The ultimate goal of every Business is to keep growing. In India, multiple small businesses start their operations as an LLP. But it becomes critical for them to alter their business structure for expansion and growth at some level.
Fortunately, section 366 of Companies Act, 2013 mandates that if an LLP satisfies specific criteria, it can be converted into Private Ltd firm. So the question here is, Should you convert your LLP into a Private Limited Company? And if yes, then what are the advantages and drawbacks of doing so?
Today, I am going to address all these questions in this blog. This piece of information will help you understand all the aspects of LLP to Private Ltd Conversion.
So let’s get going.
Should you convert your LLP into a Private Limited Company?
The answer to this question depends on multiple factors. E.g. if your annual turnover is above INR 40 lakh, then it is better to convert your LLP. Apart from this, if you are looking for more finding, or Foreign Direct Investment, converting your LLP into a Private Ltd Company makes sense.
What are the benefits of converting your LLP into a Private Limited Company?
When you convert your LLP into a Private Limited Firm, you can get multiple benefits. Let’s take a look at them:
- Continuous existence
A Private Limited Company can stay fully functional even after the death or incapacity of any member to discharge his/her duty. This is in complete contrast of an LLP where any member’s death or discontinuance leads to the dissolution of the Partnership.
- Separate Legal Status
A Private Limited Company enjoys is considered a separate legal entity as per the law. So, A company can have its assets and debts are also in the name of the company/
- Limited Liability
The liability of every shareholder in the company is limited to the unpaid share capital. If the company goes bankrupt, the shareholders won’t have to pay off the debts by selling their personal property. Their liability will be limited to unpaid share capital, subscribed by them.
- More and Easy Funding
Funding is a critical aspect of all Businesses. For an LLP, its challenging to get finding from certain Angel Investors and Venture Capitalists. These investors avoid investing in LLPs as they don’t want the headache of handling Business operations.
They prefer Private Limited Company as they can control the ownership of any business by investing in it without getting indulged in the Business operations.
If you are looking forward to Foreign Direct Investment, Converting your Business into a Private Limited Company is the best option. Foreign investors can invest in a Private Limited Company through the automated process.
But if they want to invest in an LLP, they will have to get prior approval from the Government. So they avoid LLPs for an investment.
- No Capital Gain
As per multiple rulings of Courts, if an LLP is converted into a Private Limited Company and its assets are transferred, then no Capital Gain arises from such transfer.
- Option of ESOP
Employee Stock Ownership Plan or ESOP is a system where the company offers a certain number of shares to attract new and competent employees. This trend is becoming rapidly popular in India. But such facility is available only for a registered Company as there is no concept of shares in an LLP
What are the limitations of Converting an LLP into Private Limited Company?
Conversion into a Private Limited Company has some disadvantages too. Let’s take a look at them:
- Higher Compliance
Private Limited Company has to follow more compliances as compared to an LLP. This will increase the financial burden on the Business. E.g. an LLP has to submit only two statements, i.e. Annual Return and Statement of Account to the MCA. But, a Private Limited Company has to submit around ten such statements.
- Compulsory Audit
Every Private Limited Company has to get its accounts audited by a Certified Auditor. Any failure attracts penalty from MCA. This is not the case with an LLP. They have to get their accounts audited only if:
- The contribution of the LLP is more than 25 lakh.
- The annual turnover of the LLP is more than 40 lakh.
- Slow decisions
As a Private Limited Company must take approval from the Board of Directors for any critical decision, the decision-making process is prolonged.
On the contrary, in an LLP, a designated Partner can make decisions on behalf of the LLP, making the decision-making process very fast.
Converting an LLP into a Partnership firm can help Business expand its limits. It gives you an excellent opportunity to expand your Business locally as well as Globally. As more people are planning to take their Business Global, a corporatized Business structure can be of great help. Although there are some drawbacks to it, if you want your Business to scale up, you will have to accommodate these changes and challenges.
In the next blog, I will explain the whole process of How you can convert your existing LLP into a Private Limited Company in my next blog.
But if you want to know more about Private Limited Company or LLP, you can reach us any time you like.
Our experts will be ready to solve your queries.