Ministry of Corporate Affairs allowed conversion of Partnership Firm into Company under Companies Act, 2013, for such conversion there is need to prepare a list of documents and required to file the same with ROC in forms like URC-1, INC-32, INC-33 and INC-34 etc. While conversion there is need to consider the implications of income Tax provisions also like Capital Gain.

In this editorial author discusses provisions of Conversion of Partnership firm into Company considering recent announcement by Hon’ble finance minister in respect of tax benefit to Corporates i.e.:

  • New provision inserted in the income tax act with effect from fiscal year 2019-20, that allows any domestic company to pay income tax at the rate of 22% subject to condition they will not avail any incentive or exemptions
  • Manufacturing companies set up after October 1 to get option to pay 15% tax. Effective tax rate for new manufacturing firms to be 17.01% inclusive of surcharge & tax

After above announcement many business houses are looking for conversion of their firms into Companies. After conversion there are lots of benefits of taxations for the firms.

In below mentioned article author attempt to cover up the provisions of Companies Act and capital gain implication while conversion from Partnership firm into Company.

Background:

Corporatization is the need of the hour.  The entire world is gradually drifting towards one global market without any trade barriers between the countries. With the emergence of corporate work culture and promotional startup benefits, a great chunk of entrepreneurs are looking forward to corporatization. This step can be initiated in 2 ways as enumerated below:

1. Incorporation of a new corporate entity.

2. Conversion of existing entity (e.g. LLP/ Partnership Firm) into a Company.

The 2nd option of conversion of Partnership Firm into a corporate entity might be practical for the existing entities to switch over from one mode of business to another. The process of conversion is a step by step procedure, which is a technical process but if handled with expert knowledge may be time and cost saving, as well.

Complete Tax comparison between Firm and Company is given in below Table

Comparison of Tax in Firm and Company:

S. No. *Partnership Firm Effective Tax Rate T.O. up to 1 Crore Effective Tax Rate T.O. more than 1 Crore Company Effective Tax Rate
1. 30% 30*1.04= 31.2 30*1.12*1.04=

34.94

22% 25*1.10*1.04= 25.17
2. If Incorporated as Manufacturing firm after 01.10.2019 then 30% 30*1.04= 31.2 30*1.12*1.04= 34.94 If Incorporated as Manufacturing firm after 01.10.2019 then 15% 15*1.10*1.04= 17.16

No Capital Gain:

The Gujarat High Court (HC) had held in the taxpayer’s case that conversion of a firm into a company was not a transfer (even before section 47(xiii) was introduced) and would not be subject to capital gains tax.

Process for Conversion

Note: Foremost Condition for Conversion is “There should be 7 (seven) or more member in the partnership firm at the time of conversion”. However, MCA has reduced this limit to 2 (Two) under Companies Amendment Act, 2017. This amended provision still not applicable as on 30.04.2018.

First Step:

Hold a meeting of the partners to take assent of majority of its partners summoned for the purpose of registering the Partnership firm under Section 366 of the Companies Act, 2013.To authorize two or more partners to take all steps necessary and to execute all papers, deeds, documents etc. pursuant to registration of the Partnership firm as a Company.

Partnership firm have to apply for Avaibility of the Name in RUN. One of the major advantages is that the business can be run under the same name as that of the partnership (subject to avaibility of name as per Name Avaibility guidelines of Companies Act) the words ‘limited’ or ‘private limited’ has to be added.

Apply for Name Approval:

A. Login on MCA Website

Applicant have to login into their account on MCA Website. (Pro-existing users can use earlier account or new users have to create a new account.)

After Login use have to click on the icon “RUN” in MCA Service. An online form shall be open. Applicants have to fill the information online. (This form can’t be downloading)

Note* since 26th January, 2018 e-form INC-1 has been omitted from the Companies Act, 2013.

NOTE: * Approval of Name through “RUN” is an optional way. Companies can also directly apply for the Name in SPICE form.

Second Step:

After approval of name or for Incorporation of Company applicant have to prepare the following below mentioned Document and file the following below Form along with required documents with the registrar of Companies within 20 days from the date of name approval.

