How to Convert an LLP into a Private Limited Company?

Hello guys, in the previous blog, I explained the reasons for and benefits of converting an LLP into a Private Limited Firm. If you haven’t read that blog, please visit it here to get a better understand of the current blog.

Here, I am going to talk about the process to convert an LLP into a Private Limited Company, necessary documents, various rulings of Courts about Capital gain during the process and the things that you should keep in mind while conversion.

So without wasting any time, let’s get going. But before that, a little background!

Process of Converting an LLP into a Private Limited Company

Following are the steps involved in the conversion

Step1: Meeting with Partner

Before you start the process of conversion, it is mandatory to arrange a meeting with all the partners as per section 366 of Companies Act 2013. In this meeting, one Partner has to be authorized to take all the necessary decisions during the process.

Step 2: Getting Approval for name

The next step is to take approval for a name for your Company. The whole process is digitized by the Government, so you can apply for approval from the online portal RUN (Reserve Unique Name). But before you apply for the approval, we would recommend you check for the availability of the name on MCA’s portal. The reason is, if your name is the same or similar to any registered business, your application is liable to get rejected.

Step 3: Getting DSC for Directors

The next step is to obtain a DSC (Digital Signature Certificate) for every Director. The process of application is simple. You can get DSC by applying with the online DSC approving authority. You will have to submit all the necessary documents in the self-attested format.

Step 4: Getting DIN for Directors

Once you get DSC for all the directors, you will have to obtain the Director’s Identification Number (DIN). DIN is a unique number that is allotted to every Director of any existing or proposed company by the Ministry of Commerce (MCA). You will have to submit all the necessary documents in the self-attested format.

Step 5: Submitting Form URC-1

After getting DSC and DIN for all the directors, the next step is to submit form URC-1 with all the necessary documents.

Step 6: Submitting form INC-33/34/35

Once you have uploaded form URC-1, you will have to submit the link form INC-33/34/35, just like normal company registration.

Step 7: Preparing Article of Associations (AOA) and Memorandum of Association

The last and final step is to prepare AOA and MOA. You will have to submit both of these to the Registrar of the Companies.

Documents necessary for Conversion

1. A detailed list of the proposed members. Along with the names, addresses and occupations of these proposed members, the list should also contain the number of shares they hold.
2. Written consent to convert the LLP into a Private Limited Company from the majority of the partners.
3. A detailed list of the partners of an LLP firm with their name and address.
4. A written affidavit from the proposed directors of the company stating they are qualified for becoming the director of a company as per the laws. The affidavit should also state that the declared details are correct as per his knowledge
5. The copy of an LLP agreement of the existing firm.
6. Latest copies of ITR filed by the existing LLP.
7. Assets and liabilities statement of the existing LLP prepared by the CA, which should not be older than 30 days on the day of application
8. Written Consent is also mandatory from the secured-creditors.
9. A written and self-certified declaration that the directors will stay compliant to the Indian Stamp Act of 1899.
10. Memorandum of Association
11. Article of Association
12. Form INC-9
13. Form DIR-2

Capital gain after Converting an LLP into a Private Limited firm

Initially, when the Government of India approved the process of conversion, several legal disputes arose related to the capital gain arising due to the transfer of property from LLP to a Private Limited Company.

These disputes lead to court cases and on various occasion, the court delivered landmark rulings. Let’s take a look at some of these cases.

1. In various cases like Malbar Fisheries Company v CIT (1979) 120 ITR 49 (SC), CIT Vs. George Henderson & Co Ltd (1967) 66 ITR 622 (SC), CIT Vs. Gillanders Arbuthnot & Co (1973) 87 ITR 407 (SC), the Bombay High-court observed that if the LLP firm is converted to a Private Limited Company, no Capital gain arises. The Bombay High Court noted that when such conversion takes place according to the procedure in Part IX of the Company’s Act, the existing firm is not dissolved and the assets & liabilities of the firm vests in the newly formed Company.
2. In Vali Pattabhiram Roa v Shri Ramanuja Ginning & Rice Factory (P) Ltd. (1986), the court observed similar points. The court ruled that if the firm is converted into a Private Limited Company as per the Part IX of the Companies act, there is no transfer of property and hence no Capital Gain
3. In the case of Well Pack Packaging Vs. Dy. CIT (2003) 78 TTJ (Ahd.) 448, the court ruled that if the existing firm is converted as per the process mentioned in Part IX of Company’s Act, then there is no question of Capital Gain.    

In short, all the courts have observed same or similar points in the lieu of Converting an existing LLP into a Private Limited Company. If the procedures of Part IX are followed during the process, there is not Capital Gain.

Things to remember while converting an LLP into a Private Limited Company

1. A Private Limited Company has to follow more compliances as compared to an LLP
2. The audit is mandatory for a Private Limited Company.
3. There is a division of ownership in a Private Limited Company as minium 2 individuals are necessary, one for Director and one for Shareholder.

Final thoughts

Converting an existing LLP into a Private Limited Company is a vice choice if you are planning to expand your Business. It might open multiple doors for the growth of your Business. Although there are some disadvantages of registering your firm as a Private Limited Company, the pros outweigh the cons by a great margin.

I hope this blog will be insightful to all those who are planning to convert their LLP into a Private Limited Company. But before you take any step further, we like to recommend you take a second opinion from the subject expert. 

In case if you have any doubts or issues, get in touch with us.

Probal Consulting Group is a leading Taxation, Accounting, and Compliance firm that helps individuals, MSMEs, and other businesses manage their accounting, taxation regulatory compliance affordably.