When starting a business, they initially go for partnership or sole proprietorship because of
compliance requirements and low budget. Further, they opt for the conversion of a partnership
firm into a private limited company to limit liability and reap the advantages of a private limited
company. Conversion of a partnership firm into a limited company reduces the liability risk
because the company becomes a separate legal entity. The company's assets also remain untouched
unless there's fraud. Conversion of a partnership firm into LLP income tax does not have any tax
implication since a firm and an LLP are treated as equivalent as per Bill 2009 of the
Income Tax Act. However, there's no tax implication only if the obligation and rights of the
partners remain the same after conversion and if there are no transfers of liability or assets
Overview of Conversion of Partnership Firm into a Private Limited Company
Conversion of a partnership firm into a private limited company is always very advantageous. The company members
enjoy benefits like perpetual succession and limited liability. Section 366 of the Companies Act 2013 provides for
the entities eligible to be registered under this Act. As per this section, the conversion of a partnership firm into
a limited company is possible. The section also states that you can convert any cooperative society, LLP or any other
type of business into a private limited company.
Benefits of Conversion of Partnership firm into a private limited company
The major benefits of conversion of a partnership firm into a private limited company are as follows:
- With the conversion of a partnership firm into LLP income tax, the shareholders are liable only to a considerable extent.
- Private limited company registration makes it easier for the companies to raise funds as there are no limitations on the number of stockholders.
- Make management and shareholding changes and revisions easily without disturbing the company policies.
- A private limited company has a distinct legal entity.
- The outsiders can never take control of a private limited company.
- Obligations and assets are transferred.
- No capital gain taxes are levied on property transfer from one company to the other.
- Constant succession is also enjoyed with a private limited company.
Essentials for Converting the Partnership firm into a Private Limited Company
Section 366 of the Companies Act 2013 puts down the essentials for the conversion of a
partnership firm into a private limited company stamp. These include:
- The partnership deed needs to be registered with the Registrar of companies.
- There should be at least two shareholders or directors to convert a partnership firm into a private limited company.
- Secured creditors of a partnership firm must obtain the No Objection Certificate before conversion into a private limited company.
- The partnership firm should also get an exclusive name while ensuring that the name ends with Pvt. Ltd.
- A contribution of minimum capital is necessary.
- The partnership firm looking to convert into a private limited company should also have a registered office.
- Once the conversion procedure is complete, the private limited company should form its AOA and MOA for Incorporation.
Procedures for Conversion of Partnership Firm to Private Company
The procedure for conversion of a partnership firm into a private limited company goes like this:
- Conduct a meeting with the partners to take their consent on a conversion of a firm into a limited company.
- Authorise two or more partners to take all the required steps for conversion of the partnership firm into a private limited company according to Section 366 of the Companies Act 2013.
- Divide the partners-contributed business capital into units.
- Apply for Company Name Approval through RUN or Reserve Unique Number and upload all the required documents with the company registrar within 20 days from the name approval date.
- Publish advertisement in a couple of newspapers in Form URC-2 within 21 days of notice of publication date.
- Fill in Form URC-1 or the conversion form with all required documents within 30 days of company name approval.
- File Form 22 for verification of registered office within 30 days of business incorporation.
- File the incorporation forms via Spice+ with GSTIN, PAN and TAN, and AOA and MOA in a single window.
- File the E-Form INC 7 or application for incorporation to provide the details of all subscribers and directors of the converted firm.
- File Form INC 8 as an attachment of INC 7 for a declaration by a professional.
- File E-Form INC 9 as an attachment of INC 7 for an affidavit from the subscribers.
- File E-Form DIR-12 for appointment of the first directors of the company.
- Get NPC from the property owner.
- Present proof of company address which can be a rental agreement or lease deed.
- Present copies of utility bills, but they should not be older than two months.
Frequently Asked Questions
Is there a fee for capital gain or stamp duty on a conversion?
No, there is no fee for stamp duty or capital gain on conversion.
Is DIR-2 a must-have in SPICE+?
DIR-2 is mandatory for Spice+, and it is a contract to serve on the Board of Directors of a proposed Private Limited Company.
Is it necessary to include a Private Limited after the company's name?
Yes, including a Private Limited is crucial after the name of a company.
What are the requirements for forming a PVT LTD Company?
One of the most important requirements for forming a PVT LTD Company is to have at least two directors or shareholders.
What are the advantages of converting a partnership into a private limited company?
Limited liability protections and flexible taxation for the company owners are the two greatest advantages of turning a partnership firm into a private limited company.
Which is better, Pvt Ltd or partnership?
Partnership Firm Registration is better than Pvt Ltd as two heads can manage a business better than one.
Partnership firms are easy to establish, and the start-up costs are very low.
Why is a private limited company better than a partnership?
A private limited company is excellent because a partnership firm lacks a separate legal status from its partners.
On the contrary, a private limited company can hold assets and incur liability in its name.
What happens on the conversion of a firm into a limited company?
The unabsorbed depreciation and accumulated loss of the partnership firm are deemed to be depreciation or loss of the company successor for the year the conversion comes into effect. Such losses can be carried further for eight years in the successor's hands.