Understanding LLP Conversion | Advantages, Procedures, Tax Implications

1. Demystifying LLP Conversion Presented by:- CA. Ravi Kr. Patwa B.Com, FCA, DISA(ICAI) RKP ASSOCIATES Chartered Accountants ‘Sarwam’, 1st Floor Janiganj Bazar Silchar - 788001 Branches atGuwahati, Kolkata, Siliguri, Patna Associate offices at New Delhi, Mumbai, Bangalore, Chennai, Hydrabad, Ahmedabad, Jaipur, Trivandram, Cochin, Pune etc. Member Firm of Batgach  & Affiliates, a Network approved by ICAI.

2. Discussion on LLP Conversion • What can be Converted? • Advantages over Company • Advantages over Firm • Demerits • Check Points • Procedure • Tax Issues • Some Questions

3. What can Be Converted ? • Partnership Firm • Private Company • Unlisted Public Company

4. Advantages over Company • Lower Cost of Compliance • No restriction on withdrawal from Capital • No need of maintaining Statutory Registers • No Compulsory Meetings • No cap on loans and borrowings • No condition applicable on acceptance of deposits Cont’d…

5. Advantages over Company ....... (Cont’d…) • No restriction on related party transactions • Audit is not compulsory • No restriction on remuneration • No restriction on distribution of Profits • No dividend Distribution Tax

6. Advantages over Firm • Perpetual Succession • Limited Liability of partners • Partners are agents of LLP & not of other partners • Can initiate legal proceedings with own name

7. Some Demerits • Some Private Companies can not be converted • NBFC activity can not be carried out • Larger LLPs require CS signature in Annual Return • Section 8/25 Company can not be converted

8. Check Points before Conversion • LLP should comprise of all the shareholders/partners of the Company/Firm as partners & none else • Capital contribution & Profit sharing ratio in the LLP should be in the same proportion as their shareholding in the Company/Profit sharing ratio of Firm • All the Assets & Liabilities of the Company/Firm must become Assets & Liabilities of the LLP • Obtain no objection from creditors • Obtain Clearance from any other Authority/Body Corporate, if needed • Balance Sheet of a cut off date has to be drawn & Audited • If a Body Corporate is a likely partner, appoint a nominee for it

9. Check Points before Conversion (Only for Companies) • The assets should not have been given as security • Turnover or gross receipts in any of the 3 preceeding years preceeding the year of conversion shall not exceed 60 lakhs • Assets shall not exceed 5 crores in last 3 years • Shareholders of the Company shall not receive anything except the Capital Contribution & right to profits in the LLP • Aggregate profit sharing ratio of such Shareholders shall not fall below 50% in the next 5 financial years • No amount can be paid to any partner out of accumulated profits standing in the accounts of the company as the date of conversion for a period of 3 years

10. Procedure of Conversion • Obtain DIN of designated partners • Obtain DSC of at least one designated Partner • Call Board meeting, pass resolution for conversion & authorize one director to apply for name of LLP • Apply for name availability in form Form-1 • Obtain name approval • Draft LLP agreement Cont’d…

11. Procedure of Conversion ....... (Cont’d…) • File incorporation documents & subscribers statement in Form 2 • File application & statement for conversion in Form 18 / Form 17 • File Form 3 containing LLP agreement within 30 days • Obtain certificate of registration in Form No. 19 Cont’d…

12. Procedure of Conversion ....... (Cont’d…) • File intimation of conversion in Form 14 within 15 days of Registration • File consent of Designated Partners in Form 4 within 30 days • For a period of 12 months commencing not later than 14 days after the date of conversion, every official correspondence of the LLP should bear - • a statement that it was converted from Company/Firm to LLP from such date • name and registration no. of the Company/Firm Cont’d…

13. Certain Tax Issues • No Capital Gains tax on conversion if conditions are fulfilled • Carry forward of Unabsorbed business losses and depreciation • No MAT • Succeeding LLP will not get benefit of MAT as the concept of MAT is not applicable to LLP • AMT is applicable

14. Some Questions • Can the Audits & appointments of earlier Firm be continued? • Can Karta of HUF become partner of LLP? • Can multiple CA Firms convert into single LLP? • Whether Firm must be registered in order to be as LLP? • Can the ROC refuse conversion? • Whether provisions of Partnership Act, 1932 shall apply to LLP • Can a minor become a partner? • Can a body Corporate be a DP? • Can a non resident become a designated Partner? Cont’d…

15. Some Questions ....... (Cont’d…) • If there is an immovable property in the Company (to be converted), for effecting transfer, whether stamp duty etc. is required to be paid? • Whether Capital Gain Tax will come if Firm has immovable property & converted to LLP? • Where a company is converted to LLP, in order to avoid CG, since nothing except share of Profit is to be paid to Partners for 3 years, can interest on Capital and remuneration be paid? • If converted LLP creates an FD against which partners take loan from bank, whether 47A(4) will attract? • Whether 2 (22) (e) of IT Act on Deemed Dividend is applicable to LLP? Cont’d…

16. Some Questions ....... (Cont’d…) • Since the rate of tax for smaller companies is now lower, (25%) than LLP (30%), is LLP actually not tax costly? • Whether LLP can take advantage of Presumptive taxation u/s 44AD? • If NBFC is not allowed? How is it better than company for group investment? • For Firm to LLP, whether new PAN is required? • Can LLP raise Public Deposits? • Is having a common seal compulsory? Cont’d…

17. Some Questions ........ (Cont’d…) • Will an admission of a new partner require unanimity? • If it’s a 2 partner LLP & one partner dies, does the LLP die too? • Can a partner of LLP be forced to retire/expelled? • Is there any way where partners can be held personally liable? • Will the bankers give some weigtage to LLP as a company?

18. Thank You