In the hour of corporatization, what can be more mesmerizing than the fact that The Company Law provides for conversion of partnership firm into a limited company either by shares or guarantee or even an unlimited company. But as usual there is a proper process to be followed apart from the basic formalities of incorporating a new company. Let’s talk about the process and desideratum of converting a partnership firm into a private limited company.

. One has to follow Section 366- 374 of The Companies Act, 2013 and The Companies (Authorized to Register) Rules, 2018.

Prerequisites for Conversion of A Partnership Firm Into A Private Limited Company

  • Holding of meeting for consent of majority of partners
  • It is desirable if the firm is registered with Registrar of Firms but this is not a mandatory requirement
  • Authorizing two or more partners to take all actions necessary for conversion
  • Taking consent from secured creditors, if any
  • There must be a clause in the Partnership deed for Conversion of firm into company as and when needed, if the same is not available then the deed needs to be amended for addition of that clause.
  • There should not be revaluation of the assets of the Partnership firm in the previous preceding three years.
  • Shareholding pattern will remain same as that of the partners’ capital ratio. Registration will not affect the rights/liabilities of the company in respect of deeds done before registration of company.

Conversion of A Partnership Firm Into A Private Limited Company - Prerequisites & Steps

Steps to be taken for conversion of A Partnership Firm Into A Private Limited Company

  • A name reservation application for the company has to be made through e- RUN (Reserve Unique Name) form. Within 20 days from the date of name approval.
  • A Form URC-2 which provides details about registration of the company has to be published in two newspapers, namely, one in English and the other in a vernacular language. This is done to take note of any objection by anyone within 21 days of publishing.
  • Form URC-1 is to be submitted to the Registrar of Companies (RoC) along with the usual forms associated with the incorporation like SPICE+ etc. Details to be filled in URC-1 are SRN of the RUN form, name of firm/ registration no., no. of partners, date of partnership deed and resolution, amount of property and secured debts, if any. Some of the documents that are needed to be attached with the form are the details of partners and proposed first directors; copy of principal and revised partnership deed; NOC from secured creditors; copy of latest IT return; declaration from the directors that they will comply with The Indian Stamp Act, 1899; notarized affidavit of dissolution of firm; copy of URC-2 advertisement; a certificate from CA/ CS/ CWA certifying the compliance.
  • Most other documentation remains the same as that when incorporating a new company.

Partnership vs Company

Serial No Partnership Firm Company
1 Higher Tax rate @ 30 percent Tax rate @ 15/22/25 percent
2 No DIN requirement DIN is mandatory for Directors
3 No mandatory audit if no operations Audit mandatory even if no operations in the company
4 No specified minimum capital requirement Minimum Capital of Rs 1 lac for Pvt Ltd company
5 Unlimited liability of partners Limited Liability of Shareholders
6 Private investors are reluctant to invest Easier availability of funds from pvt investors

Concluding Remarks

Conversion of partnership firm into a company, like anything else, has its own pros and cons. Since the difference in tax rate has come into picture a lot of firms have started converting into companies to save taxes and this will continue to be the case in the future.

The world is leaning towards corporatization and with startup culture firmly placing its roots in the Indian economics traditional legal entities like partnership firms may be a thing of past until and unless the government comes out with guidelines to make them more attractive.

Author Bio

Qualification: CA in Practice
Company: AAN & Associates LLP
Location: Bangalore, Karnataka, India
Member Since: 21 Sep 2021 | Total Posts: 24
I am a Fellow Member of ICAI, Practicing under the banner of M/s AAN & Associates LLP, a firm based out of Kolkata & Bangalore. I am, also registered under Insolvency and Bankruptcy Board of India as a Registered Valuer for valuation of Security or Financial Assets (Passed in Feb 2020) I a View Full Profile

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February 2024