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Conversion of a Businessfrom one One Another


Learning objectives
In this chapter you will learn:
  • Commercial motivations behind conversion from one business form to another
  • Mechanisms to convert from one form to another (where one of the business structures is a company)
  • Comparison of different conversion methods from a business perspective


Many new businesses and startups are not initially structured as companies. Proprietorships, partnership and Limited Liability Partnership are extremely popular forms of structuring early stage businesses. However, these may not be the best business structures in the long run, especially for large businesses.
In the chapter on business structuring, you have learnt about the pros and cons of different business structures, and concluded that the optimal business structure for a particular venture really depends on the goals of the business. As a business grows, the goals may evolve or change, and owners may need to convert their business organization into a different form of business (such as a company being converted into an LLP) for various reasons, such as (i) tax efficiency, (ii)raising venture capitalinvestment(this is far easier for a company) or (iii) obtaining foreign loans (under foreign exchange regulations companies are allowed to obtain foreign loans in certain sectors, which is not possible for partnerships or Limited Liability Partnerships (LLPs) or (iv) for pursuing non-profit objectives, in rare cases. Over time, a business may also evolve, and the legal structure used to carry it on may have to be modified.
An advisor, compliance professional (Chartered Accountant or Company Secretary) or lawyer can add significant value by providing strategic inputs on the ideal business structure to shift to, and by helping clients through this process.
For example, how can your client convert your businessinto a more investment-friendly structure or modify it for reduced tax liability? What if he wants to spin off his current business to another pre-existing entity? What options are available to him? Which is the best structure to select? What actions are necessary to be taken for this purpose?
Let’s take an example. When a partnership business grows and the number of transactions and creditors increase, it may become prudent to convert it into a limited liability structure such as an LLP or a company, to shield the personal assets of the promoters from liabilities of the business. It is often a natural progression to convert a partnership (if you started out with one) or an LLP into a private company at the time of seeking investment. Click here to learn about how a limited liability partnership can convert itself into a private company.
Similarly, a private company needs to convert itself into a public company before it can raise money from the public through an initial public offer as per company law. After this, additional requirements laid down under securities laws and Securities Exchange Board of India (SEBI) must be observed. You will learn more about initial public offers in a subsequent module. Click here to learn about how a private company can convert into a public company.
In rare cases, public companies may also be taken private – in the west, ‘leveraged’ and ‘management buyouts’ were ways to buy out shares of public shareholders of public companies and take them private. This was done when the goal was to effect a sweeping change to the management team and business model, or to restructure the business. Such changes are too drastic and the restructuring takes time to show commercial returns - public shareholders are usually not able to appreciate this fact and shoot down proposals for such an exhaustive revamp of the company’s business model or management team, hence the tendency to take the company private.This has another benefit – public companies (especially if they are listed) are required to make a lot of disclosures to the public (through stock exchanges) pertaining to business developments from time to time, which constantly keeps them under public scrutiny and media radar. Upon conversion, the company can effect its commercial restructuring relatively quietly. Recently, Dell was taken private as the company was making significant losses and wanted to revamp its business model completely (read more about it on Forbes here).
In India, to be taken private, a company needs to undertake the following broad steps:
  1. Delist itself from the stock exchange. This requires certain regulatory and shareholder approvals, and must be undertaken in accordance with SEBI (Delisting of Equity Shares) Regulations, 2009 (See herefor the base version. For updates, also refer to any amendments here).
  2. Convert into a private company. Read more about the process here. 

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