In this article we will discuss about the conversion of private limited company to LLP, Bolting change of Private Limited Company (PLC) to Limited Liability Partnership (LLP) has become the trend among the business owners who looked forward to more freedom, less regulation, and taxes. This guide covers the various benefits that come with conversion, the process for the switch and the necessary documents needed.

Why Convert a Private Limited Company to an LLP?

Private limited companies offer structured governance and investor appeal. However, some PLCs choose to convert to LLPs to enjoy reduced compliance obligations, tax savings, and simplified management structures. Here are the primary reasons:

1. Tax Benefits: There is no tax on dividend distribution for LLPs and neither is there the minimum alternate tax, making for efficiency in tax on income distribution towards partners.
2. Reduced Compliance: An LLP has less paperwork and filing obligations and compliance than a private limited company.
3. Flexibility: In another note, LLPs are much better in terms of operational flexibility compared to PLC since the latter has rigid capital contribution criteria.
4. Limited Liability Protection: Similar to private limited companies the partners of an LLP are not personally liable for the debts or losses of the firm or their personal assets are at risk.

Pre-Requisites for Conversion

Before beginning the conversion process from a private limited company to an LLP, certain conditions must be met:

• Approval of Existing Members: All the shareholders of the private limited company need to give their consent in order to make such conversion.
• Minimum Partners: An LLP can have only two designated partners, out of which at least one has to be an Indian citizen.
• Compliance Record: Private limited company must be in a good standing with compliance, with no filing or default in due course.

Detailed Process Involved in Conversion from Private Limited Company to LLP

Step 1: After, apply for the Digital Signature Certificates (DSCs) and Director Identification Number (DIN).

As per the above said rules and regulations each of the nominated partner in the LLP should have Digital Signature Certificate (DSC) and Director Identification Number (DIN) compulsorily. This is required for signing forms electronically.

Step 2: Minutes 6: Prepare the Company for Share Conversion Holding a Board Meeting for Conversion Approval

Converting the private limited company will require a board meeting where the directors approve the procedure and one of them to make application to the requisite application. A resolution approving the conversion should be passed and recorded.

Step 3: File Name Reservation for LLP

File for name reservation with the Ministry of Corporate Affairs (MCA) through Form LLP-RUN (Reserve Unique Name). You may retain the name of the private limited company if available.

Step 4: File Conversion Application (Form FILLIP and Form 18)

File Form (Form for Incorporation of LLP) and Form 18 (Application for conversion from private limited company to LLP) with the Registrar of Companies (ROC). Form 18 specifically outlines that the PLC is being converted to an LLP, requiring company details and shareholder consent.

Step 5: Submit Necessary Documents

The following documents must be submitted to support the application:

• Consent of all shareholders for the conversion
• Incorporation documents of the existing private limited company
• Latest income tax returns and acknowledgment
• Consent from secured creditors (if any)
• Certified copies of all statutory registers and company records

Step 6: Draft the LLP Agreement

Open a company to prepare LLP agreement in which role, responsibility and profit sharing ratio of partners are to be provided. It needs to be registered within one month of obtaining the Certificate of Incorporation of LLP.

Step 7: Issue of Certificate of Incorporation

Upon verification, the ROC will issue the Certificate of Incorporation for the LLP. This certificate confirms the conversion of the private limited company to an LLP.

Step 8: Update Tax and Regulatory Authorities

It has also been found to be beneficial that after converting from an Indian company to an LLP, the same should inform the Income Tax Department, GST authorities, and banks about the change. Such record can never be out of date and it is necessary to update such records to avoid any hitches in the operation.

Key Points to Remember

• Tax Implications: After conversion, any loss and un absorbed depreciation of the private limited company can be adjusted in the LLP if the shareholding of the LLP remains same.
• Effect on Contracts: The transition process of a private limited company to an LLP is the same, where all contracts, liabilities and assets are transferred to the new form of business.
• Limited Liability Protection: Members are similar to shareholders but with limited liability status like the company members of a PLC but do not have to complies with the strict formalities.

Advantages of LLP Over Private Limited Company

The advantages of converting private limited company being one of the LLPs means that it is easier to manage, less so in terms of compliance with the standard and cost of operations. Some notable benefits include:

• Simplified Tax Structure: In terms of taxation, it is also free from double taxation of the incomes and the distribution of dividends and distribution tax which lighten the tax consciousness of the partners of LLPs.
• Fewer Compliance Requirements: Another specific advantage of the LLPs compared to private limited companies is the fact that the former has relatively fewer number of annual compliance filings than the latter.
• Flexible Capital Contribution: There is no stringent requirement of capital contribution in the LLPs and therefore the flexibility in capital control is high.

Final Thoughts 

Switching from private limited company to LLP is ideal for companies that want flexibility, easy compliance and reduced taxation. Thus, in following the procedures, documents preparation and having knowledge about the benefits, it will be easier for the organizations to decide to change from PLC to LLP.

DISCLAIMER: The information provided in this article is intended for general informational purposes only and is based on the latest guidelines and regulations. While we strive to ensure the accuracy and completeness of the information, it may not reflect the most current legal or regulatory changes. Taxpayers are advised to consult with a qualified tax professional or you may contact to our tax advisor team through call +91-9871990777 or info@semantictaxgen.in