Provisions of Companies Act 2013 are stringent for private companies as compared to the earlier version viz. Act of 1956. For entrepreneurs, selection of business entity is vital. Whether to devote more time to business or comply with the law is the equation to evaluate. In this background, a quick study of comparatives between Private Company and Limited Liability Partnership has been made in this presentation.

1. LLP
and
Private
Company
(Provisions
of
Companies
Act
2013)
Presenta;on
For
Ellisbridge
CPE
Study
Circle
of
WIRC
of
ICAI
by
CA
Divyang
Majmudar
Ahmedabad
June
2014
1
CA
Divyang
Majmudar
www.dpmca.com

2. Companies
Act
2013
ü Scheme
of
the
Act:
470
Sec;ons,
29
Chapters,
7
schedules,
33
new
defini;ons.
23
Company
Rules
are
no;fied.
ü In
346
of
470
clauses
(74%),
legal
phrase
‘
As
may
be
prescribed’
appears.
Rules
enlarge
or
curtail
scope
of
sec;ons.
In
Companies
Act
1956,
this
phrase
appears
in
108
of
658
Sec;ons
(16%).
Accordingly,
now
MCA
has
discre;on
to
alter
the
opera;on
of
law
without
going
through
the
Parliament.
ü Hope
that
such
power
is
not
misused
at
the
behest
of
few
or
influen;al
person
/
corporate
house/s.
ü Such
flexibility
is
welcoming
too;
so
that
law
can
be
amended
with
emerging
situa;ons.
(Source:
Companies
Act
2013
by
Dr.
T.P.
Ghosh
2nd
Edi;on,
Page
6
and
7,
Taxmann)
2
CA
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3. Today’s
Discussion
-­‐
Coverage
èCommon
Compliances/
Discipline
for
opera;ng
a
Private
Company
under
the
provisions
of
Companies
Act
2013
(New
COA)
and
compara;ve
view
of
provisions
of
LLP
Act
in
regard
to
opera;ons
of
LLP
è
Conversion
of
Company
into
LLP-­‐
Prac;cal
aspects
3
CA
Divyang
Majmudar
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4. Today’s
Discussion
-­‐
Coverage
Now In regard to:
Compliances/
Discipline
in
Incorpora;on
of
Private
Company
under
New
COA
and
LLP
under
LLP
Act
4
CA
Divyang
Majmudar
www.dpmca.com

5.
Compliances/
Discipline
in
Incorpora;on
of
Private
Company
under
New
COA
and
LLP
under
LLP
Act
5
Sr.
No.
Compliance /
Discipline
COA 2013 LLPAct 2008
1 Maximum
Members /
Partners
200
persons
No Limit
CA
Divyang
Majmudar
www.dpmca.com

6.
Compliances/
Discipline
in
Incorpora;on
of
Private
Company
under
New
COA
and
LLP
under
LLP
Act
6
Sr.
No.
Compliance / Discipline COA 2013 LLPAct 2008
2 Commencement of
Business
Declaration u/s 11 in Form
21
Subscribers to MOA must
pay for agreed to part of
minimum Paid up capital
(Rs.1,00,000/-)
Declaration is not
required
Minimum
contribution can be
even rupee 1/-
(One).
Annual Return in
Form 11 (Before
end of May every
year) to state
obligation to
contribute and
actual contribution
made by each
partner of LLP
CA
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7.
Compliances/
Discipline
in
Incorpora;on
of
Private
Company
under
New
COA
and
LLP
under
LLP
Act
7
Sr.
No.
Compliance / Discipline COA 2013 LLPAct 2008
3 Management / Board of
directors / Partners
First board meeting has to be
convened within 30 days of
Incorporation
Periodic meeting mandatory.
Next meeting must be
convened before expiry of
120 days from the preceding
meeting.
Notice of at least 7 days.
Penalty of Rs.25,000/-for
default.
It is proposed that provisions
of section 101 to 107 and 109
regarding meetings/ proxies/
voting etc. shall not apply to
Pvt Company if Articles
provide so and the Act
permits that.
LLP Act is silent on
process and
periodicity of
convening of
meetings of partners.
Regulation 9 of First
Schedule to LLP Act
prescribes that
decisions taken at
the meeting of
partners should be
recorded within 30
days of taking such
decisions and
minute book to be
kept and maintained
at the registered
office of the LLP.
CA
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8.
Compliances/
Discipline
in
Incorpora;on
of
Private
Company
under
New
COA
and
LLP
under
LLP
Act
8
Sr. No. Compliance / Discipline LLPAct 2008
Sec.23 (4) of LLPAct permits partners of LLP to
agree otherwise than what is stated in First
Schedule of LLPAct. Hence, vide LLP
Agreement, Partners may agree that whatever is
stated in First Schedule shall apply to the LLP to
the extent not stated, modified, varied, amended
or altered by this Agreement.
Though, not mandatory by Act; its prudent and
advisable to record the decisions taken by
partners, even if at the informal meetings, in
writing and get these confirmed by signature of
all those who attended or otherwise.
3 (Continues) Management / Board of
directors / Partners
CA
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9.
Compliances/
Discipline
in
Incorpora;on
of
Private
Company
under
New
COA
and
LLP
under
LLP
Act
9
Sr.
No.
Compliance / Discipline COA 2013 LLPAct 2008
4 Annual meetings/
Periodic meetings
AGM / EOGM to be
convened in terms of
provisions of section 96
and 100, Notice of the
meeting to be issued in
terms of provisions of
section 101 and 102,
meetings to be quorated
in terms of section 103
(depending on No. of
members) etc.
LLP Act is silent
on this aspect.
What is stated in
regard to meeting
of partners
applies in respect
of annual /
periodic meetings
here also.
CA
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10.
Compliances/
Discipline
in
Incorpora;on
of
Private
Company
under
New
COA
and
LLP
under
LLP
Act
10
Sr.
No.
