LLP to Private Limited

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Choice of LLP vs Private Limited Company

        LLP is mainly ideal for small businesses that have and will continue to have for a reasonable amount of time, an annual sales turnover of fewer than Rs.40 lakhs and a capital contribution of fewer than Rs.25 lakhs. LLPs that satisfy the above condition do not require an audit each year, whereas a private limited company irrespective of turnover and capital requires an audit of financial statements – additional cost and compliance. However, if an LLP crosses an annual turnover of Rs.40 lakhs or a capital contribution of more than Rs.25 lakhs, the compliance requirements for LLP and Private Limited Company become almost similar, making the private limited company a better choice

Winding Up of Company

Reasons for LLP Registration

• The following are reasons some small businesses opt for an LLP registration:
• An audit is not required for an LLP annual sales turnover is less than Rs.40 lakhs and the LLP has a capital contribution of fewer than Rs.25 lakhs. Whereas, for a Private Limited Company, an audit is mandatory irrespective of sales turnover or capital.
• LLP there is no concept of dividend distribution tax. Whereas, for a Private Limited Company, dividends are taxed at 15%.
• In LLP, there is no concept of Board Meetings or Annual General Meetings. So annual compliance is comparatively lesser.
• The process for incorporation of LLP also involves fewer documents and is less cumbersome.
• The above reasons have led to strong growth in the number of LLPs registered in India.

Reason for Private Limited Company Registration

        The above reasons may be good enough for many small businesses to opt for starting an LLP instead of a Private Limited Company. However, LLP still lacks a few significant advantages over a Private Limited Company as follows:

      LLPs do not have the concept of shareholders. Hence, all the owners of an LLP would be a Partner in the LLP. This structure is not suitable for Venture Capitalists and Private Equity Investors – who do not wish to actively participate in the management of the Company. Hence, equity investors will only invest in a Private Limited Company. Therefore, if the startup or promoters have plans for expanding the business by raising equity capital, then the entity must be registered as a private limited company.

Procedure for Conversion of LLP into Company

Follow the below procedure for the conversion of an LLP into Private Limited Company:

Obtain Name Approval

Step 1: Obtain name approval from the Registrar of Companies (ROC) by submitting Reserve Unquie Name (RUN) form, which is in e-format.

Securing DSC and DIN

Step 2: After obtaining name approval, apply for Digital Signature Certificate (DSC) and Director Identification Number (DIN) for the member of the LLP who will be the directors of the Private Limited Company after conversion.

Note: In case of non-applicability of DIN, the applicant needs to provide address proof, identity proof and photographs along with the application. Therefore, obtain DIN directly through filing incorporation form.

Filing of Form URC-1

Step 3: Further, Form URC-1 needs to be filed by the applicant; furnish the following list of documents along with the form URC-1.

• Provide details such as name, address and shares held by the members along with the member’s list.
• Provide details such as Name, Address, DIN, passport number along with an expiry date of all the directors of the Private Limited Company.
• An affidavit is required from the first directors of the Private Limited Company stating that they are not banned from being a director.
• Also, file all mandatory documents with the Registrar of Companies for the registration of the company.
• Note: The details provided by the company should be complete, correct and accurate to the best of their knowledge.
• Copy of Limited Liability Partnership agreement with a list containing the name and address of the partners of LLP and a certified copy of registration which is duly verified by at least two designated partners of LPP is required.
• The statement with the details of the nominal share capital of the firm and the number of shares separated, the number of shares taken and the amount remitted for each share and the name of the firm with the word private limited to be provided.
• The no-objection certificate from all the creditors has to be provided.
• Duly certified accounts statement of the company by the auditor, which should not be less than six days from the date of application and the copy of the newspaper advertisement is required.

Memorandum of Association & Articles of Association

Step 4: Draft the Memorandum of Association (MOA) and Articles of Association (AOA) and submit to the Registrar of Companies. After the approval of the company name, the Register of Companies sanctions the form URC-1.

