This blog will explain how to convert a Private Limited Company to an LLP. To understand this, we must first understand the LLP Act's eligibility criteria. This law establishes the policies for converting a corporation into an LLP. Also assumed are the prerequisites that must be met prior to conversion. In this regard, we are about to gather information on companies that cannot be converted into LLPs.

Section 55 of the Limited Liability Partnership Act, 2008 ("2008 Act") states the substantive part of the law, that allows a partnership firm to convert into a Limited Liability Partnership ("LLP"), whereas the procedural part of the law that specifies the criteria to be followed for such a conversion is stated in the Second Schedule of the 2008 Act and Rule 38 of the Limited Liability Partnership Rules, 2009 (hereinafter referred to as "2009 Rules").

As a responsible business owner, you should also be aware of the registration implications and some commonly encountered issues that arise during the conversion of a Pvt Ltd organization into an LLP. All of these questions will be answered by the end of this blog.

Effects of Company Conversion

As a result of this conversion, the partnership firm will be deemed dissolved and removed from the Registrar of Firms' records. In Pavan Coal Company LLP Ther Thru... v. State of U.P. & Ors., the Allahabad High Court stated that a partnership firm converted into an LLP becomes competent to conclude contracts as an LLP from the date of registration as specified in the registration certificate. The LLP will be identified by its name in the registration certificate, and all of its partners will be subject to the provisions of the Second Schedule. Without further action, all of the firm's undertakings, tangible and intangible property, and assets, rights, liabilities, privileges, interests, obligations, and so on will 'transfer' and 'vest' in the newly formed LLP.

The second schedule defines 'convert' to include 'transfer' of property, liabilities, and so on. However, in CIT v. Texspin Engineering and Manufacturing Works, the Bombay High Court ruled that conversion, which is a statutory vesting of properties into the LLP, cannot be equated with 'transfer' under Income Tax Law. The Court reasoned that Section 45(1) of the Income Tax Act of 1951, which states that profits arising from the transfer of capital assets are taxable, does not apply in cases of conversion under the 2008 Act because there is no distribution of assets and no transfer between two parties. However, yearly asset depreciation under Section 34 would continue to apply as long as the assets were not sold, discarded, demolished, or destroyed. Following conversion, the firm's status in relation to proceedings by/against it, and agreements (including those of employment and appointment) that existed immediately before registration will remain constant, and it is presumed that the same were entered into by the LLP.

The status of licenses issued to the firm will always be subject to the provisions of the Act under which they were issued. However, each partner of the firm will be personally liable as well as jointly and severally liable with the LLP for the firm's obligations prior to conversion, but will be entitled to indemnification by the LLP for any costs incurred in discharging such liabilities. If a CA Audit Firm, which is an auditor in a company under the Companies Act, 1956, converts into an LLP, it is deemed to be the auditor of that company under Section 58(4)(b) of the 2008 Act.

Because the procedure for converting a partnership firm into an LLP and the procedure for converting a private company into an LLP are nearly identical, the precedents established for private companies can also be applied to partnership firms. In Juluri Umamaheshwar & Ors. v. Leena Agro Chemicals Private Limited Pragathi Industrial Estate & Ors., the National Company Law Tribunal upheld the validity of a memorandum of understanding between disputing parties to convert a company into an LLP and distribute the land to be owned by the LLP in the same proportion as each partner's share. A clause in the agreement stating that the parties will withdraw all suits against each other and register on the same day was also found to be valid in the aforementioned case.

In Sky Light Hospitality LLP v. Assistant Commissioner of Income Tax, it was held that where a notice issued by the Assessing Officer under Sections 147 & 148 of the Income Tax Act, 1961 was erroneously addressed to M/s Sky Light Hospitality Private Limited (the name of the company prior to conversion into LLP) instead of Sky Light Hospitality LLP, and the same was duly received by the LLP and was subsequently relied on by the LLP, the mere fact that it It was also stated that because the notice was received by the LLP on time, the procedural irregularity in question caused no harm to the party. Acadia Hotels and Resorts LLP v. ROC Mumbai established that where there was no wilful negligence on the part of a converting company that incorrectly filed Form-3, the additional fees for amendment will be waived. Courts have emphasized that such procedural aspects should be interpreted liberally unless they contradict the substantive part of the law.

