Conversion of partnership/LLP into a company
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 ion employees, allot employee stock exchange options etc. Therefore it is important for an entrepreneur to know that such conversion of getting an entity not incorporated under present or old Companies Law, to be registered as a company under the present Company Law, 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 Section 366 of The Companies Act, 2013, the companies capable of being registered includes any society, cooperative society, partnership firm, limited liability partnership, or any other business entity which has been incorporated under any law other than Companies Act Indian Companies Act, 1882 or under the Indian Companies Act, 1913 or the Companies Act, 1956. The provision earlier provided that to be covered under the provisions of Section 366 for Company Registration, the entity must consist of 7 or more members. Through the Companies (Amendment) Act, 2017, the entity can apply for company registration if it has two or more members.
What guidelines to be followed while considering the provisions of Section 366?
For the purpose of being covered under the provisions of Section 366 for company registration, few pointers must be kept in mind:
1. A partnership firm or an LLP which has more than 2 members can convert itself into a company;
2. An LLP is permitted to get itself converted in a company limited by shares only, i.e., conversion of an LLP into an unlimited company or company limited by guarantee is not permitted under the Act, although a partnership firm can be converted into such business entities. However, it should not be a practical issue, since the conversion of a limited liability entity into an unlimited liability entity will not make any strategic sense;
3. No company registered under the Indian Companies Act, 1882 or under the Indian Companies Act, 1913 or the Companies Act, 1956, can be covered under this section;
4. An entity can continue company registration under this Section as a company limited by shares it has a permanent paid–up or nominal share capital of fixed amount
a. divided into shares of a fixed amount,
b. held and transferable as stock, or
c. partly in both form.
Only its members and no other person should be the holders of such shares/stock.
5. An entity can continue company registration under this Section not without the assent of a majority of members as are present in person, or by proxy, at a general meeting summoned for the purpose;
6. Where the liability of members is limited by any law in force, and the entity is about to register as a limited company, the majority required to approve such should not be less than3/4th members present in person, or by proxy;
7. Where an entity wants to be registered as a company limited by guarantee, a resolution should be attached with the application to approval. The resolution should be declaring that “every member has undertaken to contribute to the assets of the company for payment of the debts and liabilities of the company and of the expenses involved with the winding up, if it goes into winding up during the tenure of membership, or within an year after he ceases to be a member”
What is the Procedure for Converting and Company Registration?
The procedural requirements for conversion of LLP into a company are as follows:
1. Application for the name approval through Reserve Unique Name (RUN) has to be made.
2. An applicant for registration with the RoC in Form URC-1. The form shall be accompanied by the following documents:
a. A copy of the newspaper publication about the registration of the LLP into a company (URC-2);
b. A duly notarized affidavit must be submitted by the partners or the members stating that the appropriate documents for dissolution have been submitted to the earlier authority with which the entity was registered. (Foran LLP the documents along with the affidavit must be submitted to the concerned Registrar within 15 days from the date of registration);
c. Particulars if the members/ partners of the firm along with the details of shares held by them;
d. Declaration if two or more proposed Directors verifying the particulars of all the members/ Partners;
e. An affidavit from each of the first directors, that he is not disqualified to be a director under Section 164(1);
f. An affidavit from each of the first directors, that all the documents filed with the Registrar for registration of the company provide only complete, correct and true information;
g. Copy of the instrument constituting or regulating the entity;
h. Copy of the certificate of registration of the entity;
i. Certificate of the CA.CS/CWA certifying the compliance with all the provisions of Stamp Act, to the extent applicable;
j. Consent of majority of members;
k. Consent of at least three-fourths of members agreeing for registration under this part;
l. Duly certified by an auditor Accounts statement of the entity, if applicable (prepared not later than 6 days preceding the date of the application);
m. A copy of latest Income Tax return of the firm;
n. NOC from the concerned Registrar of Firms or Registrar of companies(LLP);
o. NOC/ Consent given by Secured creditors;
p. Copy of resolution declaring the amount of guarantee (not required in case of conversion of an LLP)
3. SPICe forms with e-MoA and e-AoA as required in case of private company registration.