Many people opt for Limited Liability Partnerships (LLPs) to benefit from lesser compliance while limiting their liabilities. However, as the business operations expand, incorporating a private limited company becomes a more lucrative option. This is also a reason why startups prefer the company format over any other business constitution format in India. However, can an LLP be converted into a company? The answer is yes. Let’s understand the benefits and process of the conversion of LLP to private limited company.
Benefits of Converting LLP Into a Private Limited Company
The following are the benefits of converting an LLP into a private limited company:
- Growth: Conversion in the company facilitates the growth and expansion of the business.
- Raising Capital: Raising investments from investors is more convenient and easier for companies than LLPs. You can make them a partner in your business by just giving them a portion of the equity. Otherwise, you can issue them debentures to raise debt capital.
- Further Issue of Shares: Capital can be increased anytime in the case of companies through the issue of equity shares. Further, bonuses can be allotted to the employees in the form of ESOPs.
- Lower Taxes: Income tax rates for LLPs are flat at 30%, whereas it is 25% in the case of companies.
- Tax Exemption: Conversion of LLP to companies is exempted from capital gains tax. It also allows the carry forward of unabsorbed depreciation and losses.
- Conversion to Public Limited Company: Private limited companies can be further converted into public limited companies in the future for further expansion of operations and raising capital from the public at large.
- Retain Goodwill: Conversion of LLP into a private limited company allows the business to retain its brand name and goodwill.
- Foreign Investments: Raising investments from foreign investors becomes easier in the case of private limited companies than in the case of LLPs.
Conditions for Conversion of LLP to private limited company
If you are willing to convert LLP into a private limited company, then you need to satisfy the following conditions:
- The LLP should have at least two partners who will become directors and shareholders in the private limited company.
- All the partners in the LLP should approve the Conversion of LLP to private limited company.
- The LLP should have complied with all the statutory compliances.
- The Conversion of LLP to private limited company should be published in at least 2 newspapers, one in English language and one in the vernacular language of the district in which the LLP is located.
- No objection certificate from the registrar should be obtained.
Process of Conversion of LLP Into a Private Limited Company
Following is the process of Conversion of LLP to private limited company:
- Obtaining name approval
- Obtaining Director's Identification Number and Digital Signature Certificate
- Filing Form URC-1, SPICE+ and other related forms
- Drafting Memorandum of Association and Articles of Association
- Issuing share certificates
Conditions for Claiming Income Tax Exemption on Conversion
If the limited liability partnership firm is converted to a company, then the capital gains tax arising therefrom will be exempted if the following conditions are satisfied:
- All the assets and liabilities of the LLP immediately before conversion becomes the assets and liabilities of the company.
- All the firm's partners immediately before the conversion become the shareholders in the new company in the same proportion at which their capital accounts stood in their books on the date of the conversion.
- The partners in the firm should not receive any benefit or consideration, directly or indirectly, otherwise than by way of allotment of shares in the company.
- The aggregate shareholding in the company of the partners of the LLP should not be less than 51% of the total voting power of the company. Further, their shareholding should continue as such for 5 years after the date of conversion.
Above was the tax implication on the conversion of LLP into the company. If the above conditions are satisfied, then the capital gains tax will not be levied on the Conversion of LLP to private limited company.
In a Nutshell
Conversion of LLP to private limited company comes with ample of benefits for the business. It allows the business to grow and expand and makes raising investments easier. Further, to smoothen and facilitate such conversions, the government has exempted such conversions from income tax subject to certain conditions. The cost of Conversion of LLP to private limited company is affordable and the benefits far outweigh the cost. If you are willing to convert LLP into a private limited company, then feel free to contact the ASC Group.