LIMITED LIABILITY LIMITED LIABILITY PARTNERSHIPPARTNERSHIP

Why Private Companies should convert to LLP?Why Private Companies should convert to LLP?

Limited Liability concept combines the organizational Limited Liability concept combines the organizational flexibility of a partnership firm coupled with the advantage flexibility of a partnership firm coupled with the advantage of limited liability for its partners. of limited liability for its partners.

The key features of the LLP such as a separate legal entity The key features of the LLP such as a separate legal entity with unlimited number of partners, no partner being liable with unlimited number of partners, no partner being liable on account of the independent or unauthorized actions of on account of the independent or unauthorized actions of other partner (s), liability of partners being limited to the other partner (s), liability of partners being limited to the respective stake of each partner in the LLP, are a distinct respective stake of each partner in the LLP, are a distinct advantage over other form of organization.advantage over other form of organization.

Such distinct features would be the key drivers for forming Such distinct features would be the key drivers for forming LLP, rather than Company for planning different LLP, rather than Company for planning different structures.structures.

Another major reason for conversion of a company into an Another major reason for conversion of a company into an LLP is on the tax front. Currently, the Income-tax Act, 1961, LLP is on the tax front. Currently, the Income-tax Act, 1961, provides for payment of minimum alternate tax (MAT) as provides for payment of minimum alternate tax (MAT) as also for payment of dividend distribution tax (DDT) by also for payment of dividend distribution tax (DDT) by companies. An LLP, which is not a company, is not be liable companies. An LLP, which is not a company, is not be liable to pay MAT, DDT and even surcharge on income tax. to pay MAT, DDT and even surcharge on income tax.

Conversion to LLPConversion to LLP

No need of converting into Public Company to have No need of converting into Public Company to have members more than 50 ,as there is no limit on members more than 50 ,as there is no limit on maximum number of partners maximum number of partners

Minimal Government Intervention Minimal Government Intervention Minimal cost of conversion Minimal cost of conversion Less Compliance level Less Compliance level No requirement of holding any meeting No requirement of holding any meeting No requirement of maintenance of Large statutory No requirement of maintenance of Large statutory

records records Limited Liability as in case of Companies. Limited Liability as in case of Companies. No restriction on related party transactions No restriction on related party transactions No Minimum alternate tax & dividend distribution No Minimum alternate tax & dividend distribution

tax. tax. No mandatory audit in some cases. No mandatory audit in some cases. Less financial disclosure norms. Less financial disclosure norms.

Status upon conversionStatus upon conversion..

It is essential to note that on conversion, all the It is essential to note that on conversion, all the partners of the partnership firm shall become partners of the partnership firm shall become the partners of the LLP. It is provided that no the partners of the LLP. It is provided that no other person would become partner on other person would become partner on conversion into an LLP for the simple reason conversion into an LLP for the simple reason that on conversion, it should be a mirror image. that on conversion, it should be a mirror image.

On conversion, all the tangible (movable and On conversion, all the tangible (movable and immovable) property and the intangible immovable) property and the intangible property, all assets, interest, rights, privileges, property, all assets, interest, rights, privileges, liabilities, obligations of the firm/Company shall liabilities, obligations of the firm/Company shall stand transferred to, and vest in, the LLP. Also, stand transferred to, and vest in, the LLP. Also, the firm so converted into an LLP shall cease to the firm so converted into an LLP shall cease to exist upon conversion exist upon conversion

