Conversion of LLC into LLP by Nivedita Sarda

Report
A SWITCH-OVER INDUCED BY COMPANIES ACT, 2013
BY
Adv. Nivedita R. Sarda
Vedanta Law Chambers,
1st Floor, SSK House, B-62, Sahkar Marg, Jaipur
9829083882, 01412740911
KEY CHANGES INTRODUCED BY THE 2013
ACT
 CHANGE IN CONCEPTS:
A subsidiary company
The concepts of ‘subsidiary’ and ‘holding
company’ have also undergone changes under the
2013 Act, as the definition now requires a
company to either have control over the board of
directors of another company or have control over
one-half of its total share capital (as opposed to
equity share capital under the 1956 Act), whether
directly or through another subsidiary, in order to
qualify as its holding company.
‘Associate’ and ‘related party
The 2013 Act has expanded the scope of ‘related
party’ to include, in relation to a company, its key
managerial personnel (“KMP”, being the CEO, CFO,
company secretary, whole-time director and other
prescribed officers) and their relatives, a public
company in which a director or manager of the
company holds more than 2% paid up capital, a
person in accordance with whose instructions a
director or manager of the company is accustomed to
act, a body corporate whose board/managing
director/manager is accustomed to act in accordance
with instructions of a director or manager of the
company, its holding company, subsidiary company,
another subsidiary of the holding company and an
‘associate company’, among others.
PENALTY
Contravention of these provisions is punishable with
imprisonment upto 5 years and/or fine upto the higher of
INR 250 million and three times the amount of profits made
by the defaulter.
INTERCORPORATE LOANS, GUARANTEES &
INVESTMENTS
The restrictions with regard to inter-corporate
loans, guarantees and investments have been
extended, under the 2013 Act, to private
companies and to such transactions between
holding and subsidiary companies. While the 1956
Act enabled the board of directors to provide a
guarantee in excess of the specified thresholds
subject to shareholder ratification, the 2013 Act
does not provide for the same.
BORROWINGS AND DISPOSAL
The earlier section 293 and the new section 180 pertained to
powers of the Board of Directors which can be exercised only at a
general meeting by way of special resolution to be passed for the
purpose. Section 293(1)(d) pertained to borrowing powers of the
companies i.e. the amount upto which the companies could borrow
was laid down in the special resolution which was approved by the
members in the general meeting. Companies are allowed to borrow
any sums of monies upto the paid up share capital and free
reserves of the company. Any borrowal in excess of the
combination of these two limits i.e. paid up share capital and free
reserves required approval of the members in the general meeting
by way of special resolution. Typically companies passed an
omnibus resolution securing approval for Rs.X amount which was
way above the paid up share capital and free reserves of the
company but sufficient for the purposes of the company.
EXCESSIVE REGULATION ON COMPANIES

A private company is now
required to comply with all fund
raising restrictions applicable to
public companies such as those
pertaining to private placement,
rights issue, preferential allotment
and issuance of shares with
differential rights. The 2013 Act also
mandates obtaining of shareholder
approval for lease or disposal of an
undertaking or its substantial part or
for borrowings in excess of specified
thresholds and for inter-corporate
loans and investments.
 Private subsidiaries of public companies
As per the definition of ‘public company’ under
the 2013 Act, a private subsidiary of a company
other than a private company, would be deemed
to be a public company, even if the company
contains the restrictions applicable to private
companies in its Articles of Association. Therefore,
a private subsidiary of a public company would
also have to comply with provisions applicable to
public companies
PROBLEMS POSED TO THE PRIVATE
COMPANIES DUE TO THE CHANGES
 LOAN TO DIRECTORS (sec185)
 A company can however give loan or give guarantee or
provide security for the due repayment of any loan if it is in
the ordinary course of its business.
 The rate of interest shall not be less than the rate of
interest provided by RBI.
Penal consequences for contravention of sec 185
 The company shall be punishable with fine which shall not
be less than Rs.5 lacs may extend to Rs.25 lacs.
 The person to whom loan etc. is be given shall be
punishable with imprisonment which may extend to 6
months or with fine which shall not be less than Rs. 5 lacs
may extend to Rs. 25 lacs or both.
