TO CONVERT A PRIVATE LIMITED COMPANY TO LLP
NO INCOME TAX
1. Section 47(xiiib)
Transactions not regarded as transfer.
Nothing contained in section 45 shall apply to the following transfers:—
(xiiib) any transfer of a capital asset or intangible asset by a private company or unlisted public company (hereafter in this clause referred to as the company) to a limited liability partnership or any transfer of a share or shares held in the company by a shareholder as a result of conversion of the company into a limited liability partnership in accordance with the provisions of section 56 or section 57 of the Limited Liability Partnership Act, 2008 (6 of 2009)24: Provided that—
(a) all the assets and liabilities of the company immediately before the conversion become the assets and liabilities of the limited liability partnership;
(b) all the shareholders of the company immediately before the conversion become the partners of the limited liability partnership and their capital contribution and profit sharing ratio in the limited liability partnership are in the same proportion as their shareholding in the company on the date of conversion;
(c) 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 limited liability partnership;
(d) the aggregate of the profit sharing ratio of the shareholders of the company in the limited liability partnership shall not be less than fifty per cent at any time during the period of five years from the date of conversion;
(e) 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
(f) 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.
Explanation.—For the purposes of this clause, the expressions “private company” and “unlisted public company” shall have the meanings25 respectively assigned to them in the Limited Liability Partnership Act, 2008 (6 of 2009)
The transaction in line with the above provision is not regarded as transfer; hence the conversion can be done without payment of Capital Gain tax.
INCOME TAX HAS TO PAY IN FOLLOWING CIRCUMSTANCE
2. Section 47A: Consequences If section 47(xiiib) is violated: Transfer of capital Assets: If the above conditions are violated, the transfer of capital asset is to be done at the market rate and accordingly capital gain is to be calculated. The private limited company which is a transferor has to pay the capital gain tax on such transfer.
3. Transfer of Other Assets:- The other assets like, stock in trade, current asset etc is also transferred at the market value and the applicable taxes is to be paid.
4. Impact on Share Holders if section 47(xiiib) is violated
The shares in the hands of the share holders of the private limited company will be converted as capital of the LLP. The share holder will surrender the shares and acquire capital in the LLP. The share holder has to pay tax on the capital gain arising from him from such transfer. The Value of capital is the consideration for the transfer of shares. The cost of share is the amount paid by such share holder at the time of purchase of shares. The receipt of bonus share will not have any cost since it is out of the reserves of the company.
5. Other Interpretation:
There is one more interpretation that, the transfer of Private Limited Company to LLP is not regarded as transfer. Consequently the share holders who are transferring the share and the person who is receiving the share are the same. Hence there is no capital gain to be paid by the share holder because one cannot make profit by selling to himself.
6. There are no rulings available on conversion of Private Limited Company to LLP. However, there are few judgments, where the conversion of the firm to limited liability Company. If the same analogy is brought for the interpretation, it is not a transfer in the hands of the share holders.
7. The honorable High Court of Gujarat has held in the case of Deputy Commissioner of Income Tax vs R L Kalathia and Co has held as follows: “Holds that sale of business of firm as a going concern to limited company for consideration of ‘share capital’ does not amount to transfer liable to capital gains tax; Accepts that even if there was a transfer, it was a slump sale and Sec 45 would not apply to the present case as the entire undertaking has been transferred as a going concern; because there was no transfer of property inasmuch as immovable property cannot be transferred without registration, and in this case there is no registration of such transfer and that there was no transfer as on conversion of the firm to a company the property vests in the same persons in proportion of their interest; (Source: Orange Tax Sutra)
8. COMMISSIONER OF INCOME TAX VS. TEXSPIN ENGG AND MFG WORKS The Honorable High Court has held that the provisions of Sec. 45(1)/(4) are not attracted even though there was transfer of assets from the firm to the newly constituted company on conversion of firm to company under Part IX of the Companies Act, 1956; Rejects Revenue stand that “on vesting of the properties of the erstwhile firm in the limited company, there was a transfer of capital assets and, therefore, it was chargeable to income- tax under the head “Capital gains” as, on such vesting, there was extinguishment of all rights, title and interests in the capital assets qua the firm.”; Holds that “even if we were to proceed on the basis that vesting in the company under Part-IX constituted transfer under s. 45(1), still the assessee ought to succeed because the firm can be assessed only if the full value of the consideration is received by the firm or if it accrues to the firm. In the present case, the company had allotted shares to the partners of the erstwhile firm, but that was in proportion to the capital of the partners in the erstwhile firm. That allotment of shares had no correlation with the vesting of the properties in the limited company under Part-IX of the Act.” (Source: Orange Tax Sutra)
9. CADD CENTRE VS. ASSISTANT COMMISSIONER OF INCOME TAX Conversion of Partnership Firm into a Limited company, not liable to capital gains u/s. 45(4) – The honorable High Court holds in favour of the assessee and ruled that “when a Partnership Firm is transformed into a Limited Company with no change in the number of partners and the extent of property, there is no transfer of assets involved and hence, there is no liability to pay tax on capital gains”; The firm has only revalued its assets which will not amount to transfer; Provision of Section 45(4) applicable only when the firm is dissolved; Rejects Revenue’s contention that expression “otherwise” occurring in Sec. 45(4) covers cases of capital gains even where there is no dissolution of the firm at all; Notes the twin conditions for Sec. 45(4) to apply – (i) transfer by way of distribution of capital assets, (ii) such transfer should be on dissolution or otherwise
10. Procedure to be followed for conversion of company into LLP
a. Requirements for conversion of company into LLP
i. Turnover Limit : The Total sales, turnover or gross receipts in business of the company do not exceed Sixty Lacs (60 Lacs) Rupees in any of the three preceding previous years
ii. Capital Contribution and Profit Sharing Ration on Conversion: The Capital Contribution and Profit Sharing ration of the shareholders of company should be in the same proportion as their shareholding in the company as on the date of Conversion.
