Conversion into Limited Liability Partnership

Report
Conversion into
Limited Liability Partnership
-Hrishikesh Balasubramaniam
-Nisarg Jaiswal
-Chirag Chaudhury
Articled Assistants , C.R. Sharedalal & Co.
C.R. Sharedalal & Co.
Who can Convert?
Procedure
Partnership to LLP
Company to LLP
Important Considerations for Conversion to LLP
Tax issues on conversion into LLP
Stamp Duty Implications
Benefits
C.R. Sharedalal & Co.
Who can convert?
Partnership Firm
 Private Company
 Unlisted Public Company

C.R. Sharedalal & Co.
Who can Convert?
Procedure
Partnership to LLP
Company to LLP
Important Considerations for Conversion to LLP
Tax issues on conversion into LLP
Stamp Duty Implications
Benefits
C.R. Sharedalal & Co.
No
Time frame
Step
Process
(days)
1
DPIN (Designated Partner
Identification Number)
• Approved DPIN is a prerequisite for incorporation
process
5
• Apply for DPIN and get a
provisional DPIN
•Certification/Attestation of
director's personal details
• Sending the same to the
MCA Cell and getting it
approved
2
Application
for
Availability
• Filing of Form 1
3
On conversion of Firm only
addition of the word LLP in
existing name of the Firm as
last word is allowed
Name
C.R. Sharedalal & Co.
No
Step
Timeframe
Process
(days)
3
Documents required for incorporation
of an LLP
• LLP Agreement
•Form 2
(Statement by Promoter)
•Form 3
(Information regarding the LLP
Agreement)
• Form 4 & Form 9
(Notice of Consent & Appointment of
Designated Partners with their
personal details)
• Subscription sheet signed by the
promoters
• Duly stamped LLP Agreement
• Proof of Address of Registered
Office
2
•Drafting the LLP Agreement
and after getting it vetted by
Promoters, sending it for
printing.
Important attachments for Form
17
• Statement of partners
• Statement of Assets and
Liabilities of the company duly
certified as true and correct by
the C.A.
• List of all the unsecured
creditors along
with their
consent to conversion
• Approval from any other
body/authority, if required
• Processing of e-Forms
C.R. Sharedalal & Co.
No
Step
4
Final Process:
Filing all the above documents
with the RoC.
• Follow up with the RoC Making
changes in LLP Agreement.
• Other Incorporation documents
as suggested by the RoC.
Time
frame
(days)
Process
5
Online uploading of e-form
Payment of registration fees
Issue of certificate of
incorporation.
C.R. Sharedalal & Co.
Who can Convert?
Procedure
Partnership to LLP
Company to LLP
Important Considerations for Conversion to LLP
Tax issues on conversion into LLP
Stamp Duty Implications
Benefits
C.R. Sharedalal & Co.
Partnership
LLP (1/2)
Existing Partnership Firm can be
converted into LLP and all the assets,
liabilities and business of existing
partnership firm will vest in to LLP.
 The conversion of partnership into LLP
will attract tax liability.
 All the existing partners must be the
partners of LLP.

C.R. Sharedalal & Co.
Partnership

LLP (2/2)
Relevant Provisions:
◦ Chapter X – Section 55 of LLP Act, 2008.
◦ Second Schedule of the LLP Act, 2008.
◦ Rule 38 of LLP Rules, 2009.
C.R. Sharedalal & Co.
Who can Convert?
Procedure
Partnership to LLP
Company to LLP
Important Considerations for Conversion to LLP
Tax issues on conversion into LLP
Stamp Duty Implications
Benefits
C.R. Sharedalal & Co.
Company


LLP (1/2)
Existing Private and Public Limited Company
(except Listed Company) can be converted
into LLP and all the assets, liabilities and
business of existing Company will vest in to
LLP.
If the security interest subsists on the assets
of the eligible company then it cannot be
converted into LLP. Company which has
taken secured loan of any nature which is
outstanding as on the date of conversion
cannot be converted into LLP.
C.R. Sharedalal & Co.
Company



