Brief Guide to Conversion of LLP into a Private Limited Company

The main factor behind converting LLP into PLC is the expansion in business. The framework of LLP is not suitable for private equity or venture capitalists; investors prefer to invest in PLCs. Even Foreign Direct Investment (FDI) prefers the latter. Therefore, converting LLP into PLC is a wise option and may be conducted by adhering to all prescribed regulations.

An LLP can be converted into a PLC according to provisions of Section 366 of the Companies Act, 2013 and Company Rules (2014). The process of conversion is a step-by-step procedure that is a technical process. When handled with expertise, it can save both cost and time, like the case with LLP registration.

There exist numerous needs that must be satisfied for the conversion of an LLP into a PLC. For example, there should be a minimum of seven partners, approvals of all the partners, advertisement in a national and local newspaper, an NOC (No Objection Certificate) from the ROC etc.

LLP Vs PLC

The LLP business structure is ideal for small businesses which have a capital contribution of less than Rs.25 lakh and an annual turnover of less than Rs. 40 lakhs. Such LLPs are exempt from undergoing an annual audit, while PLCs are mandated to conduct an audit of their financial statements annually. But LLPs that cross such limits of capital and turnover have to conduct annual audits, and this forces them to convert to the PLC structure.

Benefits of Conversion

• Preserving the value of brand

When the LLP is converted to a PLC, the business entity is enabled to continue with the brand name and does not need to make further endeavours for brand advertisements.

• Carrying forward depreciation and losses

Following the conversion, no expense will be spent on bookkeeping because the depreciation and losses incurred will be carried forward from the LLP to the PLC.

• Grant of ESOPs

By converting LLP into PLC, the company is enabled to provide ESOP plans and stock options. The later help the company to draw highly talented employees since they serve as incentives to work for the company.

• Ease in the raising of funds

Thanks to the strict process of company registration, the company structure gains more credibility. This helps in raising more funds from external sources like investors.

• Separation of legal entity

Conversion enables the separation of management and ownership for taking care of potential work. Shareholders are able to assign the management, the responsibility of running and operating the company without loss of control by the process of voting.

• Endowing limited liability

Through conversion, the liability of the owners of the company is limited to the shares held by them.

Reasons for registration of LLP as PLC

• The concept of shareholders is not entertained by LLP. Every owner of an LLP is regarded as a partner in the LLP for LLP formation. They are regarded as unsuitable for investors like private equity holders and venture capitalists who do not desire to indulge in managing the company. Therefore, if the business is growing, it is good to convert the LLP into a PLC.

• There is a rapid growth of FDI in the Indian economy. A PLC does not need approval from the government for FDI, but approvals are mandatory for FDI in LLP.

Process of conversion

• Board meeting

For registration of an LLP as per Section 366 of the Companies Act (2013), a meeting of LLP partners is held to take a vote of their assent for conversion.

• Ascertain the availability of the name

One major benefit of conversion is that the business can operate under the same name as the LLP, provided that the name is available as per the guidelines of the Companies Act, except that the words-‘private limited’ or ‘limited’ must be added.

• Name approval

It is a must to gain approval of name from the ROC (Registrar of Companies) through submission of an application in electronic format. For this, you are required to select different items which are mentioned in the form INC-1. Once the name is accepted by the authorities, it will stay valid for 60 days.

• Securing DIN and DSC

DIN (Direct Identification Number) and DSC (Digital Signature Certificate) should be obtained for all seven members who are going to be the directors of the PLC following conversion.

To obtain DIN, it is required to file an application on the MCA (Ministry of Corporate Affairs) portal. The central government will process and approve the DIN through the MCA. All documents must be attested by a practising Company Secretary or Chartered Accountant.

• Filing URC-1 form

After gaining approval of the name by the ROC, the LLP should do preparation and filing of the URC-1 form by submitting documents ranging from a list of the first directors of the PLC to NOC from creditors and copies of ads in the newspapers.

• MoA and AoA

After gaining approval of the name and sanction of the URC-1 form by the registrar, the MoA (Memorandum of Understanding) and AoA (Articles of Association) should be formulated.

The process of conversion offers some tax benefits. But to avail of these, many extra needs must be met. For example, it is necessary to maintain the same shareholding by partners as in the original LLP.

Another option for converting an LLP is by setting up a separate PLC and getting the total business transferred to the latter via a written agreement. This minimizes the conditions for setting up the PLC but will make you incur more costs like stamp duties and capital gains tax.

In sum, there are many ways to convert a firm into a PLC, such as business take-over of a company, dissolution, itemized sale, slump sale etc. With a view of the available choices, conversion must be conducted in a mode suitable to a specific situation and in the most beneficial way.