Process of conversion of Partnership firms to Private Limited Company

Learn the step-by-step process of converting a partnership firm to a private limited company in India. Explore the benefits, legal requirements, and the necessary steps involved in this conversion.

Partnership firms are a popular form of business in India, especially among small and medium-sized enterprises. However, as the business grows, partners may feel the need to convert the partnership firm into a private limited company. A private limited company offers several advantages over a partnership firm, including limited liability, separate legal entity status, and better access to funding. In this article, we will discuss the process of converting a partnership firm to a private limited company in India.

Converting a Partnership firm to a private limited company, which becomes a separate legal entity, reduces the risk of liability, and the personal assets will remain untouched except in case of fraud. The incorporation and compliance procedure of a private limited company is as per the Companies act, 2013, and the shares are held privately.

Benefits of converting a partnership firm into a private limited company in India:

1. Limited Liability: A private limited company offers limited liability protection to its shareholders. This means that the personal assets of the shareholders are not at risk in case of any losses or liabilities incurred by the company. In contrast, in a partnership firm, the partners are personally liable for the debts and obligations of the firm.

2. Perpetual Succession: A private limited company has perpetual succession, which means that it can continue to exist even after the death or retirement of its shareholders. In a partnership firm, the firm dissolves if one of the partners leaves or dies.

3. Credibility: A private limited company is considered to be more credible and trustworthy than a partnership firm. This is because it has a separate legal identity, and a board of directors, and is subject to stricter regulatory requirements.

4. Easy Transferability of Ownership: It is easier to transfer ownership in a private limited company than in a partnership firm. In a partnership firm, the consent of all partners is required for the transfer of ownership.

5. Better Access to Funding: Private limited companies have better access to funding from banks and other financial institutions as compared to partnership firms. This is because they have a separate legal identity and are subject to stricter regulatory requirements.

6. Tax Benefits: Private limited companies are eligible for various tax benefits and exemptions that are not available to partnership firms. For example, they are eligible for lower tax rates on corporate income, and they can also claim various deductions and exemptions.

Step wise Process for conversion of Partnership firms to Private Limited Company

Step 1:

Obtain Digital Signature Certificates (DSC) and Director Identification Numbers (DIN) To begin the process of converting a partnership firm to a private limited company, the partners who will become directors of the new company must obtain Digital Signature Certificates (DSC) and Director Identification Numbers (DIN). DSC is an electronic form of a signature that is used to sign electronic documents, while DIN is a unique identification number issued by the Ministry of Corporate Affairs (MCA) to individuals who are appointed as directors of a company.

To obtain a DSC, the partners must submit an application to a certifying authority, along with the required documents, such as identity proof and address proof. The certifying authority will verify the documents and issue a DSC.

To obtain a DIN, the partners must submit an application to the MCA along with the required documents, such as identity proof and address proof. The MCA will verify the documents and issue a DIN within a few days.

Step 2:

Name Approval and Reservation the next step is to obtain approval for the name of the new company. The name should be unique and not already in use. The name should also comply with the guidelines of the Companies Act, 2013. The name must be approved by the Registrar of Companies (ROC) in the state where the company will be registered.

The partners can apply for name approval online through the MCA portal by submitting Form SPICe 32. The partners must provide at least three different name options in order of preference. Once the name is approved, it can be reserved for 20 days.

File Form URC-1 File Form URC-1 within 30 days of name approval along with the necessary documents in the form of attachments with ROC. s per section 374(b) of the Companies Act, 2013 firms opting for Incorporation under the provision of Part I of Chapter XXI shall publish an advertisement about Incorporation. An advertisement shall be in Form No. URC-2. Further, the advertisement shall be published in 2 newspapers-

• One  in English and,
• The other is in the principal vernacular language of the district.

Step 3:

Drafting of Memorandum and Articles of Association The Memorandum of Association (MOA) and Articles of Association (AOA) are the most important documents required for the incorporation of a company. The MOA defines the objectives, powers, and scope of the company, while the AOA specifies the rules and regulations governing the internal management of the company.

The MOA and AOA should be drafted carefully to avoid any legal or operational issues in the future. It is recommended to seek professional help from a company secretary or chartered accountant  to draft the MOA and AOA.

Step 4:

Filing of Incorporation Documents with Registrar of Companies (ROC) Once the MOA and AOA are drafted, the next step is to file the incorporation documents with the Registrar of Companies (ROC). The partners can file the documents online through the MCA portal by submitting Form SPICe 32. The documents that need to be filed include:

• Application for incorporation
• Declaration of compliance
• Proof of registered office address
• Consent of the proposed directors
• Details of the partners who will become the directors of the company

The ROC will verify the documents and, if everything is in order, issue a certificate of incorporation. The certificate of incorporation is proof that the company has been registered and is authorized to conduct business.

Step 5:

Obtaining PAN and TAN After the incorporation, the new company must obtain a Permanent Account Number (PAN) and Tax Deduction and Collection Account Number (TAN) from the Income Tax Department. These are mandatory for opening a bank account, filing tax returns, and conducting business transactions.

The partners can apply for PAN and TAN online through the NSDL website by submitting Form 49A (PAN) and Form 49B (TAN) along with the required documents.

Step 6:

Transfer of Assets and Liabilities Once the company is incorporated, the partners of the partnership firm must transfer all the assets and liabilities of the partnership firm to the new company. This includes transferring bank accounts, contracts, licenses, permits, and other assets and liabilities.

Step 7:

Closing of Partnership Firm After the transfer of assets and liabilities, the partnership firm can be dissolved by filing an application with the Registrar of Firms. The application should include a copy of the certificate of incorporation, details of the assets and liabilities transferred to the new company, and a declaration stating that all the creditors and partners have been informed about the dissolution.

Conclusion Converting a partnership firm to a private limited company is a complex process that requires careful planning and execution. It is important to seek professional help from a chartered accountant, company secretary, or lawyer to ensure that the process is completed smoothly and without any legal or operational issues. However, the benefits of converting to a private limited company, such as limited liability, separate legal entity status, and better access to funding, make it a worthwhile investment for any growing business.

Overall, converting a partnership firm into a private limited company can provide several benefits, including limited liability protection, perpetual succession, better access to funding, and tax benefits. However, the decision to convert should be based on the specific needs and circumstances of the business. It is important to consult with a legal and financial expert before making any decisions.

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{The author i.e. Shahbaz Khan is a Company Secretary and can be reached at (M) 8982766623 and (E) [email protected]}