iii. Profit Sharing Ration after conversion: The erstwhile shareholders of the company continue to be entitled to receive at least 50 per cent in aggregate of the profits of the LLP for a period of 5 years from the date of conversion
iv. Assets and Liabilities : All assets and liabilities of the company become the assets and liabilities of the llp.
v. All the shareholders of the company become partners of the LLP in the same proportion as their shareholding in the company.
vi. No other consideration to partners: No consideration other than share in profit and capital contribution in the LLP arises to partners.
vii. No amount is paid, either directly or indirectly, to any partner out of the accumulated profit of the company for a period of 3 years from the date of conversion
viii. Check company have Creditors if, yes then NOC from Unsecured creditors
b. Obtain DPIN (Form DIR-3)
i. The designated partners, who don’t already have a DIN need to file for obtaining one.
1. Obtain DIN No of all proposed Designated Partner/ Partner.*
2. DIN Application Procedure
a. Self attested Pan Card
b. Self attested Address Proof
ii. Same is to be attached in DIN Form DIR-3 after attestation of Professional.
iii. The minimum number of partners for the incorporation of an LLP is two and also one of them must be Indian. But it is very important to file for a DSC before applying for the DIN.
iv. A Body Corporate can also be a partner in an LLP through a nominee.
c. Meeting of board of directors of the Company
i. Call for a meeting of all the board members
ii. Pass a resolution by a majority of the members for the conversion of the company to an LLP
iii. Pass Resolution to authorize any director for application of the Name of LLP.
d. File Form 1
i. Form 1 is to be filled for registering the name of the company. The name of the company can be changed into the name of the LLP.
ii. The resolution of the company authenticating the conversion of the company into an LLP is to be attached along with the form.
iii. The form must be digitally signed by the applicant using DSC.
e. Draft the LLP agreement
The mutual rights of the partners and those of the LLP and partners are decided by a mutual agreement between the partners or between the LLP and the partners. This agreement is called LLP Agreement. Contents of Agreement are:
i. Name of LLP
ii. Name of Partners & Designated Partners
iii. Form of contribution
iv. Profit Sharing ratio
v. Rights & Duties of Partners
vi. Proposed Business
vii. Rules for governing the LLP
f. File Incorporation Documents in Form-2
This form basically contains the location of the office, the contribution of every partner and other details of the directors.
i. This form has basic information about the LLP as given in Form 1.
ii. Location of the LLP’s office.
iii. Capital contribution of the designated partners.
iv. number and name of LLPs the director are already a part of.
v. Attachments with Form 2 are:
1. A copy of Board Resolution of the company which is becoming designated partner through a nominee.
2. mandatory to attach a proof of the registered office.
3. Subscriber sheet in the prescribed format.
g. File Form-18 for Application for Conversion
This is the sole form for the conversion of company into an LLP. It needs to be filled with form 2 itself. This form has information about the conversion of company such as:
i. Whether any permission is needed for conversion?
ii. Whether all shareholders have become partners of the LLP?
iii. Whether all shareholders have agreed/consented to conversion?
iv. Whether any prosecution or proceeding is initiated against the company?
v. Whether the company has filed up to date Income Tax Returns?
vi. Whether the company has filed latest financial statements with ROC?
vii. Whether there are secured creditors in the company?
viii. Attachments with LLP Form-18:
1. Copy of acknowledgment of latest income tax return (Mandatory)
2. List of all the secured creditors along with their consent (Mandatory if where there are secured creditors of the company and consent of all the secured creditors for conversion of company into limited liability partnership has been obtained)
3. Approval from any other body/ authority (Mandatory if applicable approvals from the concerned body/ authority or authorities is required and have been obtained)
4. Statement of Assets and Liabilities of the company duly certified as true and correct by the auditor (Mandatory, the statement should contain the latest place as on date of application for conversion)
5. Statement of shareholders of the Company (Mandatory to be attached)
ix. Prerequisites for filing LLP Form-18
1. No e-Forms should be pending for payment or processing in respect of the company.
2. No open (unsatisfied) charges should be pending against the company.
3. The company should be having share capital.
4. The company should not be a ‘Section 25 company’/ ’Section 8 Company under Companies Act, 2013.
5. At least one balance sheet and annual return should have been filed by the company after its incorporation.
h. File Form-3
i. This form requires you to enter details of the LLP Agreement, mutually entered by the partners of the LLP.
i. Obtain certificate of incorporation
j. File Form-14 with the Registrar
To personally inform the registrar about the conversion, form 14 must be filled within 15 days after receiving the COI.