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Methods to change business structure – conversion and assignment
When one wants to change the business structure (e.g. carry out business as a company instead of a partnership), one can either opt for a conversion process under law or incorporate a new business vehicle and transfer the existing business completely (including employees, licenses, properties and all its contracts) to the new vehicle through a process known as ‘assignment’.

If this route is chosen, a new entity is incorporated afresh, and a business transfer agreement or an assignment agreement is entered into between the old entity and the newly formed business structure, to specify the terms of this transfer. This is a sale transaction which is undertaken contractually, and is hence different from ‘conversion’, a process that is specifically provided for under law.

To understand commercial documentation, see sample business transfer agreement here.



Conversion vs. assignment– how do they compare?
In any conversion process, three aspects need to be considered operationally:
#1 - Is there movement of cash from one entity to another?
#2 - What are the tax implications of the transfer?
#3 - How do existing contracts and business licenses get transferred?
We will evaluate the difference  between conversion and assignment (or business transfer) on the basis of the above criteria.


Conversion has advantages over assignment on this front, which are discussed below:
  1. Tax efficiency: Assignment of the ‘business’ from one entity to another itself can attract tax liability – especially if the previous business entity has revenues or profits. The value of the business being transferred will have to be computed – this value will be paid by the new entity to purchase the business from the old entity. For a business which has revenues or profits, its valuation is likely to be much higher than the value of all its assets and properties in its books (called ‘net worth’) – which will attract capital gains tax. However, under certain conditions, statutory conversion will be tax-neutral when the business is substantially transferred and its owners remain the same.
If the business has no revenues or profits, then assignment can be a quicker process and is unlikely to attract tax liability. The value of the business is computed by qualified accountants, merchant bankers or valuers on the basis of valuation principles and is open to be questioned by tax authorities – hence the tax implications of a real assignment will depend on a case-to-case basis. We have provided an indicative outcome to help you develop a broad understanding.
  1. Movement of cash: Statutory conversion is a much simpler process from the point of view of movement of cash. When statutory conversion is chosen, one business entity simply adopts a new form – hence, there is no movement of cash from one business to another. However, assignment will involve ‘purchase’ of the business – the new entity must pay the old entity the money for the purchase. Therefore, the new entity must be adequately ‘capitalized’, that is, the founders / promoters of the old business must plough the necessary funds to purchase the business into the new entity. These funds will then be used to purchase the business from the old entity.
  2. Third party consentsand licenses may be more easily passed on to the new entity in case of statutory conversions: Third parties who have entered into contracts with the business usually have the right to terminate the contract if the business is transferred - consent of such third parties may be required for transferring the contracts to the new entity. Obtaining such consents might be easier at a practical level if the statutory conversion process is adopted. In some cases the requirement to obtain consent may not be triggered at all under the contracts in case of statutory conversion. The same discussion applies to key business licences.
Despite the above advantages, it does not mean that conversion is always the preferred mechanism. Once you go through the stepsfor conversion of one business vehicle into another(discussed below), you will realize that conversion can be a time-consuming process. Businessmen prefer assignment as it can be completed faster, provided there are no tax implications. This is often possible for businesses whose valuation remains the same as book value or is less than book value, but this is not true in all cases.

Read on to recap the commercial motivations for conversion and steps for conversion of company into LLP or a partnership/ LLP into a company below.

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