1. Introduction

A limited liability partnership (LLP) is a flexible legal and tax entity where every partner has a limited personal liability for the debts or claims of the partnership Which Means if the partnership fails, then creditors cannot go after a partner’s personal assets or income.

A private company is a company having a minimum paid-up capital as prescribed and whose articles of association:

• Restricts the right to transfer shares
• Excluding One Person Company (OPC) limits the number of its members to 200
• Restricts any invitation to the public to subscribe to any company securities

2. Legal Framework for Conversion of Company into LLP:

A Private Limited Company or Unlisted Public Company may convert into a Limited Liability Partnership in accordance with the provisions of Section 56 and the Third and Fourth Schedule of LLP Act, 2008.

3. Benefits Of LLP Under Income Tax Act:

• 1.Non-applicability of MAT.
• 2. Profits can be distributed without any cost of Dividend Distribution Tax (DDT).
• 3. Audit not mandatory.

Other Benefits Of LLP

4. What is the Need Of Conversion From Company into an LLP?

- No Dividend Tax on Distribution of Profits:

A dividend received from Company is taxable in the hands of shareholders as per their applicable income tax slab rate. While taxation structure for LLP is simpler as Compared to Company. Once profit is declared and tax is paid by LLP, the distributed income is tax free in the hands of the partners.

- Withdrawal/Paying back Of Capital:

Buy back is very complex and costly exercise in case of company. However, in LLP, partners can withdraw his/her capital at any point of time by writing a simple letter. There is no tax implications on withdrawal of capital from LLP.

- No Stamp Duty Payable:

There is no stamp duty payable on all movable and immovable properties of the company pursuant to conversion of a private limited company into LLP as such properties automatically vest in the LLP.

- Sec 72A- Set Off and Carry forward of losses:

Carry forward and set off losses and unabsorbed depreciation of the company is deemed to be loss/depreciation of successor LLP the previous year in which conversion was affected, thus such loss can be carried for further 8 years in the hands of the successor LLP.

- Capital Gain Tax On Transfer:

No Capital gain tax shall be charged on transfer of property from the company to LLP, if the conditions stipulated in the Section 47(xiiib) of the Income Tax Act 1961, are fulfilled. There will be no capital gains in the hands of the shareholders when they receive capital in the LLP in lieu of their shares in the company. The transfer is exempt under sec 47(xiiib).

5.Pre-requisites for Conversion Of a Company into LLP

• There is no security interest in its assets (open charges) subsisting or in force at the time of application.
• Every shareholder of the Company must agree with the decision of conversion and become partners of LLP.
• All the creditors of the Company must also agree with the conversion.
• All the pending forms and returns are required to be filled up to date with the ROC.
• At least one financial statement and annual return should have been filed by the company after its incorporation.
• The Company should be having share capital.
• The Company should NOT be a Section 25 Company/Section 8 Company under Companies Act, 1956/2013.

6. TAXATION ON CONVERSION OF COMPANY INTO LLP:

As per Section 47(xiiib), no capital gains shall arise on the following transfer:

• Any transfer of a capital asset or intangible asset by a private company to a LLP or
• any transfer of a share or shares held in the company by a shareholder as a result of conversion of the company into an LLP in accordance with the provisions of section 56 or section 57 of the Limited Liability Partnership Act, 2008

The capital gains will be Exempt on compliance of following conditions:

• All the assets and liabilities of the company immediately before the conversion become the assets and liabilities of the LLP
• All the shareholders of the company immediately before the conversion become the partners of the LLP and their capital contribution and profit-sharing ratio in the LLP are in the same proportion as their shareholding in the company on the date of conversion.
• The shareholders of the company do not receive any consideration or benefit, directly or indirectly, in any form or manner, other than by way of share in profit and capital contribution in the LLP.
• The aggregate of the profit-sharing ratio of the shareholders of the company in the LLP shall not be less than 50% at any time during the period of 5 years from the date of conversion.
• The total sales, turnover or gross receipts in the business of the company in any of the 3 previous years preceding the previous year in which the conversion takes place does not exceed 60 lakh rupees.
• The total value of the assets as appearing in the books of account of the company in any of the 3 previous years preceding the previous year in which the conversion takes place does not exceed 5 crore rupees.
• No amount is paid, either directly or indirectly, to any partner out of balance of accumulated profit standing in the accounts of the company on the date of conversion for a period of 3 years from the date of conversion.

If all the above conditions are complied with, the conversion shall not attract capital gains tax either for the Company or the Successor LLP or for the shareholders of the Company, who became partner in the successor LLP .If any of the above conditions are not complied with, then as per provisions of Section 47A(4) such transfer of Capital Assets & Intangible assets deemed to be liable to Capital gains of the successor LLP or the Shareholders of the predecessor Company in the previous year in which such non-compliance took place.

7.Conclusion:

Owing to flexibility in its structure, compliances, tax and operation, LLP would be useful for small and medium enterprises and service sector enterprises. Those companies which depends on self-funding or companies with less capital requirements, may go for conversion to LLPs to tap the benefits which LLPs offer. The conversion from the existing corporate structure can be made to a LLP while retaining the advantages of Limited Liability, Separate entity and perpetual succession.