BORROWING POWERS
According to sec 180(1)(c) of Companies Act, 2013 the Board of
Directors of a company shall exercise the following powers
only with the consent of the company by a special resolution,
namely:—
 to borrow money, where the money to be borrowed, together
with the money already borrowed by the company will exceed
aggregate of its paid-up share capital and free reserves, apart
from temporary loans obtained from the company’s bankers in
the ordinary course of business:
 Provided that the acceptance by a banking company, in the
ordinary course of its business, of deposits of money from
the public, repayable on demand or otherwise, and
withdrawable by cheque, draft, order or otherwise, shall not
be deemed to be a
borrowing of monies by the banking company within the
meaning of this clause.
 It implies that it has become necessary for
private companies to obtain approval of their
members by way of special resolution passed
at the general meeting that the company is
allowed to borrow monies in excess of the
paid up share capital and free reserves of the
company, specifying thereby the maximum
amount upto which monies could be borrowed
by the company
SWITCH-OVER
 Companies Act, 2013 has brought massive changes for
private companies as barring a very few, all the exemptions
which were available to private companies under the
Companies Act, 1956 have been withdrawn in the
Companies Act, 2013. This problem has brought a fresh and
relaxed model of “LLP” into the scenario.
WHAT IS A “LLP”?
A Limited Liability Partnership is a hybrid between a
company and a partnership that, as the name suggests,
provides the benefits of limited liability and allows its
members the flexibility of organizing their internal structure
as a partnership based on a mutually arrived agreement.
ADVANTAGES OF LIMITED LIABILITY
PARTNERSHIP(LLP)




In a nutshell, the Limited Liability Partnership has the following
advantages:
It provides limited liability to its partners. Though personal Liability
arises in case of wrongful acts or omissions, a partner is not
personally liable for such acts or omissions of other partner.
LLP Business Structure also has the advantage of Internal
Flexibility. As in traditional partnership, the internal structure of
LLP can be organized as per mutual agreement.
The requirements as to Board Meetings, Resolutions, Annual
meetings, etc. are not there in case of LLP. There is less paperwork
in case of LLPs, even the formation of a partnership agreement is
not mandatory; the Act provides for default provisions in its
Schedule I. The filing requirements are also less as compared to a
company.
Since LLP is a separate legal entity, its existence is not offered by
the entry or exit of partners.
HOW IS THE SWITCH-OVER
BENEFICIAL?
1. TAXATION
2. NO AUDIT REQUIREMENT
3. AUTOMATIC TRANSFER
4. NO CAPITAL GAIN TAX
5. NO LIMIT ON NUMBER OF PARTNERS
6. MINIMAL COMPLIANCE LEVEL AND COST
EFFECTIVE MODEL
7. CONTINUATION OF BRAND VALUE
TAXATION
REQUIREMENT OF AUDIT
1. Only the Limited Liability Partnership whose
contribution exceed Rs. 25 Lakh or the Limited
Liability Partnership whose turnover exceed Rs.
40 Lakh are required to annually get their
accounts audited by any Chartered Accountant in
practice.
2. Limited Liability Partnerships who are exempted
from mandatory audit may also get their accounts
audited as per the Limited Liability Partnership
Rules 2009.
3. In case if the partners do not decide for the
audit of the accounts of the LLP a statement to
be included in the Statement of Account and
Solvency by the partners to the effect that the
partners acknowledge their responsibilities for
complying with the requirements of the Act and
the Rules with respect to preparation of books
of account and a certificate.
This certificate to be filed with the Registrar of
Companies, LLP along with e Form 8.
AUTOMATIC TRANSFER
All the assets and liabilities of the
company immediately before the
conversion become assets and liabilities of
the LLP.
NO LIMIT ON NUMBER OF
PARTNERS
Unlike Private Limited Companies
whose number of shareholders are
limited to 50, an LLP can have
unlimited number of partners.
MINIMAL COMPLIANCE LEVEL & COST
EFFECTIVE MODEL
1. Many
of the privileges and exemptions
currently available to private companies in
the Companies Act 1956 stand withdrawn in
Companies Act 2013.
2. Stricter compliance and disclosure regime
for private companies under the Companies
Act 2013.
3. This would require revamping and
scaling up internal processes by the
private companies.
CONTINUATION OF BRAND VALUE
The goodwill of the company and its brand
value is kept intact and continues to enjoy
the previous success story with legal
recognition.
DISADVANTAGE
 Consideration
 Ownership Restrictions
 Transferability
 Insurance
Stamp duty on conversion
 According to the Indian Stamp Act 1899 stamp duty is applicable for Limited Liability
Partnership Agreements under the respective State Stamps Acts on the basis of
contribution.
 A private company can look forward to convert into more flexible form of Limited
Liability Partnership without paying stamp duty to state governments.
