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