An LLP cannot merge into a company under Sections 230 to 232 of the Companies Act, 2013 ("the Act"). The scheme provisions apply to companies, and an LLP is not a company within the meaning of Section 2(20). The only lawful route for an LLP-company combination is the registration of the LLP as a company under Section 366, read with the Companies (Authorised to Register) Rules, 2014.
The Section 366 Mechanism
Section 366 permits any entity formed under an Act other than the Companies Act—including an LLP—to register as a company under the Act. The registration is not a merger; it is a conversion. The LLP ceases to exist as an LLP and continues as a company, with the partners becoming shareholders and the LLP's assets and liabilities vesting in the company.
Section 366(2) originally required seven or more members for registration as a company, but the requirement was amended to two or more members, with the result that a two-member LLP can register as a private company. An LLP with fewer than seven members must register as a private company; it cannot register as a public company.
The Conditions
The conversion is subject to conditions. All the partners of the LLP must become shareholders of the company in the same proportion as their partnership interest, unless the partners agree otherwise. The LLP must not be in default of any statutory compliance. The conversion must not result in a change in the beneficial ownership of the undertaking.
The tax consequences must be considered. The conversion of an LLP into a company is a transfer of the undertaking, and the tax neutrality of the conversion depends on compliance with the conditions of the Income-tax Act, including the condition that all the assets and liabilities of the LLP are transferred to the company and that the partners receive shares in proportion to their capital accounts.
The Prohibition on Direct Merger
The NCLT has consistently held that a direct merger of an LLP into a company under Sections 230 to 232 is not maintainable. The scheme provisions contemplate a transferor that is a company, and an LLP does not satisfy that requirement. A company that wishes to combine with an LLP must either use the Section 366 conversion route or structure the transaction as an acquisition of the LLP's business by the company, with the LLP subsequently being struck off or dissolved.
The Section 366 route is the cleanest path, because it preserves the continuity of the undertaking and avoids the need for a separate winding up of the LLP.
Call to Action
Anuj Desai & Associates advises LLPs and companies on the Section 366 conversion—from the eligibility analysis and the partner consent process to the registration formalities, the tax treatment, and the post-conversion compliance. If you are planning an LLP-company combination, we can help you determine whether conversion or acquisition is the appropriate route.
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