Compliance / Discipline COA 2013 LLPAct 2008
5 Capital Contribution
and sharing of profits
by Dividend
Distribution of dividend
is in proportion to the
capital contribution by the
(equity) shareholders
unless entitled for fixed
dividends.
Further issue of shares
has to be made to the
existing shareholders in
proportion to their
existing shareholding.
(Time limit to exercise
preemptive rights by
existing shareholders is
proposed to be reduced
to 15 days instead of 30
days)
Distribution of
profits can be in
different pattern
than capital
contribution.
Partners may
mutually decide
the pattern of
contribution.
CA
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11.
Compliances/
Discipline
in
Incorpora;on
of
Private
Company
under
New
COA
and
LLP
under
LLP
Act
11
Sr.
No.
Compliance
/ Discipline
COA 2013 LLPAct 2008
5
(Con
tinue
d)
Capital
Contribution
and sharing
of profits by
Dividend
Interest on capital is not
allowed in general terms.
Reduction of share capital
has to be with the approval
of the Court. [Sec.66]
Buy back of shares has to be
out of free reserves,
securities premium or
proceeds of securities of
different class/ category.
[Strictly regulated
mechanism permitting
limited buy back in terms of
Sec. 68]
Interest can be paid on capital
contribution.
Reduction of Contribution of
partners by LLP is not prohibited
in terms of provisions of LLP Act
but subject to Agreement between
partners and filing of Form 3 on
MCA Portal for changes in LLP
Agreement. Sec. 33 (2) of LLP Act
gives a right to unpaid creditor who
has extended credit to the LLP on
the basis of original contribution of
partners of LLP. However, no prior
approval of the Court or any other
authority is required to reduce the
contribution of partners.
CA
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12.
Compliances/
Discipline
in
Incorpora;on
of
Private
Company
under
New
COA
and
LLP
under
LLP
Act
12
Sr.
No.
Compliance /
Discipline
COA 2013 LLPAct 2008
6 Distribution of
Dividend / Profits
Provisions of Sec. 123 of
New Act regulate the
process of declaration of
dividends. Provision for
Depreciation before
declaration of dividend is
necessary. Dividend has
to be paid in cash and
deposited in separate
bank account within 5
days of its declaration.
LLP Act considers that partners
shall have twin rights / interest in
profits of LLP; one is share of
profit/ loss of LLP and other is to
receive distributions (of profits).
Any of these rights are
transferable / assignable [Sec. 42
(1) of LLP Act] subject to certain
reservations. Accordingly, LLP
Agreement may provide for share
of profit /loss amongst partners
and mode and manner of
distribution of profits as well.
However, the LLP Act does not
regulate any of these aspects.
CA
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13.
Compliances/
Discipline
in
Incorpora;on
of
Private
Company
under
New
COA
and
LLP
under
LLP
Act
13
Sr.
No.
Compliance /
Discipline
COA 2013 LLPAct 2008
7 Corporate Social
Responsibility
(CSR)
Provisions of Sec.135
requires every Company
having net-worth of 500
crores or turnover of Rs.
1000 crores or net profit
of Rs.5 crores or more
during any financial year
shall spend 2% of avg.
net profits of last three
financial years towards
projects / programs of
CSR. [Sec.135] CSR
Rules laid down w.e.f.
1.4.2014.
LLP Act has no such provision.
CA
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14.
Compliances/
Discipline
in
Incorpora;on
of
Private
Company
under
New
COA
and
LLP
under
LLP
Act
14
Sr.
No.
Compliance /
Discipline
COA 2013 LLPAct 2008
8 Audit and Accounts Ø Rotation of Auditors
Ø Application of CARO
Ø Schedule VI
Ø XBRL Reporting
Ø Director’s Report
Ø Cost Audit
Ø Extensive Disclosures and
coverage of reporting by
Auditors [Companies (Audit
and Auditors) Rules 2014]
It is proposed that limit of 20
Companies for CA as an
auditor shall not apply in so
far as Pvt. Cos are concerned.
LLP Act does not provide
for such compliances and
discipline
CA
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15.
Compliances/
Discipline
in
Incorpora;on
of
Private
Company
under
New
COA
and
LLP
under
LLP
Act
15
Sr.
No.
Compliance /
Discipline
COA 2013 LLPAct 2008
9 Directorship in
Companies /
Partner in LLP
Maximum 20 Companies
out of which 10 can be
Public Companies (even
if Alternate Director as
well)
In a case of two directors
in a private Company,
one (1) Director must be
‘Resident in India’. [Sec.
149 (3)]
No Limit. As many LLP as can
be contributed for.
One of the two Designated
Partners must be ‘Resident in
India’ but no such condition for
ordinary partners [Sec. 7 (1)]
For ordinary partner in LLP
Residency in India is not
applicable.
CA
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Majmudar
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16. Compliances/
Discipline
in
Incorpora;on
of
Private
Company
under
New
COA
and
LLP
under
LLP
Act
16
Sr.
No.
Compli
ance /
Discipli
ne
COA 2013 LLPAct 2008
10 Borrow
ings
Company cannot freely
borrow money [Sec.186,
185, 74]
Deposit includes receipt of
any money by way of
deposit or loan or in any
other form (Stock
Lending?) by the
Company.
Company may borrow
Loan / accept deposit from
(only) the director/s
provided he makes a
declaration that such
money is his own money.
LLP may borrow money and pay interest.
Caution:
LLP cannot carry on its principal business as NBFC.
No entity other than Company can carry on business
as NBFC.
Hence, LLP cannot carry on business as NBFC.
In order to identify a particular company as a non-
banking financial company (NBFC), RBI will
consider both, the assets and the income pattern as
evidenced from the last audited balance sheet of the
company to decide its principal business. The
company will be treated as an NBFC if its financial
assets are more than 50 per cent of its total assets
(netted off by intangible assets) and income from
financial assets should be more than 50 per cent of the
gross income. Both these tests are required to be
satisfied as the determinant factor for principal
business of a company.
