How to Convert LLP to Private Limited Company in India

Introduction

A Limited Liability Partnership (LLP) is a business structure that combines elements of a partnership and a company, offering flexibility with limited liability. To overcome these challenges, many entrepreneurs opt to convert their LLP into a Private Limited Company. A Private Limited Company (Pvt Ltd) offers better growth opportunities, the ability to raise funds from investors, and a more structured business framework.

This blog provides a comprehensive guide on how to convert an LLP into a Private Limited Company in India, along with legal requirements, tax implications, and common challenges.

Why Convert LLP to Private Limited Company?

Converting a Limited Liability Partnership(LLP) into a Private Limited Company is a strategic decision that many growing businesses make to achieve greater flexibility, access to funding, and operational efficiency. 

Here are some benefits of the conversion:

1. Access to Funding and Investment Opportunities: 

LLPs cannot issue shares to raise capital, making it difficult to attract investors. Private Limited Companies can issue shares, attract venture capital, and raise funds from angel investors or private equity firms.

2. Separate Legal Entity with Corporate Identity: 

A Private Limited Company enjoys a separate legal identity, meaning it can own assets, enter contracts, and sue or be sued in its name. This provides greater credibility in the market.

3. Limited Liability Protection for Shareholders: 

Both LLPs and Private Limited Companies offer limited liability protection, but a Private Limited Company provides better legal security for shareholders.

4. Increased Business Growth and Expansion: 

A Private Limited Company is more widely recognized in India and internationally, making it easier to expand operations, secure partnerships, and establish credibility with customers and suppliers.

5. Compliance and Governance Structure: 

While an LLP has fewer compliance requirements, a Private Limited Company provides a well-defined corporate governance structure under the Companies Act, 2013.

Eligibility to Convert LLP to Private Limited Company

Before initiating the conversion of an LLP (Limited Liability Partnership) into a Private Limited Company, it is crucial to ensure that the business meets the eligibility criteria prescribed under Section 366 of the Companies Act, 2013. 

Below are the eligibility conditions that an LLP must fulfill to be converted into a Private Limited Company:

1. Approval from LLP Partners

The first and most crucial step in converting an LLP (Limited Liability Partnership) into a Private Limited Company is obtaining approval from all partners.

• The conversion process requires unanimous consent from all partners of the LLP.
• A formal resolution must be passed in a partner’s meeting approving the conversion.
• The resolution should clearly state the intention to convert the LLP into a Private Limited Company and should be duly documented.

2. Minimum Shareholders and Directors

To ensure smooth governance and legal compliance, the Companies Act, 2013 mandates specific minimum requirements for the number of shareholders and directors in a Private Limited Company.

• A Private Limited Company must have at least two shareholders and two directors.
• At least one director must be a resident of India, meaning they must have stayed in India for at least 182 days in the preceding financial year.
• The partners of the LLP can become shareholders and directors in the newly converted Private Limited Company.

3. LLP Must Be Registered Under LLP Act, 2008

For an LLP to get converted into a Private Limited Company, it must first get registered with the LLP Act, 2008. Without getting registered, it can not get converted into a Private Limited Company.

• Only legally registered LLPs under the Limited Liability Partnership Act, 2008, are eligible for conversion.
• Unregistered partnerships or informal business structures do not qualify for direct conversion and must first register as an LLP before applying for conversion.

4. No Existing Legal Liabilities or Pending Cases

Before converting an LLP into a Private Limited Company, it is essential to ensure that the business is free from any legal disputes, pending cases, or outstanding liabilities.

• The LLP should not have any outstanding legal disputes, lawsuits, or pending cases in any court.
• If the LLP has ongoing litigation, it must be resolved or transferred before conversion.
• Any unpaid statutory dues or penalties with regulatory authorities (such as the Ministry of Corporate Affairs, Income Tax Department, or GST authorities) must be cleared.

Documents Required for LLP Conversion

Before jumping into how to convert LLP to private limited company, it’s essential to keep all the essential documents needed for the same. Converting an LLP into a Private Limited Company involves submitting several key documents to the Registrar of Companies (ROC). These Documents ensure that the conversion complies with regulatory requirements and facilitates smooth processing. 

Below is a list of documents required for the conversion process:

1. LLP Incorporation Certificate

This document verifies the legal existence of the LLP. It must be submitted as proof that the business is duly registered under the Limited Liability Partnership Act, 2008.

