When Should You Convert an LLP to a Private Limited Company?

The Conversion of LLP to Private Limited Company is a big step for growing businesses. The decision comes when the business starts getting bigger & needs more structure for growth. The idea of when to convert LLP to Private Limited becomes important at that time. 

Today, in this article we will look at when you should convert an LLP to a private limited company on filesure.

Understanding the Conversion of LLP to Private Limited Company

The business that starts as a Limited Liability Partnership under the LLP Act 2008 is flexible & easy to manage. The structure helps startups at the beginning. The difference between LLP and Private Limited Company is that a company gives more space for funding, investor trust & ownership transfer. The time comes when a business needs external capital & a formal structure. The time is when the business should think of when to convert LLP to Private Limited.

What are the Benefits of converting LLP to Private Limited Company?

• Easier equity funding & share issue:
  The company can issue shares & bring in investors easily. The LLP structure does not allow such flexibility.

• Credibility & governance:
  The investors & banks trust a Private Limited Company more because it shows proper structure & governance.

• Tax advantages & continuity:
  The conversion helps in carrying forward of unabsorbed losses & depreciation. The company also gets a lower corporate tax rate that helps save money.

• Future expansion potential:
  The company can later become a public company & raise more capital. The LLP model cannot provide this benefit.

The points above clearly show the benefits of converting LLP to Private Limited Company & help you decide when the time is right for conversion.

When to convert LLP to Private Limited?

The signs that tell you it is the right time to convert are clear:

• The business plans to raise investment or issue shares.

• The company needs to offer ESOPs or share-based rewards to attract talent.

• The LLP has grown large & now feels limited under the partnership structure.

• The compliance level of LLP has become almost like a company so the extra benefit of staying LLP is not big anymore.

• The company wants to make ownership transfer easy since share transfer is simple in a Private Limited Company.

The business must look at growth, funding needs & long-term goals before conversion.

What is the Process to convert LLP into Private Limited Company?

The conversion process under the Companies Act 2013 has some clear steps.

The process needs complete care & cooperation from all partners for smooth execution.

What are the Documents required for LLP to Private Limited conversion?

The company must follow some rules before starting the conversion process.

Key eligibility conditions:

• The partners must agree to the conversion.

• The LLP must have completed all filings & must not have any pending dues.

• The company must have at least two shareholders & two directors with one being an Indian resident.

Documents required:

• The list of partners of the LLP along with details & copy of the LLP agreement.

• The statement of assets & liabilities certified by a chartered accountant.

• The NOC from creditors & a copy of the newspaper publication of conversion notice.

• The identity & address proofs of directors & MOA, AOA of the new company.

The readiness of all these documents helps finish the conversion faster.

What are the Tax implications of conversion & Legal compliance after conversion?

The tax & compliance rules after conversion are important to know.

• The conversion is tax neutral only if it meets certain conditions under Section 47(xiiib) of the Income Tax Act 1961. The partners must become shareholders & there should be continuity in ownership. The tax may apply if these rules are not followed.

• The company must follow more strict rules after conversion. The rules include regular audits, board meetings & filing of forms with RoC. The company must also maintain books of accounts properly.

• The rights & liabilities of the LLP get transferred to the company. The contracts & obligations continue without any break.

The conversion brings benefits but it also adds responsibilities that need regular compliance.

Conclusion

The Conversion of LLP to Private Limited Company is a strong move toward growth. The step shows the will to scale up & make business more formal. The focus should be on when to convert LLP to Private Limited because timing decides the benefit. The company must study the benefits of converting LLP to Private Limited Company, the process to convert LLP into Private Limited Company & prepare all documents required for LLP to Private Limited conversion.

Also Read: What do You Mean by Spice+