LLP (2/2)
All the existing shareholders must be the
partners of LLP as per LLP Act,2008.
Company which has repaid loans must
ensure that the necessary formality of the
Companies Act,1956 is complete and the
charge is removed.
Relevant Provisions:
◦ Chapter X – Section 56 and 57 of LLP Act, 2008.
◦ Third and Fourth Schedule of the LLP Act, 2008.
◦ Rule 39 and 40 of LLP Rules, 2009.
C.R. Sharedalal & Co.
Who can Convert?
Procedure
Partnership to LLP
Company to LLP
Important Considerations for Conversion to LLP
Tax issues on conversion into LLP
Stamp Duty Implications
Benefits
C.R. Sharedalal & Co.
Important Considerations for
Conversion to LLP-(1/3)
o Filing
of Form with Registrar of LLP.
Form 7 & Form 1 and
Form 17/18 & Form 2
o All
the numbers of the Company/Partners
of the Firm shall be the partner in LLP(and
no one else) with the same
Capital/Contribution Ratio.
C.R. Sharedalal & Co.
Important Considerations for
Conversion to LLP-(2/3)
Consent of all members of the
Company/Partners of the Firm shall be
obtained
o No security interest on the assets shall be
subsisting or in force on the date of
application.
o No Objection Certificate from unsecured
creditors.
o Statement of Assets & Liabilities certified by
Auditor of not more than 30 days prior to
the date of the conversion application.
o
C.R. Sharedalal & Co.
Important Considerations for
Conversion to LLP-(3/3)
All due returns of Registrar of Companies,
Income Tax and other Tax authorities shall be
filed.
o No Objection Certificate from other
authorities for conversion, if required.
o After receiving Conversion Certificate the
same to be filed within 15 days with Registrar
of Companies in Form-14.
o
C.R. Sharedalal & Co.
Who can Convert?
Procedure
Partnership to LLP
Company to LLP
Important Considerations for Conversion to LLP
Tax issues on conversion into LLP
Stamp Duty Implications
Benefits
C.R. Sharedalal & Co.
Tax issues on conversion of a
Company into LLP
During Conversion
•When capital gain on conversion will
be exempt?
After Conversion
•Tax rate:
•Eligibility to claim deductions:-
C.R. Sharedalal & Co.
When capital gain on conversion will be
EXEMPT?
As per section 47(xiiib) of income tax act,1961:Any transfer of a capital asset or intangible asset or
share or shares held in the company by a share
holder as a result of conversion of the company into
a LLP in accordance with the provision
of Section 56 or Section 57 of
the LLP Act, 2008 :
47(xiiib) doesn’t apply
Provides that :-
to partnership firms
converting to LLP thus
partnership firms will
have to pay CG tax.
C.R. Sharedalal & Co.
(a)
ALL the assets &
liability of the company
immediately before the
conversion
Asset & liability of the
LLP.
(b)
ALL the
shareholders of the
company
immediately before
the conversion
(1) Become partner of LLP
(2) And their capital contribution
and their profit sharing ratio are in
the same proportion as their share
holding in the company on the
date of conversion.
C.R. Sharedalal & Co.
(c)
Share holders 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.
1year
3year
5year
(d)
2year
4year
Aggregate of the profit sharing ratio of
the shareholders of the company in LLP
should not be less than 50% at any time
during the period of 5 years from the date
of conversion
C.R. Sharedalal & Co.
(e)
(2008-09)
68 Lakhs
(2009-10)
59 Lakhs
(2010-11)
52 Lakhs
(2011-12)
(year of conversion)
58 Lakhs
The total sales, turnover or gross receipts in
business of the company in any of the three previous
years preceding the previous year in which the
conversion takes place does not exceeds 60 lakh
rupees.
C.R. Sharedalal & Co.
82 Lakhs
(f)
Year of Conversion
+Year 2
+Year 1
+Year 3
No amount is paid, directly or indirectly, to any partner
out of balance of accumulated profits (i.e. General
Reserve, etc.) standing in the accounts of the company
on the date of conversion for a period of three
years from the date of conversion.
C.R. Sharedalal & Co.
After Conversion
Tax rate:
• 30% flat tax rate + 3% education cess
• No Minimum Alternate Tax & Dividend Distribution Tax
C.R. Sharedalal & Co.
Following deductions are allowed
to LLP*
1. Interest paid to partners, provided such interest is
authorized by the LLP Agreement (Section 40(b)).
2. Any salary, bonus, commission, or remuneration (by
whatever name called) to a partner will be allowed as a
deduction if it is paid to a working partner who is an
individual.
3. The remuneration paid to such working partner must
be authorized by the LLP Agreement and the amount of
remuneration must not exceed the given limits.
((Section 40(b)).
C.R. Sharedalal & Co.
1. There is a written LLP Agreement.
2. The individual shares of the partners should be very clearly specified in the
deed.
3. A certified copy of LLP Agreement must be submitted with the return of
income of the LLP of the previous year in which the partnership was
formed.
4. Revised LLP agreement should be submitted when ever there is a change in
the constitution of firm or profit sharing ratio.
5. There should not be any failure on the part of the LLP while attending to
notices given by the Income Tax Officer for completion of the assessment of
the LLP.
*Conditions of Section 184 of Income Tax Act should be
satisfied
C.R. Sharedalal & Co.
Tax issues on conversion of a Company/firm into LLP Relevant provisions of Income Tax Act (1/2)
No.
Section
Subject
1
Section 32(1)
5th Proviso
Depreciation in the year of
conversion prorate allocation
between the company and LLP
A.Y. 2011-2012
Section 35
DDA (4A)
Amortization of expenditure
incurred on Voluntary
Retirement Scheme – LLP
eligible to claim deduction for
balance period
A.Y. 2011-2012
Section 43(1)
Explanation
13(b)(iii)
Actual cost – where deduction
is allowed u/s 35AD – cost will
be Nil
A.Y. 2011-2012
2
3
4
Section 43(6)
Explanation 2C
Effective
Date
Written down value – wdv in
A.Y. 2011-2012
the hands of company will be
wdv in the hands ofC.R.
LLP
Sharedalal & Co.
Tax issues on conversion of a Company/firm into LLP Relevant provisions of Income Tax Act (2/2)
No.
Section
Subject
5
Section
49(1)(iii)(e)
Cost to previous owner – cost
in the hands of LLP will be cost
in the hands of company.
A.Y. 1999-2000
6
Section 49
(2AAA)
Rights of partner in LLP – Cost
of acquisition
A.Y. 2011-2012
7
Section 72A
(6A)
Carry forward of business loss
and unabsorbed depreciation
LOSS NOT C/F IN CASE
of PARTERNSHIP FIRM
CONVERTING TO LLP
A.Y. 2011-2012
8
Section
115JAAA(7)
Carry forward of MAT credit
of Company not available to
LLP
C.R. Sharedalal & Co.
Effective
Date
A.Y. 2011-2012
Who can Convert?
Procedure
Partnership to LLP
Company to LLP
Important Considerations for Conversion to LLP
Tax issues on conversion into LLP
Stamp Duty Implications
Benefits
C.R. Sharedalal & Co.
Stamp Duty Implications

