Conversion of Partnership Firm to Private Limited Company

Conversion of Partnership Firm to Private Limited Company

Converting a partnership firm to a private limited company involves several legal and procedural steps. This transformation allows the firm to benefit from the advantages of a corporate structure, such as limited liability, perpetual succession, and easier access to capital. In this article, we will discuss the process of converting a partnership firm to a private limited company in detail. 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. 

Essentials for Converting the Partnership firm into a Private Limited Company

The essential pre-requisite conditions for converting the Partnership firm into a Private Limited Company are-

Essentials for Converting the Partnership Business into a Private Limited Company

There should be a minimum of two directors and shareholders for the conversion of a partnership firm to a private limited company.
  1. The Partnership deed must be registered with the Registrar of companies.
  2. The No Objection Certificate must be obtained from the secured creditors of the partnership firm.
  3. The partnership firm must obtain a unique name, and the name should end with Pvt. Ltd.
  4. There should be the contribution of the minimum capital.
  5. There should be a registered office of the partnership firm.
  6. After completing the appropriate procedure of conversion,
  7. the company should form their MOA and AOA for Incorporation.

Benefits of Converting a Partnership firm into a Private Limited Company

Limited Liability: One of the most significant benefits is limited liability. In a partnership firm, partners have unlimited liability, which means their personal assets can be at risk if the business faces financial difficulties or legal issues. In a private limited company, the liability of shareholders is limited to the extent of their shareholdings. Personal assets are generally protected unless there are exceptional circumstances involving fraud or misconduct.

Separate Legal Entity: A private limited company is considered a separate legal entity from its owners. This means that the company can enter into contracts, own assets, and sue or be sued in its own name. It provides a distinct identity to the business, enhancing its credibility and facilitating easier transfer of ownership.

Perpetual Existence: Unlike a partnership firm, a private limited company has perpetual existence, which means it continues to exist even if the ownership or management changes. The death, retirement, or insolvency of a partner does not affect the continuity of the business. This feature makes it easier to attract investors and plan for long-term growth.

Raising Capital: Private limited companies have more options for raising capital compared to partnership firms. They can issue shares to investors and raise funds through equity financing. This allows for greater flexibility in expanding the business, acquiring assets, or implementing new projects. Additionally, private limited companies can also access various debt financing options, such as bank loans, lines of credit, and debentures.

Transfer of Ownership: Converting a partnership firm into a private limited company allows for the easy transfer of ownership. Shares in a private limited company can be sold or transferred to new investors without disrupting the business operations. This provides an avenue for partners to exit the business or bring in new partners without any legal complexities.

Tax Advantages: Private limited companies often enjoy certain tax benefits. The tax rates applicable to companies can be lower than those for individual partners in a partnership firm. Additionally, private limited companies may have access to various tax deductions, incentives, and exemptions that can help in reducing the overall tax liability.

Credibility and Branding: Operating as a private limited company enhances the credibility and perception of the business in the market. It signals a higher level of professionalism, stability, and corporate governance. This can attract customers, suppliers, and investors who prefer to deal with well-established, legally compliant entities

Memorandum of Association (MOA): You need to draft a new MOA for the private limited company. It should contain the name, registered office address, objectives, capital structure, and other relevant details of the company.

Articles of Association (AOA): Prepare a new AOA that outlines the internal rules, regulations, and operational procedures of the private limited company. Application for Name Approval: Submit an application to the Registrar of Companies (RoC) for the approval of the new company name. The proposed name should comply with the naming guidelines specified by the Companies Act, 2013.

Partners' Consent: Obtain a written consent from all partners of the partnership firm, stating their agreement to convert the firm into a private limited company. Board Resolution: Hold a meeting of the partners and pass a board resolution approving the conversion. The resolution should include the decision to convert, authorization to execute necessary documents, and appointment of the directors of the new company.

Shareholders' Agreement: If there are multiple partners, it is advisable to draft a shareholders' agreement outlining the rights, obligations, and responsibilities of the shareholders in the private limited company. 