List of Documents required filing with Roc:

E-form URC-1

Company required filing e-form URC- 1 along with all the below mentioned documents:

i. A list showing the names, addresses, and occupations of all persons named therein as members with details of shares held by them

ii. a list showing the particulars of persons proposed as the first directors of the company

iii. an affidavit from each of the persons proposed as the first directors, that he is not disqualified to be a director under sub-section (1) of section 164 and that all the documents filed with the Registrar for registration of the company contain information that is correct and complete and true to the best of his knowledge and belief

iv. a list containing the names and addresses of the partners of the firm

v. in case of a firm, deeds of partnership, bye laws or other instrument constituting or regulating the company and duly verified in the manner provided in sub-rule (4) and in case the deed of partnership was revised at any time in the past, copies of the principal and all subsequent deeds including the latest deed, along with the certificate of the registration issued by Registrar of firms, in case the firm is registered

vi. a statement of assets and liabilities of the Limited Liability Partnership duly certified by a chartered accountant in practice which is made as on a date not earlier than thirty days of the filing of form no.URC-1

vii. a copy of latest income tax return of the Partnership Firm

viii. an undertaking that the proposed directors shall comply with the requirements of Indian Stamp Act, 1899 (2 of “1899)

ix. written consent or No Objection Certificate from all the secured creditors of the applicant

x. written consent from the majority of Partners

xi. a statement specifying the following particulars:—

  • the nominal share capital of the company and the number of shares into which it is divided;
  • the number of shares taken and the amount paid on each share;
  • the name of the company, with the addition of the word “Limited” or “Private Limited” as the case may require, as the last word or words thereof;

E-form INC- 33 / INC-33 / INC-34/ AGILE

Company required filing e-form INC-32/ INC-33/ INC-34 along with URC-1 as linked form with all the attachment as required in normal Incorporation of Company like:

∇ INC-9 Affidavit / declaration by first subscriber(s) and director(s) (on duly authorized Stamp Papers).

∇ DIR-2 declaration from first Directors along with Copy of Proof of Identity and residential address.

∇ NOC from the owner of the property.

∇ Proof of Office address (Conveyance/ Lease deed/ Rent Agreement etc. along with rent receipts);

∇ Copy of the utility bills (not older than two months)

∇ In case of subscribers/ Director does not have a DIN, it is mandatory to attach: Proof of identity and residential address of the subscribers

∇ All the Subscribers should have Digital Signature.

Single Window Form:

Earlier if a Person wants to incorporate Company then it has to apply for the DIN, Approval of the Name Avaibility, Separate form for first Director, Registered office address, PAN, TAN etc. But this form is a single window for Incorporation of Company.

This form can be used for the following purposes:

∇ Application of DIN (up to 3 Directors)

∇ Application for Avaibility of Name

∇ No need to file separate form for first Director (DIR-12)

∇ No need to file separate form for address of registered office (INC-22)

∇ No need to file separate form for PAN & TAN

∇ No need to file separate form for GST

STEP – IV: Preparation of MOA & AOA:

∇ After proper filing of SPICE form applicant has to download the e-form INC-33 (MOA) and IN-34 (AOA) form the MCA site. After downloading of form fill all the information in the forms as per requirement of Table A to J of Schedule I.

∇ After completely filing of the form affix DSC of all the subscribers and professional on subscriber sheet of the MOA & AOA.

STEP – V: Fill details of PAN & TAN:

∇ It is mandatory to mention the details of PAN & TAN in the Incorporation Form INC-32. Link to find out of Area Code to file PAN & TAN are given in Help Kit of SPICE Form.

STEP – VI: Fill details of GST in AGILE:

∇ It is mandatory to mention to mention details of GST in AGILE form. If company wants to apply select yes otherwise select No and file the form.

STEP – VII: Submission of URC-1, INC-32, 33, 34, AGILE on MCA-:

∇ Once all the 5 forms ready with the applicant, upload all three documents Linked form on MCA website and make the payment of the same.

STEP – VIII: Certificate of Incorporation-:

∇ Incorporation certificate shall be generating with CIN, PAN & TAN.

Conclusion:

After announcement for reduction in tax liability in Companies. It is beneficial to covert firms into Company. Process for such conversion is very simple as mentioned above.

Quick Question – conversion

i. How to file the Conversion form in case of more than 7 partners in the Firm?

