How to convert LLP into private limited?

LLP, the worldwide recognized form of business organization was introduced in India by way of Limited Liability Partnership Act, 2008 and LLP Rules, 2009. A limited liability partnership (LLP) is a partnership in which all partners have limited liabilities. LLP is an alternative corporate form of business organization which gives the benefits of limited liability of a company and the flexibility of a partnership. Its existence will continue irrespective of changes in partners and ownership. It is capable of entering into contracts and holding property in its own name. It is a separate legal entity, and is liable to the full extent of its assets but liability of the partners is limited to their agreed contribution in the LLP. In an LLP, one partner is not responsible or liable for another partner’s misconduct or negligence. In an LLP, mutual rights and duties of the partners within the LLP are governed by an agreement between partners or between the partners and the LLP as the case may be. However in the absence of such agreement the LLP would be governed by the framework provided in Schedule I of Limited Liability Partnership Act, 2008, which describes the matters relating to mutual rights and duties of partners of the LLP. Further any other form of business such as a partnership set up under the provisions of Indian Partnership Act, 1932, a private limited company and an unlisted public limited company can convert itself into LLP pursuant to the provisions of LLP Act, 2008 and by following the due procedure of law.

Conversion of LLP into Company

Sadly before the introduction of Companies Act, 2013 conversion of LLP into a Company was not allowed as both the LLP, 2008 and the Companies Act, 1956 were not containing any enable provision for such conversions. This was a major hurdle in the adoption of LLP as an organizational form. However, with the introduction of Companies Act, 2013 this issue has been addressed upto some extent. Section 366 of the Companies Act, 2013 provides that any partnership firm, limited liability partnership, cooperative society, society or any other business entity formed under any other law consisting of seven or more members, may at any time register under Companies Act, 2013 as an unlimited company, or as a company limited by shares, or as company limited by guarantee by following the procedure laid down in Companies (Authorized to Register) Rules, 2014. Provided that –

A Company registered under the Indian Companies Act, 1882 or under the Indian Companies Act, 1913 or the Companies Act, 1956 shall not register in pursuance of this section;
A company having the liability of its members limited by an Act of Parliament other than Companies Act, 2013 or by any other law for the time being in force, shall not register in pursuance of this section as an unlimited company or as a company limited by guarantee;
A company shall be registered in pursuance of this section as a Company limited by shares only if it has a permanent paid-up or nominal share capital of fixed amount divided into shares, also of fixed amount, or held and transferable as stock, or divided and held partly in the one way and partly in the other, and formed on the principle of having for its members the holders of those shares or that stock, and no other persons;
A company shall not register in pursuance of this section without the assent of a majority of such of its members as are present in person, or where proxies are allowed, by proxy, at a general meeting summoned for the purpose;
Where a company not having the liability of its members limited by any Act of the Parliament or any other law for the time being is force is about to register as a limited company, the majority required to assent as aforesaid shall consist of not less than three-fourths of the members present in person, of where proxies are allowed, by proxy, at the meeting;
Where a company is about to register as company limited by guarantee, the assent to its being so registered shall be accompanied by a resolution declaring that each member undertakes to contribute to the assets of the company, in the event of its being wound up while he is a member, or within one year after he ceases to be a member, for payment of the debts and liabilities of the company or of such debts and liabilities as may have been contracted before he ceases to be member, and of the costs, charges and expenses of winding up, and for the adjustment of ht rights of the contributories among themselves, such amount as may be required, not exceeding a specified amount.

Procedure to be followed for Conversion of LLP Into Company

Before filing application for conversion, please ensure followings:

That secured creditors have given their consent for such conversion;
A notice in newspaper about such conversion, one in English and in vernacular language seeking objections must be published;
There are minimum seven or more members in the existing LLP for converting the LLP in to a Company.
A general meeting must be held where majority of partners have given their consent for such conversion.

DIN & Digital Signature Certificate:

In case all seven members, who are proposed Directors of the Company after conversion, not holding any DIN then DIN and Digital Signature Certificate for all the proposed Directors of the Company must be obtained. For obtaining DIN an application in Form No. DIR – 3 should be filed on MCA Portal. DIN application is processed and approved by the Central Government through the office of Regional Director, Ministry of Corporate Affairs. Form No. DIR – 3 must be accompanied by self attested Identity Proof and Address Proof and one recent passport size color photograph of the Applicant. All the documents must be attested by a practicing professional viz. Practicing Cost & Management Accountant, practicing Company Secretary or practicing Chartered Accountant.