CA
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17. Compliances/
Discipline
in
Incorpora;on
of
Private
Company
under
New
COA
and
LLP
under
LLP
Act
17
Sr.
No.
Compli
ance /
Discipli
ne
COA 2013 LLPAct 2008
10 Borrow
ings
(Contin
ued)
Company cannot freely borrow money
[Sec.186, 185, 74]
For Acceptance of Deposits, section 74 is
proposed to be changed. It is proposed
that a private Company may accept
deposits from its shareholders (if they
are 50 or less) not exceeding 25% of its
net-worth or 100% of paid up capital,
whichever is more.
LLP may borrow money and pay
interest.
CA
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18.
Compliances/
Discipline
in
Incorpora;on
of
Private
Company
under
New
COA
and
LLP
under
LLP
Act
18
Sr.
No.
Complian
ce /
Discipline
COA 2013 LLPAct 2008
11 Loan to
Directors
/ other
persons
Provisions of Sec. 185 of the New Act
prohibit granting of loans to director or
persons connected/ related to such director.
It is proposed to relax this provision for
Pvt. Co which has no shareholder as
body corporate and has borrowed
money from bank/ FI or body
corporate, which is less than Rs.50 cores
or 2 times of its paid up capital;
whichever is less.
Provisions of section 186 (2) regulates
making of loans / providing Guarantee or
security by the Company to any person /
body corporate.
LLP Act does not prohibit
granting of loans to
partners or persons
connected / related to
partners.
but…. It must not cross
the level whereby it can be
classified as NBFC
Activity as stated earlier
CA
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19.
Compliances/
Discipline
in
Incorpora;on
of
Private
Company
under
New
COA
and
LLP
under
LLP
Act
19
Sr.
No.
Complian
ce /
Discipline
COA 2013 LLPAct 2008
12 Investme
nt and
Loans
Provisions of Sec. 186 regulate this aspect.
Beyond Two Layer Investment, lower of
60% of net-worth+ Security Premium OR
100% of Free Reserves+ Security
Premium, approval by shareholders,
Disclosures, application of market rate of
interest etc. are regulatory aspects.
Liberties and exemptions are for
businesses, which have principal object of
financing loans etc.
LLP can make investments
or grant loans but…. It must
not cross the level whereby
it can be classified as NBFC
Activity as stated earlier.
CA
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20.
Compliances/
Discipline
in
Incorpora;on
of
Private
Company
under
New
COA
and
LLP
under
LLP
Act
20
Sr.
No.
Complian
ce /
Discipline
COA 2013 LLPAct 2008
13 Powers
of
manage
ment
( Board /
Partners)
Provisions of Sec. 180 regulate this aspect.
Several restrictions have been placed in the
New Act as compared to the Old Act,
which necessarily requires the board to act
only if shareholders have granted such
authority to the board by special
resolution.
Its proposed to exclude Private
Company having 50 or less shareholders
from such restrictions.
In LLP Agreement, partners
can authorize / control the
designated partners to do or
not to do certain businesses.
CA
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Majmudar
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21.
Compliances/
Discipline
in
Incorpora;on
of
Private
Company
under
New
COA
and
LLP
under
LLP
Act
21
Sr.
No.
Complian
ce /
Discipline
COA 2013 LLPAct 2008
14 Related
Party
Transacti
ons
Provisions of Sec. 188 restrict transactions
with related parties unless approved by
shareholders in general meeting with
special resolution.
Its proposed to exclude Private
Company from such restrictions.
LLP Act does not prohibit or
restrict related party
transactions
In LLP Agreement, partners
may mutually agree / restrict
such transactions.
Disclosures as per AS- 18
CA
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22.
Compliances/
Discipline
in
Incorpora;on
of
Private
Company
under
New
COA
and
LLP
under
LLP
Act
22
Sr.
No.
Compliance
/ Discipline
COA 2013 LLPAct 2008
15 Managerial
Personnel
and Key
Managerial
Personnel
Provisions of Sec. 196 regulate restrict
transactions with related parties unless
approved by special resolution passed
by shareholders in general meeting.
Provisions of Section 203 (3) prohibits a
Whole time KMP to hold office in more
than One Company, except a subsidiary
Co.
Its proposed to exclude Private
Company from such restrictions.
LLP Act does not prohibit or
restrict related party
transactions
In LLP Agreement, partners
may mutually agree / restrict
such transactions.
Disclosures as per AS- 18, if
applicable.
CA
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Majmudar
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23. Today’s
Discussion
-­‐
Coverage
Now In regard to:
Prac;cal
aspects
of
Conversion
of
Company
into
LLP
23
CA
Divyang
Majmudar
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24. Issues
in
conversion
of
Company
into
LLP-­‐
LLP
Act
2008
Ø LLP
Agreement.
Ø Conversion
of
Private
Company
into
LLP-­‐
Some
essen;als
and
procedures.
Ø Conversion
–
Whether
a
transfer
in
terms
of
provisions
of
Income
Tax
Act?
Ø If
it
is
a
transfer;
implica;ons
and
cost
benefit
analysis.
Ø Case
Study-­‐
Real
Estate
LLP
24
CA
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Majmudar
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25. Issues
in
conversion
of
Company
into
LLP-­‐
LLP
Act
2008
LLP
Agreement
Whether
it
is
mandatory
to
have
the
Agreement
of
Partnership
between
the
partners
of
LLP?
25
CA
Divyang
Majmudar
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26. Issues
in
conversion
of
Company
into
LLP-­‐
LLP
Act
2008
LLP
Agreement
No.
It
is
not
necessary
to
have
the
agreement
between
the
partners
governing
their
mutual
rights
and
du;es
(rela;onship)
and
those
of
LLP
and
them
–
Refer
Sec(on
23
and
First
Schedule
to
LLP
Act.