Pros of Private Limited Company over LLP

1. LLPs do not have the concept of members. Hence, all the owners of an LLP would be a designated Partner in the LLP. This structure is not appropriate for Venture Capitalists and Private Equity Investors – who do not wish to actively participate in the management of the Company. Hence, equity holders will only invest in a Private Limited Company. Therefore, if the owners have plans for expanding the business by raising equity capital, then the entity must be registered as a private limited company.
2. Foreign Direct Investment (FDI) in a private limited company is under the automatic route whereas FDI in Limited Liability Partnership is under the approval route. Therefore, businesses that have foreign or NRI promoters opt for the incorporation of a private limited company.
3. Tax credit in respect of tax paid on deemed income relating to certain companies (i.e. MAT credit U/S 115 AA)
4. The penalty for non-compliance or late filing of documents with the Ministry of Corporate Affairs is most of the time higher for an LLP as a flat fee of Rs.100 per day is charged when the non-compliance continues with no cap on the liability. Therefore, LLPs could incur a huge penalty or fines from MCA due to non-compliance.

Cons of Private Limited Company over LLP

1. Private limited companies have a limit on Number of shareholders whereas an LLP there is no such restriction.
2. The audit is not required for an Limited Liability Partnership annual sales turnover is less than Rs.40 lakhs and the LLP has a capital contribution of fewer than Rs.25 lakhs. Whereas for a Private Limited Company, an audit is mandatory irrespective of sales turnover or capital of the company.
3. In LLP, there is no such concept of Board Meetings or Annual General Meetings. So annual compliance is comparatively lesser.
4. Minimum Alternate Tax U/S 115 JB of Income Tax Act, 1961 is not applicable to LLP.
5. There is no need for compliances related to meetings and maintenance of huge statutory records.

Frequently Asked Questions (FAQ’s)

Can we convert LLP to Private Limited Company?

Provision mentioned in the Section 366 of the Companies Act, 2013 and Company (Authorised to Register) Rules, 2014, says that an LLP can be converted into a Private limited Company.

Is LLP better than Private Limited Company?

It offers limited liability, offers tax advantages, can accommodate an unlimited number of partners, and is credible in that it is registered with the Ministry of Corporate Affairs (MCA). At the same time, it has less compliance than a private limited company and is also significantly cheaper to start and maintain.

How can a partnership be converted into a private limited company?

File an affidavit, duly notarised, from all the partners to provide that in the event of registration, necessary documents or papers shall be submitted to authority with which the firm was earlier registered, for its dissolution as partnership firm consequent to its conversion into private limited company.

Can LLP take loan from bank?

Unlike private limited company, you cannot raise equity funding in llp from any person other than its partner. However debt funding such as term loan, overdraft from bank is possible.

What is the disadvantage of private limited company?

In a private limited company the number of members in any case cannot exceed 50. Another disadvantage of private limited company is that it cannot issue prospectus to general public.

What is the minimum capital required for LLP?

There is no minimum capital requirement in LLP. An LLP can be formed with the least possible capital.

What are the three benefits of LLP registration?

• Gives the advantage of limited liability and also provides flexibility to organize their firm internally.
• Audit is not needed if an annual sale is more than Rs 40 lakhs and capital contribution does not cross the limit of Rs 25 lakhs.
• LLP is not bound to pay Dividend Distribution Tax (DDT).

What is the benefit of Private Limited Company Registration?

LLP does not entertain the concept of shareholders. All the owners in a LLP are considered as Partners in the LLP and are considered as unsuitable for investors such as Venture Capitalists and Private Equity investors who do not possess any desire to indulge in the management of the Company. Private Company is the best choice for investors. If the business is growing then the owners must convert it into a private limited company.

Can LLP borrow money from partners?

All partners are liable for statutory compliances under Partnership Act Only designated partners are liable for statutory compliances as are required under LLP Act (not necessarily in respect of other Acts). He can also give loans to LLP. Every partner of firm is agent of firm and also of other partners.

What is the benefit of converting LLP into Private Limited Company?

• Preservation of Brand Value
• Carry forward of unabsorbed losses and depreciation
• Employee Stock Ownership Plan to employees
• Easy Fund Raising
• Separate Legal Existence
• Limited Liability of Owners

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