In case of more than 7 partners in the Firms at the time of conversion into Company then Company have to file Scan copy of physically prepared MOA & AOA.

In above mentioned situation company have to file 1. URC-1 and 2. INC-32. No need of INC-33 and INC 34 in the above mentioned situations.

ii. Whether at the time of Conversion whether Latest Partnership deed shall be attached in the form URC-1?

As per Rules, at the time of Conversion partnership firm have to file “copies of the principal and all subsequent deeds including the latest deed” with the ROC in e-form URC-1

iii. Whether certificate of registration issued by the Registrar of Firms is Mandatory?

Certificate is mandatory only in case when the firm is registered with Registrar. In other cases there is no need to attached certificate.

iv. Whether e-MOA & AOA can be file in case of MOA & AOA is signed by a person at a place outside of India?

In case of incorporation of a company where any of the subscribers of the MOA/AOA is signing at a place outside India, MOA & AOA shall be filled with INC 32 in the respective format as specified in Table A to J in Schedule I without filing form INC 33 and INC 34. (Means Physical attachment of MOA & AOA in e-form INC 32)

v. How many DIN can be apply through SPICE Form?

Maximum 3 (Three) DIN can be apply through SPICE form.

If applicant want to incorporation Company with more than 3 Directors and more than 3 persons doesn’t have DIN. In such situation applicant have to incorporate Company with 3 Directors and have to appoint new directors later on after incorporation.

vi. Whether there is need to file any separate form for PAN & TAN?

No need to file any separate form. Details in relation to Area Code and other details shall be mention in the form INC-32 itself and PAN & TAN shall be generating with Certificate of Incorporation.

CAUTION TO BE TAKEN BY PROFESSIONALS

1. Obtain engagement letter from subscriber:As per certification in e-form SPICE i.e. INC-32, a professional declares that he has been engaged for the purpose of certification Therefore it is advisable to obtain an engagement letter.

2. Verification of original records pertaining to registered office: – As per certification in e-form Spice i.e. INC-32, a professional declares that he has verified all the particulars(including attachments) from original records.

3. Ensure all attachments are clear enough to read: – As per certification in e-form Spice i.e. INC-32, a professional declares that all attachments are completely and legibly attached.

4. Ensure registered office of the company is functioning for the business purposes of the company: As per certification in e-form Spice i.e. INC-32, a professional declares that he has personally visited the registered office.

5. Take a declaration to the effect that all the original documents have been handed over after incorporation. Since as per section 7(4) copies all documents/information as originally filed should be preserved at the registered office of the company, therefore a professional should take a declaration while handing over the incorporation documents.

6. MCA Circular 10/2014: – According to this circular ROC/RD in case of omission of material fact or submission of false/incomplete/ misleading information can after giving opportunity to explain refer the matter toe-governance division of MCA, which in turn may initiate proceedings under section 447 and/or ask the respective professional institute to take requisite disciplinary action.

(Author – CS Divesh Goyal, ACS is a Company Secretary in Practice from Delhi and can be contacted at csdiveshgoyal@gmail.com)

(Republished with amendments)

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10 Comments

  1. MANGILAL SUTHAR says:

    1. If 2 partners firm convert in to Pvt Ltd Co. Capital gain attract or not?

    2. An Land & building is assets of partnership firm , but Title deed of property are on the name of partners. This property may be transfer from Partnership firm to Company ?

  2. Pramod Iyer says:

    What will be cost of acquisition for the Shares in the hands of Partners when their Capital is converted into Share Capital under conversion under Part IX?
    OR
    Subsequently if the Partner sells his shares post 3 years, how will the cost of acquisition computed to arrive at Capital Gains

  3. CA NARENDRA SEKSARIA says:

    dear CS Divesh Goyal-many thanks for great efforts on this topic-well covered big input to all of us
    PL KEEP UP EDUCATIVE SERVICE OF YOUR KNOWLEDGE-GOD BLESS U WITH SATIS FACTION BUT GOOD FEES ALSO

  4. CA. Nishant Singla says:

    Divesh Ji,
    Thanks a lot for guiding us on this important topic. One thing I am having doubt about that whether a Land registered in the name of Firm will automatically transferred in the name of company in revenue records with no stamp duty? Your precious inputs are invited on this.
    Thanks & Regards

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