In
absence
of
such
Agreement,
rela;ons
of
partners
inter-­‐se
and
between
them
and
LLP
shall
get
governed
in
terms
of
clause
1
to
14
of
the
First
Schedule.
26
CA
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27. Issues
in
conversion
of
Company
into
LLP-­‐
LLP
Act
2008
LLP
Agreement
to
state
about
applica;on
of
the
First
Schedule
of
Limited
Liability
Partnership
Act
2008:
‘Regula'ons
contained
in
the
First
Schedule
to
the
Limited
Liability
Partnership
Act
2008
shall
apply
to
this
Limited
Liability
Partnership
to
the
extent
these
are
not
stated,
modified,
varied,
amended
or
altered
by
this
Agreement.’
27
CA
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Majmudar
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28. Issues
in
conversion
of
Company
into
LLP-­‐
LLP
Act
2008
LLP
Agreement
Ø LLP
Agreement
can
be
made
prior
to
the
registra;on
of
LLP
or
conversion
of
Company
into
LLP.
Ø If
so
made,
make
sure
to
ra;fy
the
said
Agreement;
post
incorpora;on
/
registra;on
/
conversion.
(Refer
to
Sec(on
23
(2)
and
(3)
of
LLP
Act)
Ø It
is
advisable
to
make
LLP
as
party
to
Ra;fica;on
Agreement
as
the
agreement
governs
the
rela;ons
between
the
partners
and
the
LLP
also.
28
CA
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29. Issues
in
conversion
of
Company
and
Partnership
into
LLP
LLP
Agreement
to
define:
‘Conversion
coming
into
effect’
means
that
all
the
business,
undertakings,
proper'es
and
liabili'es,
obliga'ons
of
whatsoever
nature,
type
and
kind,
wheresoever
situate,
on
the
going
concern
basis;
together
with
all
their
assets
and
liabili'es
without
any
limita'on
and
shall
mean
and
include:
(i) Tangible
movable
or
immovable
property
including
that
situate
at
____________
(more
par'cularly
described
in
Schedule
‘A’
hereto)
and
intangible
property
including
ac'onable
claims,
interests,
rights,
privileges,
licenses,
permits,
quotas,
approvals,
registra'ons,
incen'ves,
tax
deferrals,
benefits,
concessions,
grants,
if
any,
as
well
the
whole
undertaking
and
business
as
a
going
concern,
belonging
to
or
vested
in
and
liabili'es
in
respect
of
any
debt
or
obliga'on
incurred
or
any
contract
entered
into,
by,
to,
with,
or
on
behalf
of
the
Company
shall
pass
to,
vest
in
for
all
the
estate,
assets,
rights,
'tle
and
interest
and
authori'es
of
the
LLP
and
become
the
liabili'es
and
obliga'ons
of
the
LLP
respec'vely,
having
regard
to
the
obliga'ons
imposed
on
the
LLP
by
these
presents
and
shall
be
taken
at
its
respec've
value
as
stated
in
the
books
of
the
Company
including
the
capital
represented
by
total
assets
less
total
outside
liabili'es
on
and
from
the
date
of
the
conversion
of
the
Company
into
LLP
by
opera'on
of
Law
in
terms
of
the
provisions
of
the
LLP
Act
and
in
par'cular
Sec'on
56,
58
and
Third
Schedule
thereof.
(
Con(nued
in
next
slide)
29
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30. Issues
in
conversion
of
Company
and
Partnership
into
LLP
(Con;nued
from
previous
slide)
LLP
Agreement
to
define:
(ii)
Without
prejudice
to
(i)
above,
in
respect
of
such
of
the
assets
and
proper'es
of
the
Company
as
are
movable
in
nature
or
incorporeal
property
or
are
otherwise
capable
of
being
handed
over
by
manual
delivery
or
by
endorsement
and
/or
delivery,
the
same
shall
be
considered
as
so
passed
on,
handed
over,
delivered
or
endorsed;
as
the
case
may
be,
so
as
to
become
the
assets
and
proper'es
of
the
LLP
as
an
integral
part
of
the
Business,
Undertaking
without
any
act,
deed,
instrument
or
conveyance
for
the
same.
30
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31. Issues
in
conversion
of
Company
and
Partnership
into
LLP
(Con;nued
from
previous
slide)
LLP
Agreement
to
recite:
Assets
to
vest
in
LLP
on
its
Conversion
‘On
Conversion
coming
into
effect
all
the
proper'es
and
assets
of
whatsoever
nature
without
any
limita'ons
whether
movable
or
immovable
including
all
tangible,
intangible,
real
or
corporeal
and
rights,
privileges,
licenses
permissions,
approvals,
concessions,
claims,
status
and
other
benefits
of
the
business
or
undertaking;
related
to,
owned
by
or
vested
in
the
Company
shall
pass
to
and
vest
in
the
LLP
for
all
the
estate
and
interest
of
the
LLP
without
further
assurance,
act
or
deed.’
31
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32. Issues
in
conversion
of
Company
into
LLP-­‐
LLP
Act
2008
LLP
Agreement
May
confer
Vo;ng
Power
to
partners:
Ø One
Vote
for
each
Partner;
Ø In
propor;on
to
Capital
Contribu;on
ra;o;
Ø In
propor;on
to
Profit
sharing
ra;o;
Ø Discre;onary
vo;ng
power
to
designated
partners
in
certain
special
magers;
Ø May
be
Veto
Power?
LLP
Act
does
not
prohibit
this.
