Conversion of LLP into Company

By Trademark Bazaar - 21st November 2017

Conversion of LLP into Company

Currently, there are no provisions for converting an LLP into a company. However, considering the growing need for such conversion enabling provisions would be made when companies Act 2013 will be amended.

In today’s scenario more and more people are attracted towards forming a Limited Liability Partnership. As it provides multiple benefits like a legal status, limited liability and fewer compliances. Generally, small business units opt for limited liability partnership due to less compliance requirements. However, in some cases, an LLP may feel the need to convert itself into the company.

As per the ministry of corporate affairs currently, there is no provision for such conversion. However, considering the growing need for such conversion enabling provisions would be required to be made in the Companies Act for such conversion. Thus, necessary action in this regard would be taken when Companies Act would be revised.

Benefits of LLP registration over the company registration

1. One of the major advantages of LLP over the company is the cost of incorporation of limited liability partnership is significantly less than the cost involved in incorporation of private limited company. Also, the procedure of incorporation of LLP is less cumbersome as compared to the company.

2. In LLP the compliance requirement is very less as compared to the company. For instance in LLP there is no concept of annual general and board meetings.

3. In case of LLP there is no concept of dividend distribution tax. Whereas, in case of the Company, dividends are taxed at 15%.

4. Audit is mandatory to be conducted in case of the company. However, audit is not required for a LLP annual sales turnover is less than Rs.40 lakhs and the LLP has a capital contribution of less than Rs.25 lakhs.

Benefits of the company registration over LLP registration

1. Limited Liability Partnership is prohibited from raising funds in the form equity shares. Thus, the startup or promoters having plans for expanding the business by raising equity capital must get their business registered as a private limited company.

2. LLPs do not have the concept of shareholders. Hence, all the owners of a 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.

3. Further in Foreign Direct Investment (FDI) in LLP is a cumbersome process as an approval is required. However, in case of a private limited company it is under the automatic route thus process of FDI is very simple. Therefore, businesses that have foreign or NRI promoters opt for incorporation of a private limited company.

Conversion of LLP into Company

As per the Ministry of Corporate Affairs:

“LLP conversion into the private limited company would not be allowed under LLP Act, 2008. However, enabling provisions would be required to be made under the Companies Act for such conversion. Necessary action in this regard would be taken when Companies Act would be revised.”

Any business entity initially registered as Limited liability Partnership may desire to be converted as the company. The reasons for such conversions may be the growth in business, need for expansion, equity capital requirement, etc .  As both the acts LLP Act 2008 and companies Act 2013 is silent in this regard thus such conversion cannot be facilitated. However as the as more and more LLP growing, the chance of introduction of the conversion procedure is bright. 

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