2. LLP Agreement

The original LLP agreement must be provided. This agreement outlines the internal structure and operational framework of the LLP.

3. Consent of All LLP Partners

A written consent from all partners is required, confirming their approval of the conversion. This is typically documented in the form of a resolution passed by the LLP partners.

4. Financial Statements

The LLP must submit its most recent balance sheet and profit & loss statement for verification. These documents demonstrate the financial health and compliance of the LLP.

5. Identity and Address Proof of Directors and Shareholders

PAN card, Aadhaar card, passport, or voter ID (for Indian citizens) and passport (for foreign nationals) are required for identification purposes. Additionally, address proofs such as utility bills or bank statements are needed.

6. Registered Office Proof

Proof of the registered office address is necessary. This can include a rent agreement (if rented), electricity bill, or NOC from the landlord.

7. Digital Signature Certificate (DSC)

The proposed directors must obtain a Digital Signature Certificate (DSC), which is required for signing electronic documents and forms during the conversion process.

8. Director Identification Number (DIN)

A Director Identification Number (DIN) must be obtained for all directors of the newly formed Private Limited Company. If the directors don’t already have a DIN, they will need to apply for one through the MCA portal.

Step-by-Step Process to Convert LLP to Private Limited Company

This streamlined process ensures that the conversion is completed in compliance with legal requirements, making the transition from LLP to a Private Limited Company smoother and faster.

Here’s a simplified version of the step-by-step process:

1. Obtain a Digital Signature Certificate (DSC) and Director Identification Number (DIN)

The first step is to obtain a Digital Signature Certificate and Director  Identification Number which are crucial aspects for the process of conversion of LLP to a Private Limited Company.

• All proposed directors must apply for a Digital Signature Certificate (DSC) for signing electronic documents.
• Additionally, every director must have a Director Identification Number (DIN), which is required for legal identification under the Companies Act, 2013.

2. Pass a Resolution for Conversion

For converting the LLP into a Private Limited Company, the partners of the LLP should pass a resolution by giving their consent about the process of conversion.

• The partners of the LLP must hold a meeting and pass a formal resolution agreeing to convert the LLP into a Private Limited Company.
• The resolution must be recorded and signed by all partners, indicating their consent.

3. Name Approval from the Ministry of Corporate Affairs (MCA)

For converting a LLP into a Private Limited Company then the LLP must give a unique name to the Private Limited Company.

• The new Private Limited Company must have a unique name.
• Apply for name approval through the RUN (Reserve Unique Name) service on the MCA portal.
• Ensure the name complies with MCA naming guidelines and is available for registration.

4. File Form URC-1 with MCA

After obtaining name approval and passing the resolution for conversion, the next crucial step is to file Form URC-1 with the Ministry of Corporate Affairs (MCA).

• Form URC-1 must be filed with the Registrar of Companies (ROC).
• Attach the required documents, including the LLP agreement, partners’ consent, financial statements, and proof of registered office.

5. Draft and Submit Memorandum of Association (MOA) and Articles of Association (AOA)

Memorandum and Articles of Association are the most important documents and they should be drafted, signed by the directors, and submitted to ROC.

• The Memorandum of Association (MOA) outlines the company’s objectives, and the Articles of Association (AOA) defines the internal governance rules.
• Both documents must be signed by all directors and submitted to the ROC.

6. Certificate of Incorporation

Once all the necessary documents have been filed and verified by the Registrar of Companies (ROC), the final step in the conversion process is obtaining the Certificate of Incorporation.

• Once the ROC verifies the documents and approves the application, a Certificate of Incorporation is issued.
• This certificate officially confirms the conversion of the LLP into a Private Limited Company.

Legal and Tax Implications of LLP Conversion

Converting an LLP to a Private Limited Company brings with it several legal and tax-related considerations that need to be understood before proceeding with the transformation. 

Here are the legal and tax implications for conversion:

1. Legal Compliance under the Companies Act, 2013

Companies Act, 2013  imposes stricter regulatory compliance requirements than those for LLPs, which include corporate governance norms, filing obligations, and operational procedures. 

This means that the company will need to comply with:

• Annual General Meetings (AGM): Private limited companies are required to hold an AGM every year.
• Board Meetings: The company must conduct regular board meetings and record minutes.
• Corporate Governance: Private Limited Companies must follow strict governance norms, including the appointment of directors, maintenance of statutory registers, and filings with the Registrar of Companies (ROC).