32
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33. Issues
in
conversion
of
Company
into
LLP-­‐
LLP
Act
2008
LLP
Agreement
Take
care
of
certain
provisions
in
the
First
Schedule
(Akin
to
Table
A
of
the
Companies
Act
1956)
1. All
partners
are
en;tled
to
share
equally
in
the
capital,
profits
and
losses;
2. Every
partner
may
take
part
in
the
management
of
the
LLP;
3. No
partner
is
en;tled
for
any
remunera;on;
4. Each
partner
shall
have
one
vote
for
the
issues
/
mager
related
to
LLP,
which
has
to
be
passed
through
a
resolu;on
approved
by
majority
partners;
5. Decisions
concerning
LLP
must
be
recorded
in
the
minutes
within
30
days
of
taking
such
decisions;
6. If
a
partner
is
carrying
on
compe;ng
business
without
consent
of
the
LLP,
he
must
account
for
and
pay
for
the
profits
of
such
business
to
the
LLP;
33
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34. Issues
in
conversion
of
Company
into
LLP-­‐
LLP
Act
2008
Conversion
of
Private
Limited
into
LLP-­‐
Some
essen;als
to
be
taken
care
of:-­‐
Ø Shareholding
Pagern;
contribu;on
to
Capital
and
Profit
sharing
ra;o
could
be
different.
If
required;
re-­‐align
the
shareholding
pagern.
But
take
care
of
sec(on
56
(vii)
Receipt
of
movable
property
i.e.
Shares
exceeding
Rs.25000/-­‐
without
considera;on
or
less
than
its
fair
value
Ref.
Rule
11
U
and
11
UA
Ø Firstly
named
shareholder
to
become
partner;
joint
shareholder
to
become
beneficial
partner.
Tax
impact
–
Ref
to
sec(on
10
(2A)
rws
2
(23)(ii)
and
(iii)
of
I
TAX.
This
issue
has
become
controversial
as
a
circular
from
MCA
does
not
permit
a
partner
to
hold
the
shares
in
trust
for
the
other.
Ø If
shareholder
is
ostensible
owner
and
holding
shares
in
trust
for
the
beneficial
owner
of
shares;
ensure
that
compliance
u/s
187
C
of
Companies
Act
1956
(‘COA’)is
made.
This
issue
has
become
controversial
as
a
circular
from
MCA
does
not
permit
a
partner
to
hold
the
shares
in
trust
for
the
other.
Ø Ensure
that
last
annual
return
in
terms
of
provisions
of
COA
and
Tax
Return
in
terms
of
I
Tax
Act
have
been
filed.
34
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35. Issues
in
conversion
of
Company
into
LLP-­‐
LLP
Act
2008
LLP
Agreement
Its
advisable
to
empower
designated
partners
for
Appointment
of
Auditors
in
LLP
Agreement:
“Any
two
of
the
Designated
Partners
are
authorised
to
appoint
/
reappoint
the
Auditors
of
the
LLP,
if
required.
Such
appointment
may
be
of
the
first
auditors
or
on
causal
vacancy
or
on
resigna'on
or
removal
of
the
Auditors.
“
35
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36. Issues
in
conversion
of
Company
into
LLP-­‐
LLP
Act
2008
LLP
Agreement
Procedure
for
removal
of
Auditors
can
be
determined
in
terms
of
LLP
Agreement
in
terms
of
Rule
24
(18)
(b):
“LLP
may
cause
the
removal
of
the
Auditor/s
before
expiry
of
his
term.
LLP
may
issue
a
no'ce
to
such
Auditor/s
of
its
inten'on
to
do
so
and
seek
his
representa'on
of
reasonable
length
in
wri'ng.
Such
representa'on
should
be
made
by
such
Auditor/s
to
the
LLP
within
two
weeks
from
the
date
of
receipt
of
such
no'ce.
Upon
considering
the
said
representa'on,
if
any,
tendered
by
the
said
Auditor/s,
if
majority
the
Designated
Partners
are
having
consensus
for
his
removal,
said
Auditor/s
shall
be
removed
and
he
shall
be
informed
about
the
decision
of
the
Designated
Partners
by
the
LLP
within
seven
days
from
the
date
thereof.”
In
absence
of
the
above,
consent
of
all
the
partners
shall
be
required
to
remove
the
Auditors.
36
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37. Issues
in
conversion
of
Company
into
LLP-­‐
LLP
Act
2008
Conversion
of
Private
Limited
into
LLP-­‐
Some
essen;als
to
be
taken
care
of:-­‐
Ø Obtain
the
consent
of
all
unsecured
creditors
in
wri;ng
for
conversion;
Ø If
security
interest
of
creditors
exist
on
the
assets
of
Company,
Applica;on
for
Conversion
is
not
permissible.
37
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38. Issues
in
conversion
of
Company
into
LLP-­‐
LLP
Act
2008
Conversion
of
Private
Limited
into
LLP-­‐
Some
essen;als
to
be
taken
care
of.
Form
the
date
of
conversion,
the
Company
stands
dissolved.
Ø What
happens
to
the
Accounts
of
the
current
financial
year
;ll
the
date
of
conversion?
On
conversion
Company
ceases
to
exist;
Ø Whether
accounts
of
the
Company
are
required
to
be
audited
by
CA?
Ø Who
shall
approve
these
accounts
for
the
auditors
to
agest?
Ø Whether
shareholders
need
to
approve
the
accounts?
Ø Whether
Tax
Audit
is
required
to
be
done?
Ø Who
shall
sign
the
Income
tax
return?
In
what
capacity?
Whether
it
is
to
be
signed
by
the
partner
of
the
LLP
or
by
Ex-­‐director
of
the
Company?
Ø What
happens
to
opera;ons
of
the
LLP
immediately
preceding
the
conversion?
Bank
Account?
VAT
registra;on?
PAN?
38
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39. Issues
in
conversion
of
Company
into
LLP-­‐
LLP
Act
2008
Law
is
silent
on
these
issues!
LLP
Agreement
Should
take
care
of
Transit
period
Define
Transit
period
in
LLP
Agreement
‘Transit
Period’
means
the
period
cons'tu'ng
the
date
on
which
the
Company
is
converted
to
and
registered
as
LLP
and
the
last
of
the
dates
on
which
the
rights,
powers,
privileges,
licenses,
approval,
permission,
consents,
registra'ons,
authorisa'ons
of
any
kind,
type
and
nature
whatsoever
without
any
limita'ons
of
the
Company
to
carry
on
the
business
under
the
provisions
of
any
other
law
in
force,
vest
or
stand
transferred
in
the
LLP.
