Conversion into Limited Liability Partnership

C.R. Sharedalal & Co.

Conversion into Limited Liability Partnership

- Hrishikesh Balasubramaniam- Nisarg Jaiswal

- Chirag ChaudhuryArticled Assistants , C.R. Sharedalal & Co.



Who can Convert?

ProcedurePartnership to LLP

Company to LLPImportant Considerations

for Conversion to LLP

Tax issues on conversion into LLP

Stamp Duty Implications

Benefits


Who can convert?

Partnership FirmPrivate CompanyUnlisted Public Company



Who can Convert?






Benefits


No Step Time frame

(days)

Process

1 DPIN (Designated Partner Identification Number)• Approved DPIN is a pre-requisite for incorporation process

5 • Apply for DPIN and get a provisional DPIN•Certification/Attestation of director's personal details• Sending the same to the MCA Cell and getting it approved

2 Application for Name Availability• Filing of Form 1

3 On conversion of Firm only addition of the word LLP in existing name of the Firm as last word is allowed


No Step Timeframe

(days)

Process

3 Documents required for incorporation of an LLP• LLP Agreement•Form 2(Statement by Promoter)•Form 3(Information regarding the LLP Agreement)• Form 4 & Form 9(Notice of Consent & Appointment of Designated Partners with their personal details)• Subscription sheet signed by the promoters• Duly stamped LLP Agreement• Proof of Address of Registered Office

2 •Drafting the LLP Agreement and after getting it vetted by Promoters, sending it for printing. Important attachments for Form 17• Statement of partners• Statement of Assets and Liabilities of the company duly certified as true and correct by the C.A.• List of all the unsecured creditors along with their consent to conversion• Approval from any other body/authority, if required• Processing of e-Forms


No Step Timeframe(days)

Process

4 Final Process:Filing all the above documents with the RoC. • Follow up with the RoC Making changes in LLP Agreement. • Other Incorporation documents as suggested by the RoC.

5 Online uploading of e-formPayment of registration feesIssue of certificate of incorporation.



Who can Convert?






Benefits


Partnership LLP (1/2)Existing Partnership Firm can be

converted into LLP and all the assets, liabilities and business of existing partnership firm will vest in to LLP.

The conversion of partnership into LLP will attract tax liability.

All the existing partners must be the partners of LLP.


Partnership LLP (2/2)

Relevant Provisions:◦Chapter X – Section 55 of LLP Act,

2008.◦Second Schedule of the LLP Act,

2008.◦Rule 38 of LLP Rules, 2009.



Who can Convert?






Benefits


Company LLP (1/2)Existing Private and Public Limited

Company (except Listed Company) can be converted into LLP and all the assets, liabilities and business of existing Company will vest in to LLP.

If the security interest subsists on the assets of the eligible company then it cannot be converted into LLP. Company which has taken secured loan of any nature which is outstanding as on the date of conversion cannot be converted into LLP.


Company LLP (2/2)All the existing shareholders must be the

partners of LLP as per LLP Act,2008.Company which has repaid loans must

ensure that the necessary formality of the Companies Act,1956 is complete and the charge is removed.

Relevant Provisions:◦Chapter X – Section 56 and 57 of LLP Act, 2008.◦Third and Fourth Schedule of the LLP Act, 2008.◦Rule 39 and 40 of LLP Rules, 2009.



Who can Convert?






Benefits


Important Considerations for Conversion to LLP-(1/3)o Filing of Form with Registrar of

LLP.Form 7 & Form 1 andForm 17/18 & Form 2

o All the numbers of the Company/Partners of the Firm shall be the partner in LLP(and no one else) with the same Capital/Contribution Ratio.


Important Considerations for Conversion to LLP-(2/3)o Consent of all members of the

Company/Partners of the Firm shall be obtained

o No security interest on the assets shall be subsisting or in force on the date of application.

o No Objection Certificate from unsecured creditors.

o Statement of Assets & Liabilities certified by Auditor of not more than 30 days prior to the date of the conversion application.


Important Considerations for Conversion to LLP-(3/3)

o All due returns of Registrar of Companies, Income Tax and other Tax authorities shall be filed.

o No Objection Certificate from other authorities for conversion, if required.

o After receiving Conversion Certificate the same to be filed within 15 days with Registrar of Companies in Form-14.



Who can Convert?






Benefits


Tax issues on conversion of a

Company into LLPDuring Conversion•When capital gain on conversion will be exempt?

After Conversion•Tax rate: •Eligibility to claim deductions:-


When capital gain on conversion will be EXEMPT?

As per section 47(xiiib) of income tax act,1961:-Any transfer of a capital asset or intangible asset or share or shares held in the company by a share holder as a result of conversion of the company into a LLP in accordance with the provision of Section 56 or Section 57 of the LLP Act, 2008 :

Provides that :-

47(xiiib) doesn’t apply to partnership firms converting to LLP thus partnership firms will have to pay CG tax.


(a)ALL the assets & liability of the company immediately before the conversion

Asset & liability of the LLP.