2. Taxation Structure

The tax structure for an LLP differs significantly from that of a Private Limited Company. When the conversion takes place, the company will be taxed under corporate tax laws, which come with distinct benefits and obligations

Below are key tax-related implications:

• LLP Taxation: LLPs are taxed at a rate of 30%, and the partners’ income is taxed individually as per personal income tax slabs.
  
• Private Limited Company Taxation: Unlike LLPs, which are taxed on the income of the partners, a Private Limited Company is treated as a separate legal entity and is subject to corporate tax rates.

3. Legal Documentation and Filing Requirements

Post-conversion, the new Private Limited Company will have to follow specific filing and documentation requirements mandated by the Registrar of Companies (ROC). 

• Filing with ROC: Post-conversion, the Private Limited Company will have to file certain documents with the Registrar of Companies (ROC), including Annual Returns and Financial Statements. 
• Contractual Obligations: Any contracts or agreements signed by the LLP, including leases, employee contracts, or vendor agreements, need to be re-evaluated and possibly amended under the name of the new Private Limited Company.

Common Challenges in LLP to Private Limited Company Conversion

While converting an LLP to a Private Limited Company can offer several advantages, the process is not without its challenges. Entrepreneurs and business owners may face a range of difficulties during the conversion, from legal complications to financial implications. 

1. Legal and Documentation Complexities

One of the most common challenges in converting an LLP to a Private Limited Company is the complexity of legal procedures and documentation.

• The process involves multiple filings with the Registrar of Companies (ROC), including the submission of Form URC-1, Memorandum of Association (MOA), Articles of Association (AOA), and other supporting documents.

2. Valuation of Assets and Liabilities

When converting an LLP to a Private Limited Company, there can be challenges related to the valuation of assets and liabilities.

• The assets of the LLP, including fixed assets, intellectual property, and other business assets, need to be properly valued to reflect their fair market value in the new company structure.

3. Tax Implications and Liabilities

The shift from an LLP to a Private Limited Company can lead to unforeseen tax implications and liabilities.

• Additionally, the transition to a corporate tax regime introduces different taxation rates, such as Dividend Distribution Tax (DDT), Minimum Alternate Tax (MAT), and other corporate taxes.

4. Change in Governance and Management Structure

A Private Limited Company operates under a more formal governance structure compared to an LLP and requires several changes for the conversion.

• Converting the business to a Private Limited Company may require changes in management roles, responsibilities, and decision-making processes, which could cause disruption, especially if the transition isn’t carefully planned.

LLP vs Private Limited Company: Difference Between

When starting or growing a business, choosing the right legal structure is crucial for long-term success. Limited Liability Partnership (LLP) and Private Limited Company are two popular business structures in India, each offering distinct advantages and disadvantages.

Here is the difference between LLP and Private Limited Company : 

Feature	LLP	Private Limited Company
Legal Structure	A hybrid of partnership & Company	Separate legal entity
Ownership	Partners	Shareholders & Directors
Liability Protection	Limited to partners’ contributions	Limited to shareholders’ shares
Fundraising Options	Cannot issue shares	Can raise funds via equity
Taxation	LLP tax rates apply	Corporate tax rates apply
Regulatory Compliance	Governed by LLP Act, 2008	Governed by Companies Act, 2013
Annual Compliance	Less stringent	Requires more statutory compliance

Conclusion

Converting an LLP into a Private Limited Company provides several benefits, including better funding opportunities, corporate structure, and limited liability protection. However, the process involves multiple legal, tax, and compliance steps. Ensuring proper documentation and following the prescribed steps can help businesses transition smoothly.

Contact RegisterKaro to consult with legal and financial experts who can help you navigate the conversion process, evaluate your business needs, and guide you in making the right decision for your future success.

Frequently Asked Questions (FAQs)

1. Can an LLP be converted into a Private Limited Company?

Yes, an LLP can be converted into a Private Limited Company under Section 366 of the Companies Act, 2013.

2. How long does the LLP to Private Limited Company conversion take?

The process usually takes 30 to 45 days, depending on document approvals and MCA processing times.

3. Do I need to close the LLP before conversion?

No, the LLP does not need to be dissolved but must comply with conversion procedures.

4. What happens to the assets and liabilities of the LLP after conversion?

All assets, liabilities, and contracts of the LLP transfer to the Private Limited Company automatically.

5. Can a Private Limited Company convert back to an LLP?

Yes, but the process requires approval from the ROC and compliance with the LLP Act, 2008.