Conversion of LLP into Private Limited Company
Can it be done?
Registration of LLP is on the rise in India due to various factors. LLP registrations in India has risen by 55% during the Financial Year 2014-15 and is to set to raise even further with rising awareness about LLP. Most of the Entrepreneurs opting for LLP registration are small businesses that do not foresee any requirement for raising equity funds. However, some of these small businesses may at some point have a requirement to convert to a private limited company due to various reason. Therefore, in this article, we look at whether a LLP can be converted into a private limited company.
Limited Liability Partnership (LLP)
Limited Liability Partnership (LLP) was introduced in India thorough the LLP Act, 2008. LLP Registration in India began in 2010 and its popularity amongst startups and Entrepreneurs has steadily increased over the year. During the year financial year 2014-15, the number of LLP registered in India increased over 55% while the number of private limited companies registered decreased during the FY 2014-15.
Conversion of LLP into Private Limited Company
Many businesses started as LLP may now want to convert to a private limited company due to growth in business or for infusion of equity capital. However, the conversion of LLP into Private Limited Company is currently not possible in India, as both LLP Act, 2008 and Companies Act, 2013 are silent about the matter.
As per the Ministry of Corporate Affairs:
“Conversion of LLP into private limited company would not be allowed under LLP Act. However, enabling provisions would be required to be made in the Companies Act for such conversion. Necessary action in this regard would be taken when Companies Act would be revised.”
As per Companies Act, 2013:
“COMPANIES CAPABLE OF BEING REGISTERED (SECTION 366):
For the purpose of this Part the “company” includes any partnership firm, limited liability partnership, cooperative society, society or any other business entity formed under any other law for the time being in force which applied for registration under this Part.”
The LLP Act, 2008 does not provide any facility for conversion of a LLP into a private limited company. However, the Ministry of Corporate Affairs website clarifies that an enabling provision would be made when Companies Act is revised.
In the newly introduced Companies Act, 2013, LLP is mentioned among companies that are capable of being registered as a Company. However, no rules have so far been issued by the Ministry of Corporate Affairs establishing the procedure for conversion of LLP into Private Limited Company. Therefore, currently a LLP cannot be converted into a private limited company.
The chances of introduction of procedure for conversion of LLP into Private Limited Company is however bright and is expected in the near term – as the number of registered LLP grows.
Choice of LLP vs Private Limited Company
LLP is mainly ideal for small businesses that have and will continue to have for a reasonable amount of time, an annual sales turnover of less than Rs.40 lakhs and a capital contribution of less than Rs.25 lakhs. LLPs that satisfy the above condition do not require an audit each year, whereas a private limited company irrespective of turnover and capital requires an audit of financial statements – additional cost and compliance. However, if an LLP crosses an annual turnover of Rs.40 lakhs or a capital contribution of more than Rs.25 lakhs, the compliance requirements for LLP and Private Limited Company become almost similar, making private limited company a better choice.
Further, since there is currently no procedure for conversion of LLP into a Private Limited Company, it is recommended that those wishing to induct equity capital from venture capitalist or private equity investors or angel investors start a private limited company always.
Reasons for LLP Registration
The following are reasons some small businesses opt for a LLP registration:
- The awareness about Limited Liability Partnership (LLP) introduced in 2010 has steadily increased among Entrepreneurs over the year and many small businesses are opting to start a LLP now instead of a Private Limited Company.
- Audit is not required for a LLP annual sales turnover is less than Rs.40 lakhs and the LLP has a capital contribution of less than Rs.25 lakhs. Whereas, for a Private Limited Company, audit is mandatory irrespective of sales turnover or capital.
- LLP there is no concept of dividend distribution tax. Whereas, for a Private Limited Company, dividends are taxed at 15%.
- In LLP, there is no concept of Board Meetings or Annual General Meetings. So annual compliance is comparatively lesser.
- The government fee for incorporation of LLP is significantly lower than the government fee for incorporation of private limited company. ComplianceIndia offers Private Limited Company incorporation at Rs.12000/- all inclusive. Whereas, LLP Incorporation is Rs.8000 all inclusive.
- The process for incorporation of LLP also involves less documents and is less cumbersome.
The above reasons has led to a strong growth in the number of LLPs registered in India.
Reason for Private Limited Company Registration
The above reasons may be good enough for many small businesses to opt for starting a LLP instead of a Private Limited Company. However, LLP still lacks a few significant advantages over a Private Limited Company as follows:
- LLPs do not have the concept of shareholders. Hence, all the owners of a LLP would be a Partner in the LLP. This structure is not suitable for Venture Capitalists and Private Equity Investors – who do not wish to actively participate in the management of the Company. Hence, equity investors will only invest in a Private Limited Company. Therefore, if the startup or promoters have plans for expanding the business by raising equity capital, then the entity must be registered as a private limited company.
- Foreign Direct Investment (FDI) in a private limited company is under the automatic route whereas FDI in LLP is under the approval route. Therefore, businesses that have foreign or NRI promoters opt for incorporation of a private limited company.
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