 The government intends to allow these entities to vest the ownership of their assets with
a newly formed LLP without executing a deal of transfer these assets.
 To remove the requirement of transfer of assets through conveyance or instrument which
attracts stamp duty, the government has introduced a special provision in the LLP bill for
vesting of assets on the LLP at the time of its registration.
Inbound and Outbound
FDI is subject
to FEMA
regulations
LLP with FDI
will not be eligible
to make
downstream
investment
Not permitted in
Agricultural,
plantation,
Print media,
real estate
FDI in LLP under
automatic route
Is not allowed.
Inbound
Investment
FDI permitted in
Sectors where
100% FDI allowed
Through
Automatic route
FDI allowed
Only Through
government
route
FDI policy for
LLP
Announced in
April
2012
Foreign
Institutional
Investors cannot
Invest in LLP
Conversion of Co.
With FDI into LLP,
Allowed With prior
approval Of FIPB/
Government.
Foreign Capital
Participation by
way Of debit to NRE
/ FCNR account
Foreign Venture
Capital Investors
Cannot invest in
LLP
Inbound
Investment
Foreign Capital
Participation by
way Of cash,
through
Normal banking
channels
LLP’s cannot
avail
External
Commercial
Borrowing
Co. registered
In India can
nominate
Designated partner
In LLP having
FDI
LLP is not permitted
to invest outside
India under
automatic route
Outbound
Investment
No guidelines are
framed
So far
LLP can make
investment
With prior approval
of RBI
Service tax, Sales Tax and registration
Service Tax
 For the purpose of Service Tax, an LLP will be treated as partnership firm only.
 Service Tax rules, 1994 has been amended by the Service Tax (Amendment) Rules, 2012 to
consider LLP as a partnership firm.
 Even when the word “body corporate” is used it will not include LLP’s despite of its legal
status being a body corporate.
 Accordingly, Partial reverse charge is also not applicable to an LLP.
 Rate of service Tax- 12.36%
 Due date for payment:
OFLINE- 5th day of the following quarter in which payment is received.
ONLINE- 6th day of the following quarter in which payment is received.
Sales Tax/ VAT
 Under Sales Tax, LLP is treated as Body Corporate.
 The definition of “Dealer” under Central Sales Act, 1956 includes body corporate also.
 There is no dissimilarity in partnership firm, body corporate etc with regard to payment,
return, audit etc under sales act.
 Provisions for different dealers are distinguished based on the volume/ size or turnover of
the dealer and not on the basis of the status of the dealer.
Procedure to Convert Limited Liability
Company into LLP
Obtain DPIN for the
designated
Partner and DIN
If registrar is satisfied
that application is
in order, he will
register the
conversion.
Registrar will issue the
certificate of registration
on conversion of the
private limited company
into LLP in Form 19 of
the LLP Rules & forms
2008
Application for allotment
of DPIN to be made
online in E-form 7
(Procedure in
Annexure 1)
Application
for
conversion has to be
made in Eform 18
among
with
attachment.
Annexure 2
LLP shall within 15 days from
registration, inform the
concerned ROC about
such conversion in Form
14 of the LLP rules &
Forms 2008 (annexure
3)
Shareholders being
directors who
already possessed
DIN, then the same
can be used in LLP.
Application made in E
form 1.
Applicable fees
has to be paid by
credit card.
Decide the name with
which LLP is to
be incorporated.
Registrar will approve the
name, if the name is
not undesirable or
identical.
LLP shall ensure that for 12 months,
commencing not later than 14 days
after date of registration, every
correspondence shall bear name and
registration No. of company so
converted.
Annexures 2
Attachments with form 18:
 Statement of shareholders (may be attached in a tabular form)
 Incorporation Document & Statement in Form 2 filed electronically.
 Statement of Assets and Liabilities of the company duly certified as true and correct by
the Chartered Accountant in practice.
 List of all the creditors along with their consent to the conversion (may be given in the
form of a tabular statement).
 Approval of the governing council (In case of professional private limited companies)
 NOC from Income Tax authorities.
 Approval from any other body/authority as may be required.
 Particulars of pending proceedings from any court/Tribunal etc.
 Rejection letter of Registrar of any earlier application for conversion.
 Particulars of convictions, rulings, orders, judgement of Courts in favour or against the
private limited company which are subsisting.
 Other optional attachments as may be required.