As per Section 58 of LLP Act, 2008, all the
assets and liabilities vest into LLP. There is
no transfer of assets and liabilities and
hence no Stamp Duty is required to be
paid.
C.R. Sharedalal & Co.
Who can Convert?
Procedure
Partnership to LLP
Company to LLP
Important Considerations for Conversion to LLP
Tax issues on conversion into LLP
Stamp Duty Implications
Benefits & Drawbacks
C.R. Sharedalal & Co.
Key Benefits
 No Limit on number of shareholders/partners unlike private limited
companies (shareholders limited to 50), an LLP can have unlimited
number of partners.
 Minimal Compliance Level & Cost effective model there is no need of
compliances related to meetings and maintenance of huge statutory
records.
 Automatic transfer - All the assets and liabilities of the Company
immediately before the conversion become the assets and liabilities of
the LLP.
 The goodwill of the Company and its brand value is kept intact and
continues to enjoy the previous success story with legal recognition
 Carry Forward and Set off Losses and Unabsorbed Depreciation the
accumulated loss and unabsorbed depreciation of Company is
deemed to be loss/ depreciation of the successor LLP for the
previous year in which conversion was effected. Thus such loss can be
carried for further eight years in the hands of the successor LLP.
C.R. Sharedalal & Co.
•LLP being recently introduced suffers from lack of awareness &
recognition.
•Requirement of amending LLP Agreement, on happening of various
events, creates frustration.
• Heavy penalties are prescribed for non compliance.
• Partners salary beyond specified limits is not allowed as deduction ,
for tax purposes.
•Benefits of Carry forward of losses and
Capital Gains Tax Exemption are not
available in case of a partnership firm
converting to LLP.
C.R. Sharedalal & Co.

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