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Conversion of partnership/ LLP into company – Commercial Motivations

An entrepreneur may decide to convert his partnership/ LLP into a company for the purposes of seeking venture capital investment, or for seeking foreign investment or borrow money from international markets, or in the expansion phase, to inspire more confidence in employees, allot employee stock options, etc. Therefore, it is very important for an entrepreneur to know whether such conversion is possible.
A partnership or a limited liability partnership (LLP) can convert into a company pursuant to Section 366 of the Companies Act, 2013 (as per the procedure described below) – however, this procedure is only applicable when the business has 7 or more members(under the old Companies Act, 1956, conversion of a partnership into a company was possible under Section 565, but it was unclear whether an LLP could convert into a company).
A partnership firm or a LLP which has more than 7 members can convert itself into a company. A LLP is permitted to get itself converted in a company limited by shares only, i.e., conversion of a LLP into an unlimited company or a company limited by guarantee is not permitted under the Actal though a partnership firm can be converted into such business entities). However, that should not be a practical issue –it will not make strategic sense for any business to convert into an unlimited liability model from a limited liability one.
How can a limited liability partnership with less than 7 members convert? An LLP or partnership with less than 7 members will have to transfer assets by assignment – there is no other alternative.
Process for conversion of a partnership/LLP into a company
The procedural requirements for conversion into a company are as follows:
  1. Application for name approval in Form INC-1 (under the Companies Central Government’s General Rules and Forms), which must be made in accordance with the guidelines applicable to name approval.
  2. Application for registration with the Registrar of Companies (in Form No URC-1 typically). The form has to be accompanied by the following documents:
    1. A copy of the newspaper publication about the registration of the LLP into a company (see Form No URC-2 for the format of such advertisement)
    2. An duly not a rised affidavit must be submitted by the partners or the members stating that the appropriate documents for dissolution has been submitted to the earlier authority with which the entity was registered (for a LLP the documents along with the affidavit must be submitted to the concerned Registrar (LLP) within 15 days from the date of registration).
    3. Particulars of members/partners of the firm along with the details of shares held by them;
    4. Declaration of two or more proposed directors verifying the particulars of all members/partners;
    5. Copy of the instrument constituting or regulating the entity;
    6. Copy of certificate of registration of the entity;
    7. Certificate from a CA/CS/CWA certifying the compliance with all the provisions of Stamp Act, to the extent applicable;
    8. Consent of majority of members;
    9. Consent of at least three-fourth of members agreeing for registration under this part;
    10. No objection certificate from the concerned Registrar of Firms or Registrar of Companies(LLP);
    11. No objection certificate/Consent given by secured creditors;
    12. Statement of accounts of the company, prepared not later than 6 days preceding the date of applicat ionduly certified by auditor; if applicable
    13. Copy of the resolution declaring the amount of guarantee (not required in case of conversion of a LLP)
  3. File Forms INC-7, INC-22,DIR-8 as in the case of a normal company.
Impact on licenses by conversion into LLP
On conversion of a firm/private company/unlisted public company into LLP, any approval, permit or licence issued to the firm/private company/unlisted company under any other Act shall, subject to the provisions of such other Act under which such approval, permit or licence was issued, be transferred in the name of the converted entity, i.e. the LLP. Note that certain licenses are given only to limited liability companies, for instance, permission from RBI to carry out the business of a non- banking financial institution (NBFC). Such companies cannot convert into LLPs as their business license will get terminated if they convert to the LLP form.

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