Capital Gain on ConversionCapital Gain on Conversion

Under the provisions of LLP Act, 2008 on conversion of company into LLP, all Under the provisions of LLP Act, 2008 on conversion of company into LLP, all tangible (movable or immovable) and intangible property vested in the tangible (movable or immovable) and intangible property vested in the company, all assets, interests, rights, privileges, liabilities, obligations relating company, all assets, interests, rights, privileges, liabilities, obligations relating to the company, and the whole of the undertaking of the company, shall be to the company, and the whole of the undertaking of the company, shall be transferred to and shall vest in the limited liability partnership without further transferred to and shall vest in the limited liability partnership without further assurance, act or deed; Section 45 of the Income Tax Act provides that any assurance, act or deed; Section 45 of the Income Tax Act provides that any profit or gains arising on transfer of capital asset shall be chargeable to profit or gains arising on transfer of capital asset shall be chargeable to capital gain. Though Section 47(xiii) of the Income Tax Act exempts the capital gain. Though Section 47(xiii) of the Income Tax Act exempts the conversion of Firm/LLP (as per Union Budget 2009-10) into Company from the conversion of Firm/LLP (as per Union Budget 2009-10) into Company from the provisions of Capital Gains subject to certain conditions that the all the provisions of Capital Gains subject to certain conditions that the all the Partners before the succession become the shareholders of the Company in Partners before the succession become the shareholders of the Company in the same proportion of the capital account on the date of succession but no the same proportion of the capital account on the date of succession but no exemption is granted to conversion of company into LLP. Therefore till any exemption is granted to conversion of company into LLP. Therefore till any such amendment in Income Tax Act, the transfer of all assets (movable such amendment in Income Tax Act, the transfer of all assets (movable assets) and liabilities of the Company will be made at their Book Value at the assets) and liabilities of the Company will be made at their Book Value at the time of conversion to avoid any Capital Gain Tax. In respect of immovable time of conversion to avoid any Capital Gain Tax. In respect of immovable property, as per section 50C of the Income Tax Act, in case of transfer of property, as per section 50C of the Income Tax Act, in case of transfer of land , building or both, the value of asset calculated for the purpose of land , building or both, the value of asset calculated for the purpose of making the payment of stamp duty ,shall be taken to be value of asset and making the payment of stamp duty ,shall be taken to be value of asset and therefore any difference in the book value and valuation as per stamp duty, therefore any difference in the book value and valuation as per stamp duty, shall be liable for capital gain shall be liable for capital gain

Conversion ProcedureConversion Procedure

Step IStep I Deciding the Partners and Designated Partners A Private Company desires to convert its Deciding the Partners and Designated Partners A Private Company desires to convert its status to LLP Form shall foremost decide the designated Partners of the proposed LLP, status to LLP Form shall foremost decide the designated Partners of the proposed LLP,

1. Minimum of Two Individuals as Designated Partners, of total no. of Partners. 1. Minimum of Two Individuals as Designated Partners, of total no. of Partners. 2. At least One Designated Partner to be Resident Indian. 2. At least One Designated Partner to be Resident Indian. Step IIStep II Obtaining DPIN No. & Digital Signature Obtaining DPIN No. & Digital Signature Designated Partner Identification Number Designated Partner Identification Number

(DPIN): (DPIN): Every Designated Partner have to obtain a DPIN from the Registrar of LLP. Every Designated Partner have to obtain a DPIN from the Registrar of LLP. Digital Digital Signature CertificateSignature Certificate: Any one Designated Partner shall obtain a Digital Signature. : Any one Designated Partner shall obtain a Digital Signature.

Step IIIStep III Checking the Name Availability Checking the Name Availability The next step is to make an application in e Form 1 of Rule 18(5) of the Limited Liability Partnership The next step is to make an application in e Form 1 of Rule 18(5) of the Limited Liability Partnership

Act 2008, for reservation of the desired name of the LLP on payment of the prescribed fees. A Board Act 2008, for reservation of the desired name of the LLP on payment of the prescribed fees. A Board resolution passed by the Company approving the conversion into LLP shall be attached with the resolution passed by the Company approving the conversion into LLP shall be attached with the aforesaid form. aforesaid form.

Step IVStep IV Drafting of LLP Agreement The next pertinent step is drafting of Limited Liability Drafting of LLP Agreement The next pertinent step is drafting of Limited Liability Partnership Agreement governing the mutual rights and duties among the partners and among the Partnership Agreement governing the mutual rights and duties among the partners and among the LLP and its partners. LLP and its partners.