Income Tax issues on conversion- Capital
gain
 Section 72(6A)transfer of assets on conversion to a LLP exempt, under Section 47(xiiib)
of the LLP Act subject to –
All the assets and liabilities of the company immediately
before the conversion become the assets and liabilities of the
LLP;
2. 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;
3. 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;
1.
The aggregate of the profit sharing ratio of the
shareholders of the company in the LLP shall not be
less than fifty percent at any time during the period of
five years from the date of conversion;
2. The total sales, turnover or gross receipts in the business
of the company in any of the three previous years
preceding the previous year in which the conversion takes
place does not exceed sixty lakh rupees; and
3. 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 three years from the date of conversion.
1.
Provisions on breach of Rs. 60 lakh condition
VIEW 1- Slump Sale from private Limited Company
The difference between consideration received for the
transfer and networth of the business transferred is
treated as capital gains.
The consideration will be equal to networth and hence no gain
is likely to accrue, except in case of transfer of land or
buildings where Section 50C of the Act, will kick in.
NOTE:
1.
Calculation of net worth- Aggregate vale of assets of the business transferred – Book value of liabilities.
2.
Value of assets: Depreciable assets- Written down value, Other assets- Book value
3.
Nature of Capital gain- Long term if held for more than 36 months otherwise short.
4.
Section 50C- Substitution of consideration for stamp duty value
View 2- No Transfer but only change in form to
LLP
No capital gain would arise in LLP on account of automatic
Vesting of assets/ liabilities in LLP.
On account of assets being transferred at book value
And shareholders become partners and receive profits in
line with profit sharing ratio
No actual consideration payable to company/
shareholders on account of conversion
View 3- Dissolution of Company and Formation
Of New LLP
Shareholders taxed on shares transferred on the basis of
dissolution of Company on conversion
Taxable value determined according to section 46Amount of accumulated profits treated as deemed
dividend under section 2(22)(c). The same is exempt,
Provided LLP paying DDT @ 16.223%.
Market value of assets distributed in excess of accumulaTed profits treated as full value of consideration, subject
to Capital gain tax under section 46.
Carry forward of business loss/ unabsorbed
depreciation
 Carried forward of business losses or unabsorbed depreciation of a company
which is converted into LLP can be carried forward in the hands of LLP and set
off against the profit of LLP.
 Section 72(6A) – the reference is to satisfaction of conditions u/s 47(xiiib)-
benefit of carry forward will only be available if condition of Section 72(6A) are
satisfied.
 The spirit is that when company is converted to LLP there is no transfer and
hence the benefit to the company be permitted in the hands of LLP. Whether a
view can be taken that de hors the provisions of Section 47(xiiib), there is no
transfer and hence the benefit of carry forward be allowed even if the
conditions of Section 47(xiiib) are not satisfied.
Relevant provisions of Income Tax Act, 1961
No.
Section
Subject
Effective date
1.
Section 32(1)
5th Proviso
Depreciation in the year of conversion. Prorate
allocation between the company and LLP
A.Y. 2011-2012
2.
Section 35
DDA (4A)
Amortization of expenditure incurred on Voluntary
Retirement Scheme- LLP eligible to claim
deduction for balance period
A.Y. 2011-2012
3.
Section 43(1)
Explanation
13(b)(iii)
Actual Cost- where deduction is allowed u/s 35ADcost will be Nil
A.Y. 2011-2012
4.
Section 43(6)
Explanation 2C
Written down value- cost in the hands of LLP will
be cost in the hands of company.
A.Y. 2011-2012
5.
Section
49(1)(iii)(e)
Cost of 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.
A.Y. 2011-2012
8.
Section
115JAAA(7)
Carry forward of MAT credit of company not
available to LLP.
A.Y. 2011-2012
Taxability of LLP
As per the Budget 2009-10, LLP will be treated as Partnership firms for the purpose of Income Tax and will be
taxed like a partnership firm.
Tax rate:
 30% flat tax rate + 3% education cess
 No Dividend Distribution Tax
 ITR- 5 is applicable
Eligibility (section 184):





In order for Limited Liability Partnership to be assessed as firm as Income Tax Act, it has to satisfy the
following criteria
The LLP is evidenced by an instrument i.e. there is a written LLP Agreement.
The individual shares of the partners are very clearly specified in the deed.
A certified copy of LLP Agreement must accompany the return of income of the LLP of the previous
year in which the partnership was formed.
If during a previous year, a change takes place in the constitution of the LLP or in the profit sharing
ratio of the partners, a certified copy of the revised LLP Agreement shall be submitted along with the
return of income of the previous years in question.
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.
House open for Queries

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