Application for Conversion: File Form URC-1 (Application by a Partnership Firm for Registration as a Company) with the RoC. This form should include the details of the partnership firm, proposed company name, details of partners, directors, and registered office address.

Partnership Deed: Submit a certified copy of the partnership deed of the existing partnership firm. Financial Statements: Provide the audited financial statements of the partnership firm for the last three years. This includes the balance sheet, profit and loss account, and annual returns.

Identity and Address Proofs: Submit identity proofs (such as PAN card, passport, or Aadhaar card) and address proofs (such as utility bills or bank statements) of all partners and directors of the proposed private limited company.

NOC from Creditors: Obtain a No Objection Certificate (NOC) from all creditors of the partnership firm, stating that they have no objection to the conversion. Other Required Forms: Fill and submit various other forms, such as Form INC-9 (Declaration by first directors), Form DIR-2 (Consent to act as a director), and Form INC-22 (Notice of situation or change of situation of the registered office).

Documents required in Spice+ form

DIR-2 Declaration from the first Directors,
  1. Copy of ID and Address proof of the shareholders and directors,
  2. NOC from the owner of the property,
  3. Proof of Commercial address (Rent Agreement or lease deed),
  4. Copy of the utility bills (not older than two months)

The procedure of Conversion of a Partnership Firm into a Private Limited Company

Requisite steps to be followed for the conversion of a Partnership Firm into a Private Limited Company are:

Step 1-Conducting a meeting of the partners for the Conversion of the Partnership Firm into a Private Limited Company

Consent of the majority of the partners, not less than 3/4thof the partners should be present in person.
To authorize two or more partners to take all steps required and to execute the conversion process along with the documentation.
Consent Of the Secured Creditors- Before conversion, the partners must obtain written consent from the secured creditors of the firm, if any.

Apply For DSC And DIN For All Proposed Directors and Shareholders of The Company- It is one of the pre-requisites to apply for DSC and DIN of the proposed directors and shareholders.

Step -2 Obtain name Approval in the RUN form.

File an application in the RUN form on the MCA website click here to get the Incorporation done for the proposed company after conversion.

A Partnership firm can apply for the same name, provided the name should be unique as per the rules of the Companies Incorporation Rules 2014 and subject to the availability of the name.

The proposed director or shareholder shall provide the necessary attachments along with the proposal for the conversion of the partnership firm.

Step -3 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.

Step - 4 Publish an advertisement in Two Newspaper

As per section 374(b) of the Companies Act, 2013 firm 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-

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

Step – 5 Draft MOA and AOA

Once the Name and E-FORM URC-1 are approved by the Registrar, the applicant company is required to draft the Memorandum and Articles of Association and other relevant documents required for Incorporation.

Step -6 Issue of Certificate of Incorporation

File SPICE+ along with the required documents and if the Registrar is satisfied with the documents and information filed by the applicants. The Registrar shall issue a COI (Certificate of Incorporation) to the applicant company.

Corpbiz assistance in Converting Partnership Firm into Private Limited Company

  1. Purchase a Plan for Expert Assistance
  1. Add Queries Regarding the conversion
  2. Provide Documents to Corpbiz Expert
  3. Proper Assistance and advisory for conversion.
  4. Complete all other required Actions
  5. Get your work done!

Conclusion

The benefits of transforming a Partnership Firm into a Private Limited Company include the Private Limited Company’s standing as an independent legal entity, which a Partnership Firm does not have. A Private Limited Company’s establishment is more transparent than other business formats. Limited Liability, Perpetual Succession, Easy Access to Funds, and other benefits are available to Private Limited Companies that are not available to Partnership Firms.

Created & Posted By Sapna Choudhary
Accounts executive at TAXAJ

TAXAJ is a consortium of CA, CS, Advocates & Professionals from specific fields to provide you a One Stop Solution for all your Business, Financial, Taxation & Legal Matters under One Roof. Some of them are: Launch Your Start-Up Company/Business, Trademark & Brand Registration, Digital Marketing, E-Stamp Paper Online, Closure of Business, Legal Services, Payroll Services, etc. For any further queries related to this or anything else visit TAXAJ

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