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Change Business Form

Changing the Form of Business Every aspiring entrepreneur starts a business with dreams of success and growth. But during the whole process of expanding the organization, it is possible that he/she is unable to continue the business in a profitable manner on a sustained basis due to certain inherent drawbacks of the business form, under which the business is carried. So it may become necessary for him/her to change the type/form of the business organization. This change may be from a public company to a private company, vice versa or converting the company into Limited Liability Partnership (LLP).. The Companies Act, 1956 contains the provisions and procedures for such conversions.

Changing the form of business organization reflects the attitude of the management for moving towards a better management system. The decision to change business organization is very important and therefore, it is necessary to undertake a detailed analysis of the decision before executing the same. The factors, governing the decision to convert will depend upon the existing organization and objective of the management.

Various types of conversion are outlined below:

1. Conversion from Private to Public Company
2. Conversion from Public to Private Company
3. Conversion of Private/Unlisted Company into Limited Liability Partnership (LLP).

Conversion from Private to Public Company:

When the company has plans for its diversification and expansion and its needs funds for the same , than it has option of coming out with public issue of its equity by way of listing at recognized stock exchange in India. Apart from arranging the necessary resources for the business, listing also bring recognition and better management in the organization. Moreover listing of equity shares also opens various other avenues of raising funds like issuing shares outside India, rising of loans from financial institutions established abroad. Due to stringent disclosure norms, it also increases the credit worthiness of the Company and attracts fund from financial institutions.

Since nothing come free, therefore after conversion, the company would be subject to more regulatory control and have to undertake more compliance. In some case, for getting certain contracts or tender from Government or any of its agencies, it is necessary to be public company.

But apart from the benefit of accessibility of public and other sources for raising funds , the decision to convert into Public Limited company , doesn’t attracts , any additional benefit.

Procedural Aspect:

For converting a Private Limited Company into Public Company, approval of shareholders is required by way of special resolution passed in their meeting along with the following:

• Articles of Association of the Company needs to be altered
• Number of members shall be increased to seven, in case it is less.
• Minimum paid-up capital shall be raised to Rs 5 Lacs, in case it is less.
• Number of Directors shall be increased to three, in case it is less.

Conversion from Public to Private Company

Private Companies are being managed as closely held and are not subject to much regulatory control under the Companies Act 1956; therefore this could be the only reason of converting into it. But it is generally not easy to convert into Private Limited Company, as its requires the approval of Registrar of Companies and it is necessary to put strong reason for conversion before it, in order to convince the said authority for approving the conversion. Another reason for converting into Private Company, is that it provides some degree of flexibility in terms of its management as compared to Public Company.

Procedural Aspect:

For converting a Private Limited Company into Public Company, approval of shareholders is required by way of special resolution passed in their meeting along with the following:

• An application is required to made to Registrar of Companies for its approval.
• Articles of Association of the Company needs to be altered

Conversion of Private/Unlisted Company into Limited Liability Partnership

Limited Liability Partnership concept combines the organizational flexibility of a partnership firm coupled with the advantage of limited liability for its partners. The key features of the LLP such as a separate legal entity with unlimited number of partners, no partner being liable on account of the independent or unauthorized actions of other partner(s), liability of partners being limited to the respective stake of each partner in the LLP, are a distinct advantage over other form of organization.

Such distinct features would be the key drivers for forming LLP, rather than Company for planning different structures.

Major advantages as compared to Company

• Flexibility to define terms and conditions , as to how the business will be run and managed
• Minimal Government Intervention
• Minimal cost of conversion
• Less Compliance level
• No requirement of holding any meeting
• No requirement of maintenance of Large statutory records
• Limited Liability as in case of Companies
• No needs to pay Minimum Alternate Tax and Dividend Distribution Tax

Limited Liability Partnership is basically suitable for:

1. Small and medium enterprises
2. Where business is managed by large number of persons
3. Knowledge based industries
4. Service Industry

Procedural Aspect:

For converting Company into Limited Liability Partnership, the following procedure needs to be undertaken:

• Approval of all shareholders for conversion shall be approved.
• A LLP is required to be incorporated.
• An application is required to filed with the Registrar of LLP for converting company into LLP.
• Execution of LLP Agreement between partners after conversion.
• Intimation of conversion needs to be filed with the Registrar of Companies

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