Conversion of Private Limited Company into LLP: Form 18, Form FiLLiP & Section 47(xiiib)

Businesses that outgrow the compliance burden of a private limited company — annual ROC filings, statutory audit regardless of scale, board meeting formalities — sometimes look to convert into a Limited Liability Partnership (LLP), which offers a lighter compliance regime while retaining limited liability protection. The conversion itself is governed by Sections 56 and 57 of the LLP Act, 2008 read with the Third Schedule, but the transaction's real complexity lies in structuring it to qualify as tax-neutral under Section 47(xiiib) of the Income Tax Act — get this wrong, and the conversion is treated as a taxable transfer, potentially triggering capital gains tax on the company's entire asset base.

1. Eligibility Conditions for Conversion (Third Schedule, LLP Act)

• The company must have no security interest in its assets subsisting at the time of the conversion application.
• All shareholders of the company become partners of the LLP, and there is no one else becoming a partner other than the shareholders of the company.
• The company's shareholders receive a capital contribution and profit-sharing ratio in the LLP in proportion to their shareholding in the company as on the date of conversion.

2. The Tax-Neutrality Conditions — Section 47(xiiib)

A conversion that satisfies the LLP Act's Third Schedule conditions is not automatically tax-exempt. To qualify as a transfer that is not regarded as a "transfer" for capital gains purposes under Section 47(xiiib), all of the following additional conditions must be satisfied:

1. All assets and liabilities of the company immediately before conversion become the assets and liabilities of the LLP.
2. All shareholders of the company immediately before conversion become partners of the LLP, and their capital contribution and profit-sharing ratio in the LLP are in the same proportion as their shareholding in the company.
3. No consideration other than the share in profit and capital contribution in the LLP is paid or payable, directly or indirectly, to any shareholder.
4. The erstwhile shareholders' aggregate share of profit in the LLP is not less than 50% at any time during the period of five years from the date of conversion.
5. The total sales, turnover, or gross receipts of the company in the business does not exceed ₹60 lakh in any of the three financial years preceding the year of conversion.
6. The total value of assets as appearing in the books of account of the company does not exceed ₹5 crore in any of the three financial years preceding the year of conversion.
7. No amount is paid, directly or indirectly, to any partner out of the accumulated profit of the company standing in the accounts on the date of conversion, for a period of three years from the date of conversion.

Why the Turnover/Asset Ceiling Trips Up Growing Companies: Conditions 5 and 6 are the most common disqualifiers in practice. A company that has grown its turnover past ₹60 lakh, or built assets past ₹5 crore, in any one of the three years before conversion loses tax-neutral treatment entirely — even if the conversion happens after the business has since scaled back, or even if turnover in the actual conversion year is lower. This is a backward-looking test across three prior years, not a test of the current year alone, and businesses planning a conversion should check this well in advance rather than assuming eligibility.

3. Consequence of Failing the Section 47(xiiib) Conditions

If any condition is not satisfied, the conversion is treated as a transfer of a capital asset, and the company (or, in certain structurings, the resulting entity) becomes liable to capital gains tax on the difference between the fair market value of the assets transferred and their cost/written down value — a potentially very large tax exposure relative to the compliance-saving motive that typically drives the conversion decision in the first place. Additionally, where the accumulated profit condition (point 7 above) is breached within the three-year window after an otherwise tax-neutral conversion, the amount withdrawn is taxed as deemed capital gains in the hands of the partner receiving it, in the year of withdrawal.

4. The Filing Procedure — Form FiLLiP and Form 18

1. Board Resolution and Shareholder Approval: The company's board and shareholders approve the proposed conversion, typically via a special resolution, and authorise the filing.
2. Obtain consent of secured creditors (if any), or confirm no security interest subsists, as required by the Third Schedule.
3. Apply for LLP Name Reservation via the RUN-LLP service (or equivalent name reservation integrated into the FiLLiP form), if the LLP's proposed name differs from a straightforward derivative of the company's existing name.
4. File Form FiLLiP (Form for incorporation of LLP) on the MCA portal — this is the primary incorporation form, used here specifically for a conversion-route incorporation.
5. File Form 18 simultaneously (or as an integrated linked form, depending on the MCA portal's current filing structure) — this form specifically captures the particulars of conversion: the converting company's CIN, its latest financial statements, list of shareholders becoming partners, and a statement of assets and liabilities being transferred.
6. Certificate of Registration: On the Registrar's satisfaction, a Certificate of Registration is issued confirming the LLP's incorporation by conversion, and the LLP Agreement is then required to be filed in Form 3 within the prescribed period from incorporation.
7. Intimate the Registrar of Companies (ROC): Within 15 days of conversion, the LLP must file an intimation to the ROC (where the company was originally registered) about the conversion, so the company's status is updated on the MCA Master Data to reflect dissolution by conversion.

5. Post-Conversion Practical Points

• All existing statutory registrations — GST, PAN (a fresh PAN is required for the LLP as a distinct legal entity, though it inherits the business), bank accounts, and licenses — must be transitioned to the new LLP entity; they do not automatically carry over from the company.
• Contracts, leases, and employee agreements executed by the company should ideally be formally novated or reassigned to the LLP, since the LLP is technically the successor entity by operation of the Third Schedule/Section 58, but counterparties (banks, landlords, key vendors) commonly still expect formal confirmation.
• The company's PAN and GSTIN should be surrendered/cancelled in an orderly, documented sequence once the LLP's corresponding registrations are active, to avoid dual/overlapping compliance obligations during the transition period.

Related Advisory Services & Practice Guides

• Access expert statutory assistance for LLP registration services with our senior Chartered Accountants.
• Access expert statutory assistance for Private Limited Company registration with our senior Chartered Accountants.