Conversion of LLPs - Regulatory Legislative changes

Section 56 of the Limited Liability Partnership Law, 2008: In order to formalize the conversion of a privately owned company into an LLP, the owners must follow the provisions stated in the Third Schedule and Chapter X of the Indian LLP law (2008).

Rule 39 was implemented in 2009: The applicant or business owner must submit a Form 18 to begin the request process. Once the conversion issues have been resolved, the Registrar will issue a registration certificate. The newly formed LLP must notify the appropriate Registrar of Companies of the completed conversion using Form 14. To understand why private business owners, want to make such a change, consider the associated benefits that LLPs provide. To understand this, we must refer to the LLP Act's Third Schedule, which went into effect in 2008.

LLPs benefit from the following advantages:

When compared to private enterprises, there is less legal compliance.
There are no restrictions on transactions in the Related category.
LLPs are exempt from mandatory auditing.
Profit distribution is no longer subject to restrictions.
DDT, or Dividend Distribution Tax, is not applicable to all LLPs.
Policies promoting MAT, or Minimum Alternate Tax, shall not be implemented on LLPs.
Loans can be obtained from third-party sources without the involvement of an agency.

Appropriate company capabilities that aid in LLP conversion

Companies may apply for LLP conversion while adhering to the policies of Schedule 3 only if:

The Limited Liability Partnership members to whom it is delivered include all business shareowners. Apart from them, there must be no outsiders.
There should be no security interests in the assets of the company. Before submitting an application, the proprietors must examine this criterion.

Prerequisites for LLP Conversion

We will discuss the essential pre-conditions which are as follows:

Each enterprise shareowner must be a legal partner of the LLP.
There should be no security interests in the assets of the company. Before submitting an application, the proprietors must examine this criterion.
The conversion process cannot begin until there has been valid voting by all shareholders in favour or against conversion.
Simultaneously, the company's list of creditors must be confirmed in order to seek permission from them for the conversion.
The appropriate legislative council must issue a No Objection Certificate. This is an essential document for LLP conversion.
All required returns for income tax, ROC, and subsequent statutory authorities must be filed.
The company must present a complete statement of liabilities and assets that has been authenticated by a registered auditor. The notice period must not exceed one month from the date the conversion request is filed.

Factors that influence a company's LLP Conversion Possibilities

Companies in the financial sector, as well as those dealing with insurance policies, cannot be converted into LLPs. Furthermore, businesses that have secured a security/loan against their assets are not eligible for conversion.

Many FDI-holding companies operate; in their cases, performance-oriented conditions are set across functions, and they cannot be converted into an LLP. Companies with third-party commercial borrowings and those displaying FDI through the approval route are also exceptions.

Implications of LLP Registration

Bits and pieces of intellectual and tangible assets belonging to the business, as well as the applicable rights, interests, obligations, and liabilities related to company operations and the undertaking part, must be transferred to new LLP members. This must be accomplished without the use of an additional deed or Act.
The Company is no longer registered with the Companies Registrar. The owners should seek this specific dissolution as soon as the action is completed.
If any authority has already registered the property rights, it is the LLP's primary responsibility to notify the appropriate authorities as soon as possible.
Regardless of the organization's capacity, each company appointment must be scheduled with the registration date in mind.
Each employment contract must continue to exist after registration, and the employer must investigate this matter.
The LLP must deal with all outstanding legal proceedings against the company, and thus tribunal and court matters remain the responsibility of the newly formed council.
The Court's decision, whether in favour of or against the previous enterprise, will continue to be binding on the newly formed LLP.
All schemes, deeds, instruments, applications, bonds, and arrangements that existed prior to the registration date must be maintained with care because they are all enforceable against or by the Limited Liability Partnership.
Before the conversion, the company could be a partner who enters into multiple agreements. After registration, the liabilities and associated rights are unchanged, and their effect is effective from the first day of the newly formed LLP.

Conclusion

The procedure for LLP conversion necessitates the hiring of an attorney to fulfill this role. The Registrar may, however, deny the request if the Council believes that the conversion specifications presented to them are not in accordance with the Companies Act of 2013. If the applicant wishes to appeal the Registrar's decision to refuse LLP conversion, he can always contact the Tribunal.

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