process.
Step 1: Obtain Digital Signature(s) (DSCs).
Every proposed director of the Private Limited Company must possess a valid Digital Signature Certificate (DSC).
Step 2: Apply for Director Identification Number (DIN).
In case, the partners of the Private Limited Company do not have DIN, then they will need to apply for it.
Step 3: Obtain Approval of Company Name.
The company’s proposed name is reserved by applying to the Ministry of Corporate Affairs (MCA).
Step 4: Prepare the Conversion Documentation.
The key documents to prepare for conversion from LLP to Private Limited Company are as follows:
• Statement of Assets and Liabilities.
• List of Partners and Consent from all Partners.
• LLP Agreement.
• Memorandum of Association (MoA) proposed to be submitted.
• Articles of Association (AoA) proposed to be submitted.
Step 5: File URC-1 Form.
File URC-1 form together with all supporting documents with the Registrar of Companies (RoC).
Step 6: Verification & Approval of ROC.
The RoC will review the application, and if necessary, will ask for clarification information or request further documentation to support the application.
Step 7: Issue of Certificate of Incorporation.
The RoC will issue a new Certificate of Incorporation after it is satisfied that the application meets the legal requirements for obtaining it; upon receiving this new Certificate of Incorporation, the conversion of the LLP into a Private Limited Company will have been completed.
Timeline for Conversion
The average time required to complete a conversion is between 20 and 30 working days based on the following factors:
The above timeframe is applicable for any LLP of any age (i.e., whether it was formed 6 months ago or has existed for several years).
Common Challenges During Early Conversion
There are numerous practical challenges to be faced when a member converts from an LLP to a Private Limited Company before the deadline. These challenges include:
By addressing these challenges prior to submitting a Conversion Application forms the basis for a smoother Conversion of an LLP to a Private Limited Company.
Consequences of Improper or Delayed Conversion
The ramifications of not adhering to the appropriate procedures can be significant.
Legal Consequences
Financial Consequences
Business Consequences
When Should You Ideally Convert an LLP to a Private Limited Company?
While it is permissible to convert within a 6-month time frame, it is most advantageous to do so when:
• At the time of raising funds,
• When issuing ESOPs
• When you plan on growing rapidly
• When your goal is to increase your company's credibility in the marketplace rapidly.
Conclusion
There is no prohibition in India against converting an LLP into a Pvt Ltd within 6 months from when the LLP was registered, provided the legal requirements are fulfilled and agreed upon by all partners. At any point in time in a startup's life cycle, the partners may decide to convert their business to a different form of legal entity, and, in many cases, this is a sound decision early on for many start-ups if they are looking to achieve growth and attract investors as well as establish long-term credibility and sustainability. As conversion will have an impact on the business's tax liabilities, the completions of certain compliance obligations, the ownership structure of the business, and business contracts with the owners and others involved in the business, careful planning should be undertaken and professional support may be required for any conversion. There are numerous advantages and potential benefits to converting your LLP into a Pvt Ltd, and a successful conversion will allow you to lay the groundwork for continuous and sustainable growth into the future.
FAQs:
1. Is it mandatory to wait 6 months before conversion?
No. There is no mandatory waiting period. Conversion can be initiated immediately after LLP registration.
2. Can an LLP with no business activity be converted?
Yes, even a dormant or non-operational LLP can be converted, subject to compliance requirements.
3. Do all partners need to become directors?
No. All partners must become shareholders, but only selected individuals need to be directors.
4. Will the LLP be dissolved after conversion?
Yes. Once conversion is approved, the LLP is deemed dissolved and removed from the LLP register.
5. Is GST registration automatically transferred?
No. GST details must be amended or a new registration may be required.
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