Conversion of Company into LLP: Legal, Tax and Procedural Insights The Update Conversion of a company into an LLP is permitted under the LLP Act, 2008, subject to conditions relating to shareholders, assets and liabilities. Legal Framework for Conversion The conversion of a company into an LLP is governed primarily by the Limited Liability Partnership Act, 2008.
Although the process is permitted under the Limited Liability Partnership Act, 2008, the conversion must also comply with the Companies Act, 2013 and the Income Tax Act, 1961. A business considering this transition must carefully examine legal requirements, tax provisions and procedural steps to ensure that the conversion remains valid and tax efficient.
Key Takeaways
- Conversion of Company into LLP: Legal, Tax and Procedural Insights The Update Conversion of a company into an LLP is permitted under the LLP Act, 2008, subject to conditions relating to shareholders, assets and liabilities.
- The Action Promoters should review legal requirements under the LLP Act, Companies Act and Income Tax Act before initiating the conversion process.
- Legal Framework for Conversion The conversion of a company into an LLP is governed primarily by the Limited Liability Partnership Act, 2008.
- Type of Company Legal Provision Private Company Section 56 and Third Schedule of LLP Act Unlisted Public Company Section 57 and Fourth Schedule of LLP Act In addition to these provisions, the tax implications of conversion are governed by Section 47(xiiib) of the Income Tax Act, 1961.
- Procedure for Conversion of Company into LLP The conversion process involves several filings with the Registrar of Companies.
Conversion of Company into LLP: Legal, Tax and Procedural Insights
The Update
Conversion of a company into an LLP is permitted under the LLP Act, 2008, subject to conditions relating to shareholders, assets and liabilities.
The Impact
Businesses may reduce compliance requirements and achieve tax efficiency by restructuring as an LLP instead of continuing as a company.
The Action
Promoters should review legal requirements under the LLP Act, Companies Act and Income Tax Act before initiating the conversion process.
Why Businesses Convert Companies into LLPs
Both companies and LLPs are recognised as body corporates with separate legal identity and perpetual succession. However, the compliance requirements under the Companies Act, 2013 are significantly higher compared to LLPs.
For many businesses, especially closely held enterprises, LLPs provide a more flexible and efficient structure.
Some common reasons for conversion include:
• Reduced compliance burden compared to companies
• Simpler management and governance structure
• Flexible profit sharing arrangements among partners
• Tax advantages in certain situations
Another important factor is taxation. Dividends distributed by companies are taxable in the hands of shareholders according to their income tax slab rates. In contrast, profits distributed by an LLP are generally not taxed again in the hands of partners once tax has been paid by the LLP.
This makes LLPs attractive for promoters seeking a simpler tax structure.
Legal Framework for Conversion
The conversion of a company into an LLP is governed primarily by the Limited Liability Partnership Act, 2008.
Different provisions apply depending on the type of company involved.
Type of Company Legal Provision
Private Company Section 56 and Third Schedule of LLP Act
Unlisted Public Company Section 57 and Fourth Schedule of LLP Act
In addition to these provisions, the tax implications of conversion are governed by Section 47(xiiib) of the Income Tax Act, 1961.
Therefore, companies planning conversion must examine all relevant laws together rather than focusing only on corporate compliance.
Pre-requisites for Conversion
Before applying for conversion, certain conditions must be satisfied under the LLP Act.
For Private Companies
• There must be no existing security interest on the company’s assets at the time of conversion.
• All shareholders of the company must become partners in the LLP.
• No person other than existing shareholders can become a partner at the time of conversion.
For Unlisted Public Companies
The conditions are largely similar.
• The company must not have any subsisting security interest on its assets.
• All shareholders must become partners of the LLP.
If any shareholder does not wish to participate in the LLP, other shareholders must acquire that person’s shares according to the company’s Articles of Association before applying for conversion.
Tax Provisions under the Income Tax Act
The tax consequences of conversion are addressed under Section 47(xiiib) of the Income Tax Act, 1961.
This provision provides relief from capital gains tax when certain conditions are satisfied.
Under this section, no capital gains tax will arise on:
• Transfer of capital assets or intangible assets from the company to the LLP
• Transfer of shares held by shareholders when the company converts into an LLP
However, these benefits apply only if the conversion is carried out in accordance with the LLP Act and the conditions prescribed in the Income Tax Act.
Conditions for Capital Gains Exemption
To claim tax exemption under Section 47(xiiib), several conditions must be satisfied.
Condition Requirement
Transfer of Assets All assets and liabilities of the company must become those of the LLP
Shareholders to Partners All shareholders must become partners in the LLP
Profit Sharing Profit share in LLP must be proportionate to shareholding
No Additional Consideration Shareholders must not receive any benefit other than profit share and capital contribution
Minimum Profit Share Shareholders must hold at least 50 percent profit share for 5 years
Turnover Limit Company turnover must not exceed ₹60 lakh in any of the previous three years
Asset Limit Book value of assets must not exceed ₹5 crore in the preceding three years
Accumulated Profits No distribution of accumulated profits to partners for three years
If any of these conditions are violated, the capital gains that were previously exempt will become taxable in the year when the conditions are breached.
Procedure for Conversion of Company into LLP
The conversion process involves several filings with the Registrar of Companies.
Step 1: Name Reservation
The proposed LLP name must first be reserved by filing the RUN-LLP form on the MCA portal.
A board resolution and the proposed business objects must be attached with the application.
Step 2: Incorporation Filing
After name approval, the incorporation documents must be filed using Form FiLLiP along with Form 18.
These forms contain details about the partners, registered office and conversion of the company into an LLP.
Step 3: Approval by Registrar
Once the Registrar of Companies verifies the documents and approvals, a certificate of registration is issued and the company is officially converted into an LLP.
Required Documents for Conversion
Certain documents must be attached with the forms submitted to the Registrar.
Documents required with Form FiLLiP include:
• Consent of designated partners
• Proof of registered office address
• Lease deed or rent agreement and NOC if premises are rented
• Latest electricity bill of the premises
• Subscriber sheet of the LLP
Documents required with Form 18 include:
• Consent statement from shareholders
• Statement of assets and liabilities certified by an auditor
• List of secured creditors along with their consent
• Copy of latest income tax return of the company
• Declaration stating that there is no pending litigation
Conclusion
Converting a company into an LLP can be a useful restructuring strategy for businesses seeking reduced compliance and a simpler operational framework. When implemented correctly, the conversion can also provide tax advantages under the Income Tax Act.
However, the tax benefits under Section 47(xiiib) are conditional. Even a small deviation from the prescribed requirements can result in capital gains becoming taxable in future years.
Therefore, companies planning conversion should carefully evaluate legal provisions, tax rules and procedural requirements before proceeding. A properly structured conversion can help businesses achieve long-term operational efficiency while maintaining legal and tax compliance.
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Conversion of Company into LLP: Legal, Tax and Procedural Analysis+
Conversion of Company into LLP: Legal, Tax and Procedural Insights The Update Conversion of a company into an LLP is permitted under the LLP Act, 2008, subject to conditions relating to shareholders, assets and liabilities. Legal Framework for Conversion The conversion of a company into an LLP is governed primarily by the Limited Liability Partnership Act, 2008.