Conversion of Entity

Conversion of business entity is the process of changing one type of business structure to another type of business structure i.e. the continuance of one business entity into another form of business entity.

The process of conversion changes the legal status of the entity for different reasons. The procedure for conversion of a business entity involves-

Choose a form of business entity
Reason for conversion and why to change the business entity forms
Statutory and legal compliances.
Plan of conversion
Following the conversion process and its certification.
Documents of formation for the converted entity.

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Procedure

What are the ways of conversion of Business Entity?

There are different ways of conversion of Business Entity mentioned below-

Dissolution of the original entity and Formation of the new entity

This is the most time taking, complicated and expensive way to change entity forms. As the procedure involves dissolution, and dissolving a business entity can be complex, and further, a new entity is formed. For the same, the agreements have to be entered into to transfer the original entity’s assets and liabilities to the newly formed entity.

Under this method, the original entity gets dissolved, and a new entity is formed.

Merge over/Inter-entity merger

Merge over/Inter-entity merger is the method where the new entity type is formed, and the old entity type is merged into the new one. As a matter of statute, the significance of a merger over dissolution/formation is that the former entity will cease to exist, its assets and liabilities will vest in the later (new) entity and its owners will become owners of the new entity.

Statutory Conversion

Statutory conversion is the least complex expensive way to change business entity forms, and a document is filed with the authority to change from one entity form to another. In statutory conversion, there is no need to form a new entity, and similar to a merger, the assets and liabilities, and ownership interests are transferred by law. A conversion plan is drafted containing the terms and conditions of the transactions.

Types

Conversion of Business Entity into different type of Business Entities

Converting the business entity is a significant decision that may affect the legal structure including liability and taxes.

There are different types of conversion of business entity mentioned below-

Conversion of proprietorship into partnership under GST
Conversion of proprietorship into private limited
Conversion of one-person company into private limited company
Conversion of LLP into private limited company
Conversion of pvt ltd company into public limited company
Conversion of partnership firm to LLP

Conversion of Proprietorship into Partnership under GST

There is no specific provision under the Goods and Services Tax (GST) Act on how to convert a proprietorship into a partnership. Still, there are various mentions in the Act on converting a proprietorship into partnership firm. It includes obtaining GST registration for partnership, transfer of unutilised Input Tax Credit (ITC) to partnership firm, and cancellation of proprietorship GST registration.

Conversion of Proprietorship to Private Limited Company

A sole proprietorship cannot get all benefits of operation as it grows. So, there will be a need to convert the proprietorship into a private limited company. The conversion can bring in its wake all the benefits of a company like higher capital, limited liability, and so on.

Conversion of a proprietorship into a private limited company provides many benefits, but it also brings along the diffusion of power and loss of independence. Therefore the decision must be taken after careful consideration of all the factors involved and see if it genuinely brings about privileges intended.

Conversion of one-person company into private limited company

The conversion of an OPC- One Person Company into Private Limited Company as per Section 18 of the Companies Act, 2013 and the provisions of Companies (Incorporation) Rules of 2014 should be discharged by a newly formed Private Limited Company. These rules will not affect the existing debts, liabilities, obligations or contracts of the OPC. There are two ways of converting an OPC into a private limited company either voluntarily or mandatorily. Under both these type of conversions, the requirements are necessary alterations in the MOA and AOA of the OPC (As per the provisions provided in section 18 of the Companies Act, 2013, along with section 122 of the Act). The section says to obtain no objection in written form, from the concerned members and creditors; passing a resolution in support of conversion; and it should also satisfy the requirements of the minimum paid-up capital, along with the minimum number of members and directors.

Conversion of LLP into private limited company

Several businesses started in India as Limited Liability Partnership (LLP), may now wish to convert into a private limited company for more growth in business or for infusing equity capital. An LLP can be converted into a Pvt. Ltd. company as per the provisions contained in Section 366 of the Companies Act, 2013 and Company (Authorised to Register) Rules, 2014.

Conversion of pvt ltd company into public limited company

Private limited companies are a dime a dozen, but every private limited company, at some point, wishes to turn public so as to increase scalability. The question generally put across is, “Why go public?” The answer lies in certain distinct differences that arise between private limited companies and public limited companies.

1. Public companies offer the option of Initial Public Offering (IPO). Here, by going public, the company is offering its shares to the general public.

2. The option of IPO thereby removes the restriction on the transferability of shares, which is a feature of private limited companies.

3. There is no cap with regards to the maximum number of members in a public limited company, thereby allowing them to raise and gain easy access to funding.

Conversion of partnership firm to LLP

The shift from traditional partnerships to Limited Liability Partnerships (LLPs) has increased in recent years. The reason behind this is that LLPs offer more flexibility, unlimited partners and the like. But the real driving force behind the shift is due to the fact that LLPs offer a major advantage in terms of limited liability. The strain on the personal assets of the partner is put to rest when it comes to LLPs since they are a hybrid of both a partnership and a private limited company. Small and medium-sized businesses find this type of organisation structure to suit their needs very well.