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Converting a Partnership firm into a Private Limited Company

Corporatisation is the need of the hour.  The entire world is gradually drifting towards one global market without any trade barriers between the countries. A small unincorporated organization led by few partners cannot think of growth on large scale without corporatizing itself. Corporatisation has its own advantages such as Limited Liability, Perpetual Succession, Transferability of shares, easy access to funds etc. Advantages of converting

All the assets and liabilities of the firm immediately before the conversion become the assets and liabilities of the company.

  • No Stamp Duty- All movable and immovable properties of the firm automatically vest in the Company. No instrument of transfer is required to be executed and hence no stamp duty is required to be paid.
  • No Capital Gain Tax- No Capital Gains tax shall be charged on transfer of property from Proprietorship firm to Company.
  • Continuation of Brand Value- The goodwill of the Proprietorship firm and its brand value is kept intact and continues to enjoy the previous success story with a better legal recognition.
  • Carry Forward and Set off Losses and Unabsorbed Depreciation- The accumulated loss and unabsorbed depreciation of Partnership firm is deemed to be loss/ depreciation of the successor company for the previous year in which conversion was effected. Thus such loss can be carried for further eight years in the hands of the successor company.

Mandatory Conditions

All partners of the partnership firm shall become shareholders of the company in the same proportion in which their capital accounts stood in the books of the firm on the date of the conversion.

  • The partners receive consideration only by way of allotment of shares in company and the partners share holding in the company in aggregate is 50% or more of its total voting power and continue to be as such for 5 years from the date of conversion.

Requirements

  • Registered Partnership firm with minimum 7 Partners
  • Minimum Share Capital shall be Rs. 100,000 (INR One Lac) for conversion into a Private Limited Company
  • Minimum Share Capital shall be Rs. 500,000 (INR five Lac) for conversion into a Public Limited Co.
  • If the above requirement is not fulfilled by the firm, then the Partnership deed should be altered
  • Minimum 7 Shareholders
  • Minimum 2 Directors (for Private Limited Co.) and 3 Directors (for Public Limited Co.)
  • The directors and shareholders can be same person
  • DIN (Director Identification Number) for all the Directors
  • DSC (Digital Signature Certificate) for two of the Directors

Process

  • Filing of requisite form for Conversion
  • Preparation of Foundation documents of the Company
  • Filing for name approval
  • Filing of Incorporation documents
  • Receiving certificate of incorporation
(Author Ankita Chopra is Partner at White Collar Legal LLP and can be contacted at whitecollarlegal@gmail.com)
Categories: Company Law

View Comments (20)

  • Can you please let me know what are the pre requisites & procedure to convert partnership firm into pvt ltd.. In case of 2 partners.

  • we have partnership firm as HVAC work contractor, we want to converted into pvt.ltd, so let me know what is the procedure for change it.

  • For conversion of partnership firm into pvt company form URC-1 has to be filed?If yes, then error is occurring in the form stating that minimum seven members are mandatory..but since the law has amended 2 members are sufficient. Can anyone please help me out with the solution?

    • Hi, Rohan,

      You are right that the law has been amended but the concerned section has not been notified yet by the Central Government. So for now, you'll requiring seven members compulsorily to convert your partnership firm into Company.

      In case of any other query, clarification in this respect, please revert back to cskajalgoyal@gmail.com

  • Sir
    Invotech Precesion Engineers a partnership firm established in 2004 now wanted to convert into PvT LTD.
    We have PAN, GST, MSME, FIRM REGISTRATION and IMPORT EPORT LICENCE TRade mark Registered

  • can a 4 month old partnership firm be converted to a pvt ltd co.?
    Is there any mandate that it can be done only after 2 years of formation of the partnership firm?

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