39
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40. Issues
in
conversion
of
Company
into
LLP-­‐
LLP
Act
2008
LLP
Agreement
to
authorize
Designated
Partner/s
to
act,
perform
or
do
things
during
Transit
period
‘Designated
Partners
of
the
LLP
shall
have
powers,
privileges
and
obliga'on
to
authen'cate,
aest
or
sign
financial
statements,
statutory
returns,
forms
or
make
submissions
or
to
do
all
such
acts
deeds
and
things
as
may
be
required
under
any
law
for
the
'me
being
in
force
including
for
the
conversion
to
come
into
effect,
'll
the
date
of
the
registra'on
/
conversion
of
LLP
or
during
the
Transit
Period,
in
the
Representa've
capacity
for
the
Company
which
shall
be
deemed
as
dissolved
from
the
said
date
in
terms
of
the
provisions
of
the
LLP
Act.’
40
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41. Issues
in
conversion
of
Company
into
LLP-­‐
LLP
Act
2008
Conversion
of
Private
Limited
into
LLP
Procedures
§ Agreement
of
LLP
(Op;onal).
§ Filing
of
Form
No.
1,
2,
3
and
18
in
terms
of
LLP
Rules
with
the
Registrar
of
LLP.
§ Filing
of
Form
No.
14
in
terms
of
LLP
Rules
with
the
ROC
in;ma;ng
the
dissolu;on
of
Company
on
its
conversion.
41
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42. Issues
in
conversion
of
Company
into
LLP-­‐
LLP
Act
2008
Provisions
of
Income
Tax
Act
1961
Ø ‘Firm’
means
Partnership
Firm
and
LLP
and
meaning
of
word
‘Partner’
includes
partner
of
LLP
too.
[Ref
Sec
2
(23)]
Ø Share
of
a
person
in
the
total
income
of
the
Firm
which
is
separately
assessed
as
such
is
not
to
be
included
in
the
total
income
of
the
Partner
of
that
Firm.[Sec;on
10
(2A)]
Ø Interest
of
the
Partner
in
the
LLP
is
transferable
either
wholly
or
partly
.
Interest
means
right
of
the
partner
in
the
share
of
profits
/
Losses
of
the
LLP
and
to
receive
the
distribu;ons
in
accordance
with
the
LLP
Agreement.
[Sec;on
42
(1)
of
LLP
Act]
Ø Whether
assignee
of
the
share
of
the
profits
/
distribu(ons
can
claim
exemp(on
u/s
10
(2A)
of
IT
Act?
Ø Income
which
is
taxed
once
in
the
hands
of
the
LLP;
whether
can
be
taxed
again
in
the
hands
of
the
assignee?
Basic
Principle
of
Taxa(on,
whether
can
be
ignored?
42
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43. Issues
in
conversion
of
Company
into
LLP-­‐
LLP
Act
2008
Provisions
of
Income
Tax
Act
1961
Whether
conversion
of
Company
into
LLP
is
a
transfer?
Ø In
the
context
of
the
mager,
transfer
as
defined
in
terms
of
sec;on
2(47)
(i)
and
(ii)
is
to
be
analyzed.
Ø One
has
to
see
that
it’s
a
conversion;
where
so
far
an
en;ty
which
used
to
get
governed
under
the
provisions
of
Companies
Act,
is
now
gets
governed
under
the
provisions
of
LLP
Act.
Ø When
conversion
takes
place,
Company
ceases
to
exist
(dissolves)
and
LLP
comes
into
being.
This
is
simultaneous
ac;on
and
not
one
aoer
the
other.
There
are
no
two
hands
(between
two
living
beings
i.e.
“inter
vivos’’)
in
the
transac;on.
Therefore,
it
can
not
be
regarded
as
transfer.
[
Sec;on
5
of
TP
Act]
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44. Issues
in
conversion
of
Company
into
LLP-­‐
LLP
Act
2008
Provisions
of
Income
Tax
Act
1961
Whether
conversion
of
Company
into
LLP
is
a
transfer?
Ø Transac;on
is
not
‘relinquishment
’
of
the
asset
as
well;
for
the
reason
that
there
is
no
withdrawal
from,
abandoning,
ceasing
to
hold
or
surrendering
of
the
asset;
it’s
a
transac;on
where
the
form
of
the
en;ty
changes
in
so
far
as
its
governance
under
the
statute
is
concerned.
Moreover,
the
ques;on
that
who
relinquishes
what
and
in
whose
favour
remain
unanswered.
Ø On
the
same
principles,
such
transac;on
can
not
be
regarded
as
‘Ex;nguishment
of
any
rights’
in
the
capital
assets.
44
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45. Issues
in
conversion
of
Company
into
LLP-­‐
LLP
Act
2008
Provisions
of
Income
Tax
Act
1961
Whether
conversion
of
Company
into
LLP
is
a
transfer?
Sec;on
47
(xiiib)
expressly
considers
that
Transac;on
(conversion)
which
falls
within
the
framework
of
sub
clause
(a)
to
(f)
shall
not
be
considered
as
‘Transfer’,
where;
(i) All
assets
and
liabili;es
of
the
Company
become
assets
and
liabili;es
of
the
LLP;
(ii) All
the
shareholders
of
the
Company
become
partners
of
the
LLP
and
their
shareholding
pagern
in
the
Company
matches
that
of
the
capital
contribu;on
ra;o
and
profit
sharing
ra;o
in
the
LLP;
(iii) No
considera;on
in
any
form
or
manner;
other
than
by
way
of
share
in
profit
and
capital
contribu;on
is
received
by
the
shareholders
of
the
Company;
(iv) No
dilu;on
in
profit
sharing
ra;o
up
to
50
%
for
the
period
of
5
years;
(v) Company
under
conversion
should
not
have
total
sales,
turnover
or
gross
receipts
exceeding
Rs.60
lacs
in
any
of
the
three
preceding
previous
years;
(vi) Balance
of
accumulated
profits
on
the
date
of
conversion
should
be
maintained
for
the
period
of
three
years
aoer
the
conversion.
