Background: Selecting an appropriate legal structure is an important consideration for every business owner. In their previous article Vakilsearch shared the requirements for a valid contract. Here they explain how a Private Limited Company can be converted to a Limited Liability Partnership structure.

Limited Liability Partnerships (LLPs) are a form of business entity that gives extra flexibility and works similar to partnerships but with several added benefits. They can hold property and can enter into contracts in its own name, and do so without adding the name of individual partners. As a result, even when the partners change, the LLP still holds its authority and independence. This makes LLPs a separate legal entity, with all the supporting partners having only limited liability, much like the name suggests. Hence, LLPs work as a sort of hybrid between a private limited company and partnership, providing benefits mid-way between these two. So, what makes them so special? Why are more and more partnerships switching over to become Limited Liability Partnerships? More importantly, if you do want to make such a switch, what steps do you need to take?

Also read: Private Limited Company or Limited Liability Partnership: Which one to choose?

Here’s a look at everything you need to know about converting your legal entities into LLPs.

Governance and benefits

Limited Liability Partnerships are governed based on the Limited Liability Partnership Act - 2008, and this law came into effect on April 1, 2008. Primarily undertaken as a means to promote small and medium-sized enterprises, LLPs have gone on to help several companies by giving them extended benefits. Here’s a look at the major benefits provided by LLPs.

1. Allows for more self-governance 
2. Requires less compliance when compared to other entities
3. No limit to the number of partners
4. No compulsion for a minimum number of meetings 
5. Less strict regulations regarding the maintenance of statutory records
6. Non-applicability of MAT
7. Profits are not subject to Distribution Distribution Tax
8. The Audit is not mandatory
   
   

Eligibility for conversion

1. No security interest in assets while applying
2. The company must have no pending eForms 
3. The company must have no open charges against it
4. Shareholders of the Company all become partners of the LLP 
5. The company must have filed at least one balance sheet and annual return
   
   

Conversion of company into LLP  

A private limited company can be converted into an LLP. And, the following things need to be taken care of. 

Director Identification Number 

Every LLP must have at least two designated partners, and one of those two must be an Indian citizen. At the time of incorporation of the LLP, the partners get their own DIN. Such a number may also be allotted when a new person is added as a director/designated partner in an LLP. Therefore, the first step in converting to an LLP is the addition of designated partners to the company. This, in turn, helps such members obtain their own DINs. Also, members must apply for a DSC before they apply for a DIN because the digital signature is used during the process of DIN Application.

Meeting of the board of directors

The company must call a meeting of its Board of Directors, and then pass a resolution to allow for the conversion of the company into an LLP. Such a resolution must be passed with the required majority, and then must be filed to the MCA with the necessary forms and applications.

Application for name

Next, the company must apply for a name reservation, and get a certificate of approval from the Registrar of Companies.

Incorporation form 

Once the new name has been reserved and allotted, the LLP must now file its Incorporation, along with the following documents:

1. Address proof of LLP’s office
2. Subscription sheets. 
3. Consent of designated partners 
4. Identity proof of all partners
5. Resident proofs of all designated partners and partners 
6. Detail of other companies in which the LLP’s partners work as partners
   
   

Application for conversion into LLP

Form 18 must be duly filled and filed to convert an existing company into an LLP. File this form along with the Incorporation Form. Form 18 must contain the following information:

1. Consent of the company’s shareholders to convert it into LLP
2. Whether all the shareholders are just the partners themselves
3. Updated Income-tax return 
4. Latest balance sheet and annual returns as filed with MCA
5. Any ruling or Court order for or against the company 
6. Whether there exists any security interest in the company’s assets
7. Whether ROC rejects an earlier conversion application
8. List of secured creditors and their consent
9. Statement of accounts via an independent auditor
   
   

Certificate of incorporation 

If all the formalities are successfully over and all the information checks out, the ROC issues a Certificate of Incorporation to the LLP. And the company becomes a registered LLP.

Drafting an LLP agreement

Following the incorporation, the designated partners must now draw up an LLP agreement, which must contain the following information:

1. LLP’s Name
2. Name of all Partners and Designated Partners 
3. Rules of governance
4. Proposed Business
5. Rights and Duties of Partners  
6. Form of contribution 
7. Profit-Sharing ratio
   
   

E-Form-3 and E-Form-14

Form-3 contains data regarding the LLP Agreement. You must fill it within 30 days of converting the company into an LLP, and attach the agreement along with the form. Next, the partners must file Form-14 within 15 days of the conversion. Along with Form-14, the following documents must be attached:

1. Copy of Incorporation Certificate
2. Copy of E-Form FiLLiP
   
   

Also read: Top registration mistakes by startups in India

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