(b)ALL the shareholders of the company immediately before the conversion

(1) Become partner of LLP(2) And their capital contribution and their profit sharing ratio are in the same proportion as their share holding in the company on the date of conversion.


(c) Share holders of the Company do not receive:-

Any consideration or benefit, directly or indirectly, in any form or manner, other than by way of share in profit and capital contribution in the LLP.

(d) 1year 3year 5year

Aggregate of the profit sharing ratio of the shareholders of the company in LLP should not be less than 50% at any time during the period of 5 years from the date of conversion


(e)

(2008-09) (2009-10) (2010-11) (2011-12) (year of conversion)

68 Lakhs 59 Lakhs 52 Lakhs 58 Lakhs 82 Lakhs

The total sales, turnover or gross receipts in business of the company in any of the three previous years preceding the previous year in which the conversion takes place does not exceeds 60 lakh rupees.


(f)

Year of Conversion +Year 2

No amount is paid, directly or indirectly, to any partner out of balance of accumulated profits (i.e. General Reserve, etc.) standing in the accounts of the company on the date of conversion for a period of three years from the date of conversion.


After Conversion

Tax rate: • 30% flat tax rate + 3% education cess • No Minimum Alternate Tax & Dividend Distribution Tax


Following deductions are allowed to LLP*

1. Interest paid to partners, provided such interest is authorized by the LLP Agreement (Section 40(b)).

2. Any salary, bonus, commission, or remuneration (by whatever name called) to a partner will be allowed as a deduction if it is paid to a working partner who is an individual.

3. The remuneration paid to such working partner must be authorized by the LLP Agreement and the amount of remuneration must not exceed the given limits. ((Section 40(b)).


*Conditions of Section 184 of Income Tax Act should be satisfied

1. There is a written LLP Agreement.2. The individual shares of the partners should be very clearly

specified in the deed.3. A certified copy of LLP Agreement must be submitted with

the return of income of the LLP of the previous year in which the partnership was formed.

4. Revised LLP agreement should be submitted when ever there is a change in the constitution of firm or profit sharing ratio.

5. There should not be any failure on the part of the LLP while attending to notices given by the Income Tax Officer for completion of the assessment of the LLP.


Tax issues on conversion of a Company/firm into LLP - Relevant provisions of Income Tax Act (1/2)

No. Section Subject Effective Date

1 Section 32(1)5th Proviso

Depreciation in the year of conversion prorate allocationbetween the company and LLP

A.Y. 2011-

20122 Section 35

DDA (4A)Amortization of expenditure incurred on Voluntary Retirement Scheme – LLP eligible to claim deduction for balance period

A.Y. 2011-

2012

3 Section 43(1)Explanation

13(b)(iii)

Actual cost – where deduction is allowed u/s 35AD – cost willbe Nil

A.Y. 2011-

2012

4 Section 43(6)Explanation

2C

Written down value – wdv in the hands of company will bewdv in the hands of LLP

A.Y. 2011-

2012


Tax issues on conversion of a Company/firm into LLP - Relevant provisions of Income Tax Act (2/2)No. Section Subject Effective

Date5 Section 49(1)

(iii)(e)Cost to previous owner – cost in the hands of LLP will be cost in the hands of company.

A.Y. 1999-

20006 Section 49

(2AAA)Rights of partner in LLP – Cost of acquisition A.Y. 2011-

20127 Section 72A

(6A)Carry forward of business loss and unabsorbed depreciationLOSS NOT C/F IN CASE of PARTERNSHIP FIRM CONVERTING TO LLP

A.Y. 2011-2012

8 Section 115JAAA(7)

Carry forward of MAT credit of Company not available to LLP

A.Y. 2011-

2012



Who can Convert?






Benefits



As per Section 58 of LLP Act, 2008, all the assets and liabilities vest into LLP. There is no transfer of assets and liabilities and hence no Stamp Duty is required to be paid.



Who can Convert?






Benefits & Drawbacks


Key BenefitsNo Limit on number of shareholders/partners unlike

private limited companies (shareholders limited to 50), an LLP can have unlimited number of partners.

Minimal Compliance Level & Cost effective model there is no need of compliances related to meetings and maintenance of huge statutory records.

Automatic transfer - All the assets and liabilities of the Company immediately before the conversion become the assets and liabilities of the LLP.

The goodwill of the Company and its brand value is kept intact and continues to enjoy the previous success story with legal recognition

Carry Forward and Set off Losses and Unabsorbed Depreciation the accumulated loss and unabsorbed depreciation of Company is deemed to be loss/ depreciation of the successor LLP for the previous year in which conversion was effected. Thus such loss can be carried for further eight years in the hands of the successor LLP.


Drawbacks•LLP being recently introduced suffers from lack of awareness & recognition.•Requirement of amending LLP Agreement, on happening of various events, creates frustration. • Heavy penalties are prescribed for non compliance. • Partners salary beyond specified limits is not allowed as deduction , for tax purposes. •Benefits of Carry forward of losses and Capital Gains Tax Exemption are not available in case of a partnership firm converting to LLP.