45
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46. Issues
in
conversion
of
Company
into
LLP-­‐
LLP
Act
2008
Provisions
of
Income
Tax
Act
1961
Whether
conversion
of
Company
into
LLP
is
a
transfer?
For
the
;me
being
assume
that
conversion
of
Company
into
LLP
is
‘Transfer’
in
terms
of
provisions
of
Income
Tax
Act
and
one
of
the
condi;ons
prescribed
in
Sec;on
47
(xiiib)
vide
sub
clause
(a)
to
(f)
are
not
complies
with;
Then
what?
(con(nued
in
next
slide)
46
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47. Issues
in
conversion
of
Company
into
LLP-­‐
LLP
Act
2008
(con(nued
from
previous
slide)
Assume
that
conversion
is
a
transfer.
Consequences
/
Effects
1. Cost
of
acquisi;on
of
capital
assets
of
the
Company
shall
be
deemed
to
be
the
cost
of
acquisi;on
of
the
LLP.
Sec;on
49
(iii)
(e)
would
apply
as
it
is
transfer
referred
to
in
sec;on
47
(XIIIb).
2. Transac;on
of
conversion,
if
involves
an
‘undertaking’
as
defined
in
terms
of
Explana;on
1
to
sec;on
2
(19AA),
may
become
a
‘Slump
sale’
as
defined
in
terms
of
sec;on
2
(42
C).
3. Check
whether
the
‘Slump
Sale’
is
long
term.
Provisions
of
sec;on
50
B
i.e.
computa;on
of
capital
gains
in
case
of
slump
sale
would
apply.
(con(nued
in
next
slide)
47
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48. Issues
in
conversion
of
Company
into
LLP-­‐
LLP
Act
2008
(con(nued
from
previous
slide)
Assume
that
conversion
is
a
transfer.
Consequences
/
Effects
4.
If
it
is
long
term
or
short
term,
considera;on
for
conversion
shall
be
equal
to
the
share
capital
of
the
Company.
Capital
contribu;on
of
partners
in
the
LLP
would
be
equal
to
the
share
capital
of
the
shareholders
of
the
Company.
Therefore,
no
considera;on
for
conversion
is
being
passed
on
by
LLP
to
the
shareholders
/
Company
for
alleged
transfer
of
‘Undertaking’.
Therefore,
there
is
no
capital
gain.
5.
However,
provisions
of
sec;on
50
may
apply
if
book
value
of
depreciable
assets
is
greater
than
WDV.
6.
If
there
is
immovable
property
involved
in
the
conversion,
sec;on
50
C;
in
so
far
as
difference
between
the
‘Jantri
Value’
of
immovable
property
and
book
value
thereof
is
concerned,
shall
apply.
48
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49. Issues
in
conversion
of
Company
into
LLP-­‐
LLP
Act
2008
(con(nued
from
previous
slide)
Assume
that
conversion
is
a
transfer.
Consequences
/
Effects
7.
In
the
event,
there
is
incidence
of
capital
gains;
quantum
thereof
is
to
be
compared
with
the
saving
of
dividend
distribu;on
tax,
which
the
LLP
would
be
saving
in
foreseeable
future.
8.
With
effect
from
1-­‐4-­‐2012
i.e.
AY
2012-­‐13,
LLP
is
subject
mager
of
AMT
of
18.5%
in
terms
of
provisions
of
sec;on
115
(JC)
of
the
Income
Tax.
9.
Incidence
of
capital
gain
at
20%
is
a
one
;me
cost;
whereas
the
levy
of
dividend
distribu;on
tax
@16.22%
u/s
115
-­‐
O
is
recurring
and
on
year
to
year
basis.
While
comparing
the
tax
effects
of
LLP
and
Private
Company;
impact
of
sec(on
115
(JC)
is
neutral
between
the
two.
49
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50. Issues
in
conversion
of
Company
into
LLP-­‐
LLP
Act
2008
50
Year 1 2 3 4 5 Total
Taxable0Income0 100 120 150 180 200 750
Income0Tax0@31% 31 37 47 56 62 233
Profit0after0tax 69 83 104 124 138 518
Dividend0
Distribution0
Tax@16.22%
11 13 17 20 22 84
Divisible0Profit0
amongst0
Shareholders
58 69 87 104 116 434
Divisible0Profit0
amongst0partners0of0
LLP
69 83 104 124 138 518
Discounting0(NPV)0
DDT0@9%
Decision0making0from0Tax0angle0for0conversion0of0Company0into0LLP0
₨063
If0impact0of0capital0gains0is0less0than0or0equal0to0Rs.63/U;0it0could0be0viable0to0opt0for0
conversion0of0Co.0into0LLP.
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51. Case
Study
Real
Estate
LLP
Partner’s
Contribu;on;
Type
of
Partners;
Powers,
Rights,
du;es
and
obliga;ons
Ø Partner’s
contribu;on
can
be
fixed
and
variable.
But
is
mandatory
to
contribute;
if
not
monitory,
then
valua;on
of
contribu;on
made
to
support
the
same.
Ø In
real
estate
LLP;
there
could
be
equity
partners;
working
partner/s
wherein
equity
partner
would
contribute
in
fixed
and
variable
mode
where
as
working
partner
shall
contribute
only
in
fixed
mode.
Profit
sharing
ra;o
would
carve
out
a
predetermined
por;on
of
profits
/
greater
share
in
favour
of
working
partner.
Ø Working
Partner
could
be
an
LLP
as
well.