Name Approval:

Name approval has to be obtained from the Registrar of Companies [“RoC”] by submitting an application in eForm INC 1. For this you need to decide various items, which are mentioned in Form INC 1. The name once approved by the authority is valid for 60 days. The Subscriber to the Memorandum and Articles of Association shall be the applicant for the availability of name application.

Preparation and Filing of Form No. URC – 1:

After obtaining name approval from the Registrar of Companies, applicant shall prepare and file the Form No. URC – 1 along with the following documents:

A list showing the names, addresses, and occupations of all persons named therein as members with details of shares held by them respectively, showing separately shares allotted for consideration in case and for consideration other than cash along with the source of consideration and distinguishing, in cases where shares are numbered, each share by its number, who on a day, not being more than six clear days before the day of filing this application, were partners of the Limited Liability Partnership;
A list showing the particulars of persons proposed as the first directors of the Company, their names, including surnames or family names, the DIN, passport number (if any) with expiry date, residential addresses and their interests in other firms or bodies corporate along with their consent to act as Director of the Company;
An affidavit from each of the persons proposed as the first directors, that he is not disqualified to be a director under section 164(1) and that all the documents filed with the Registrar for registration of the Company contain information that is correct and complete and true to be best of his knowledge and belief;
A list containing the names and addresses of the Partners of the Limited Liability Partnerships;
A Copy of LLP Agreement and Certificate of Registration duty verified by at least two designated partners of LLP;
A statement specifying the following particulars; a) the nominal share capital of the company and the number of shares into which it is divided; b) the number of shares taken and the amount paid on each share; c) the name of the company, with the addition of the word ‘Limited’ or ‘Private Limited’ as the case may require, as the last word or words thereof;
Written consent or No Objection Certificate from all the secured creditors of the applicant;
Written consent from the majority of members whether present in person or by proxy at a general meeting agreeing for registration under section 366 of the Companies Act, 2013;
An affidavit duly notarised, from all the members or partners providing that in the event of registration as a company under Part I Chapter XXI of the Companies Act, 2013, necessary documents or papers shall be submitted to the registering or other authority with which the company was earlier registered, for this dissolution as Limited Liability Partnership;
Statement of accounts of the company, prepared not later than 6 days preceding the date of application duly certified by auditor, if applicable;
Declaration of two or more directors verifying the particulars of all members/partners;
Copy of Newspaper advertisement
Certificate from a Company Secretary in Practice/Cost Accountant in Practice/Chartered Accountant in Practice certifying the compliance with all the provisions of Stamp Act, to the extent applicable;
No objection certificate from the concerned Registrar of LLP.

Memorandum & Articles of Association:

After obtaining name approval, and approval of Form No. URC – 1 from the Registrar, the draft Constitutional Documents of proposed Company i.e. Memorandum of Association (MOA) and Articles of Association (AOA) is to be drafted and then filed with the RoC along with the forms / documents stated below.

Subscription Pages of MOA & AOA – The last page of the MOA and AOA must contain details of the subscribers to the Memorandum and Articles and the number of shares to be subscribed by each. This last page is required to be executed by subscribers.

Filing of Incorporation Forms:

The following forms are required to be filed with the RoC:

eForm INC 7 (declaration of compliance with the requirements of the Act on application for registration of a company);
eForm INC 22 (notice of situation of registered office);
eForm DIR 12 (appointment of directors of the company); and
a Power of Attorney to be executed by subscribers and proposed directors (authorisation by the promoters of the company to a person/s to carry out appropriate changes as suggested by the RoC in any of the incorporation papers that have been filed).

Clarifications/Additional Information Required By RoC:

After all the incorporation papers are filed and reviewed by the RoC, the RoC may require certain clarifications. These clarifications or enquiry need to be satisfied by the person who has been authorised to do so by the Power of Attorney filed with the RoC.

Certificate of Incorporation:

Once all clarifications are provided, the Certificate of Incorporation is issued by the RoC and the company is deemed to be incorporated from the date of the Certificate of Incorporation.

After obtaining the registration under Section 367 of the Companies Act, 2013, intimation to this effect shall be given, within fifteen days of such registration to the concerned Registrar (LLP) under which it was originally registered, along with necessary documents or papers for its dissolution as Limited Liability Partnership.

Conclusion

Section 366 of the Companies Act, 2013 has provided existing LLPs an option to convert themselves in a Company, which is a welcome move by the Ministry of Corporate Affairs. However, certain provisions such as requirement of having minimum seven or more members is restricting LLPs with less partners from conversion. And any LLP having less number of partners willing to convert itself into Company must increase its number of partners, which is something small entrepreneurs are not comfortable with. Hence requirement of minimum 7 members is major hurdle in conversion into Company form of business. Government must come up with amendment in rules to allow LLPs with 2 partners for conversion into Company.