It is not necessary to have the LLP Agreement signed at the time of incorporation, as the details of It is not necessary to have the LLP Agreement signed at the time of incorporation, as the details of the same needs to field in e form 3 within 30 days of incorporation but in order to avoid any dispute the same needs to field in e form 3 within 30 days of incorporation but in order to avoid any dispute between the partners as to the terms & conditions of the agreement after the conversion into LLP, it between the partners as to the terms & conditions of the agreement after the conversion into LLP, it is always beneficial to have the LLP Agreement drafted and executed before the incorporation of the is always beneficial to have the LLP Agreement drafted and executed before the incorporation of the LLP LLP

Step VStep V Filing of Incorporation Documents Next is the filing of prescribed e-forms with the Registrar Filing of Incorporation Documents Next is the filing of prescribed e-forms with the Registrar of LLP for incorporation of the LLP on payment of prescribed fees based on the total monetary value of LLP for incorporation of the LLP on payment of prescribed fees based on the total monetary value of contribution of partners in the proposed LLP. of contribution of partners in the proposed LLP.

E Form 2: Incorporation Document This is an informative document setting down the details of LLP, E Form 2: Incorporation Document This is an informative document setting down the details of LLP, its Partners including designated partners, amount of contribution along with Subscription Sheet to its Partners including designated partners, amount of contribution along with Subscription Sheet to be filed with be filed with

E Form 3: Details of LLP Agreement This form provides for the necessary information in respect to E Form 3: Details of LLP Agreement This form provides for the necessary information in respect to the LLP Agreement entered into between the partners. the LLP Agreement entered into between the partners.

E Form 4: Consent of Partners and Designated Partners to be filed with the Registrar of LLP within E Form 4: Consent of Partners and Designated Partners to be filed with the Registrar of LLP within 30 days of Incorporation. 30 days of Incorporation.

Conversion ProcedureConversion Procedure

Step VIStep VI Filing of Conversion Application in eForm 18 to be submitted by the Shareholder of Filing of Conversion Application in eForm 18 to be submitted by the Shareholder of the Company covering name, registration number and date of Incorporation of the the Company covering name, registration number and date of Incorporation of the Company, consent of all shareholders of the Company along with following details: Company, consent of all shareholders of the Company along with following details:

Whether any security interest in the assets of the company is subsisting or in force Whether any security interest in the assets of the company is subsisting or in force Whether up to date Income-tax return is filed under the Income-tax Act, 1961. Whether up to date Income-tax return is filed under the Income-tax Act, 1961. Whether any prosecution initiated against or show cause notice received by the company Whether any prosecution initiated against or show cause notice received by the company

for alleged offences under the Companies Act, 1956. for alleged offences under the Companies Act, 1956. Whether any proceeding by or against the company is pending in any Court or Tribunal or Whether any proceeding by or against the company is pending in any Court or Tribunal or

any other Authority. any other Authority. Whether any conviction, ruling, order, judgment of any Court, Tribunal or other authority in Whether any conviction, ruling, order, judgment of any Court, Tribunal or other authority in

favour of or against the company is subsisting. favour of or against the company is subsisting. Whether any clearance, approval or permission for conversion of the company into limited Whether any clearance, approval or permission for conversion of the company into limited

liability partnership is required from anybody/ authority. etc liability partnership is required from anybody/ authority. etc Step VII Step VII Certificate of Registration After the all formalities and filings been complied with Certificate of Registration After the all formalities and filings been complied with

by the applicants , the Registrar of LLP to issue a Certificate of Registration as to by the applicants , the Registrar of LLP to issue a Certificate of Registration as to conversion of the LLP. The Certificate of Registration issued shall be the conclusive conversion of the LLP. The Certificate of Registration issued shall be the conclusive evidence of conversion of the LLP. evidence of conversion of the LLP.

Step VIIIStep VIII Information to Registrar of Companies Converted Limited liability partnership to Information to Registrar of Companies Converted Limited liability partnership to file within fifteen days of the date of registration, information to the concerned Registrar of file within fifteen days of the date of registration, information to the concerned Registrar of Companies with which it was registered under the provisions of the Companies Act, 1956 Companies with which it was registered under the provisions of the Companies Act, 1956 about the conversion and of the particulars of the limited liability partnership in eForm 14. about the conversion and of the particulars of the limited liability partnership in eForm 14.

PREPARED BY -S.P.MODANI 09866057380PREPARED BY -S.P.MODANI 09866057380

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