(to
be
con(nued
in
next
slide)
51
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52. Case
Study
(Con(nued
from
previous
slide)
Real
Estate
LLP
Partner’s
Contribu;on;
Type
of
Partners;
Powers,
Rights,
du;es
and
obliga;ons
Ø Financing
Partner
is
responsible
for
providing
funds
for
construc;on
project;
working
partner
is
responsible
for
planning
and
performance
thereof;
its
role
is
of
facilitator
of
the
job.
For
which
its
not
being
remunerated
by
way
of
salary
or
interest
or
the
like.
Except
share
in
profits
no
partner
gets
anything.
Ø No
service
tax
to
be
charged
or
paid
for
the
jobs
carried
out
by
working
partner.
Ø Working
partner
is
responsible
for
compliance
of
the
laws
regula;ng
the
construc;on
job
and
shall
indemnify
the
financing
partners.
Ø FDI
is
permissible
if
the
project
is
complying
with
the
guidelines;
otherwise
NRI’s
can
be
partner
of
the
real
estate
LLP;
subject
to
an
averment
in
the
affidavit
that
he
/
she
shall
not
repatriate
the
profits
outside
India.
But
LLP
is
supposed
to
take
approval
of
FIPB
even
for
the
permissible
business
ac;vi;es
and
unless
no;fied
by
RBI,
inflow
of
funds
can
not
be
brought
in.
52
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53. Issues
in
conversion
of
Company
and
Partnership
into
LLP
Conversion
of
Partnership
into
LLP
Ø Principles
governing
the
conversion
of
Company
would
also
govern
that
of
Partnership.
Ø However,
instead
of
Third
Schedule
of
LLP
Act,
Second
Schedule
to
LLP
Act
would
apply.
Ø There
are
few
procedural
differences,
but
not
very
material
on
principle.
However,
in
conversion
of
Partnership
into
LLP,
even
if
there
are
secured
creditors
to
the
firm,
conversion
is
permissible.
53
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54. Issues
in
conversion
of
Company
and
Partnership
into
LLP
Prac;cal
Issues
Non
banking
Financing
business
can
not
be
commenced
or
carried
on
in
LLP.
Registrar
of
LLP
would
call
for
the
approval
of
RBI.
And
RBI
does
not
permit
this.
54
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55. Issues
in
conversion
of
Company
and
Partnership
into
LLP
FDI
in
LLP
ü Press
Note
No.
1
(2011
series)
dated
May
20,
2011
issued
by
Department
of
Industrial
Policy
&
Promo;on
(DIPP),
Ministry
of
Commerce
&
Industry,
Government
of
India
and
paragraph
3.2.5
of
the
Consolidated
FDI
Policy
Circular
1of
2013
dated
April
5,
2013
issued
by
DIPP,
has
considered
the
FDI
in
LLP.
ü Consequently,
RBI
has
issued
circular
bearing
reference
N0.
RBI/
2013-­‐14/566
A.P.
(DIR
Series)
Circular
No.
123
dated
April
16,
2014.
(Part
of
this
circular
has
come
into
opera;on
with
retrospec;ve
effect.)
55
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56. Issues
in
conversion
of
Company
and
Partnership
into
LLP
FDI
in
LLP
ü Any
FDI
in
a
LLP
shall
require
prior
Government/FIPB
approval.
ü following
sectors/ac;vi;es
shall
not
be
eligible
to
accept
FDI:
a)
Sectors
eligible
to
accept
100%
FDI
under
automa;c
route
but
are
subject
to
FDI-­‐
linked
performance
related
condi;ons
(for
example
minimum
capitalisa;on
norms
applicable
to
'Non-­‐Banking
Finance
Companies'
or
'Development
of
Townships,
Housing,
Built-­‐up
infrastructure
and
Construc;on-­‐development
projects',
etc.);
or
b)
Sectors
eligible
to
accept
less
than
100%
FDI
under
automa;c
route;
or
c)
Sectors
eligible
to
accept
FDI
under
Government
Approval
route;
or
d)
Agricultural/planta;on
ac;vity
and
print
media;
or
e)
Sectors
not
eligible
to
accept
FDI
i.e.
any
sector
which
is
prohibited
under
the
extant
FDI
policy
(Annex-­‐A
to
Schedule
1
to
No;fica;on
No.
FEMA.
20/
2000-­‐
RB
dated
3rd
May
2000)
as
well
as
sectors/ac;vi;es
prohibited
in
terms
of
Regula;on
4(b)
to
No;fica;on
No.
FEMA.
1
/
2000-­‐RB
dated
3rd
May
2000,
as
amended
from
;me
to
;me.
56
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57. Issues
in
conversion
of
Company
into
LLP
Conversion
of
LLP
into
Company
ü Provisions
of
Part
IX
(Sec;on
565
to
581)
of
Companies
Act
1956
considers
the
registra;on
of
joint
Stock
Company
as
Company
to
be
governed
under
the
provisions
of
said
Act.
These
sec;ons
are
no
more
in
effect
as
on
date.
ü Provisions
of
Chapter
XXI-­‐
Part
I
(Sec;on
366
to
371)
of
Companies
Act
2013
considers
conversion
of
LLP
as
Company
incorporated
as
Company
under
the
said
Act.
These
sec;ons
are
in
opera;on.
ü Ves;ng
of
Assets
of
LLP
into
Company
by
Statutory
Provision
and
there
is
no
transfer
of
proper;es
and
assets
‘inter
vivos’
(between
the
livings).
Past
precedents
would
apply
pari
materia.
57
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58. Issues
in
conversion
of
Company
into
LLP
Joint
Ventures
Abroad
by
LLP
RBI
has
no;fied
that
LLP
can
be
considered
as
‘Indian
Party’
in
Joint
Ventures
abroad
and
allowed
LLP
to
carry
out
financial
commitments
to
/
on
behalf
of
joint
ventures
or
WOS
of
Indian
Co’s
abroad.
RBI/2013-­‐14/595
A.P.
(DIR
Series)
Circular
No.131
DATED
14/5/2014
58
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