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Conversion of Partnership into Private Limited Company

Anyone who desires to increase small and medium scale enterprises to a large scale one, or for combination of equity capital can choose conversion of partnership firm into a private limited company.

According to the Companies Amendment Act 2017, at least 7 members are needed for any entity that is to be converted into a Private Limited Company. Under the amended section 366 of the companies Act, 2013 any unit be it a co-operative society, partnership firm, LLP or any other business entity created under any other law, with at least 2 members can be registered as a Private Limited Company. In order to perform such conversion some other requirements must be fulfilled like :

Secured creditors for such conversion

Securing approval from all partners

A notice should be served in a English and a vernacular language newspaper seeking objections and ultimately followed by the incorporation procedure of Private Limited Company.

Partners can avail an alternative option which includes forming a separate Private Limited Company and then transfer the complete business of Partnership Firm to the company. It is done through a written agreement under which the aforementioned requirements like minimum 2 partners, newspaper advertisement and others are not needed to be satisfied. However it may require stamp duty while transferring the property through takeover agreement which varies in different states.

Features of Conversion of Partnership Firm into Private Limited Company

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

There are minimum 2 or more Partners in the existing Partnership firm for conversion of the Partnership firm into a Private Limited Company.

The accumulated loss and unabsorbed depreciation of Partnership firm is regarded as loss/ depreciation of the successor company in the previous year in which conversion took part. Therefore such loss can be performed for further 8 years in the hands of the successor company.

All partners of the partnership firm shall become shareholders of the private limited company in the similar ratio in which their capital exists in the books of the firm on the date of the conversion.

No Capital Gains tax shall be chargeable on transfer of property from Partnership firm to Private Limited Company.

The goodwill and brand value of the Partnership firm shall be the same and persists to enjoy the previous success story with an improved legal acknowledgment.

All movable and immovable belongings of the Partnership firm automatically include in the Company. No method of transfer is needed to be performed and therefore no stamp duty is needed to be paid.

The partners acquire consideration only through allotment of shares in company and the partners' share in the company shall be 50% or more of its total voting authority.

Advantages of Private Limited Company

1. Protection of personal assets against liability of business, restrict liabilities of Directors

2. The Private Limited Company can run even after the demise of a Shareholder

3. Able to increase capital from a angel investor, venture capitalist, financial institutions and others

4. Brand importance as a Private Limited structure is clearer as compared to other business structures

5. By just transferring shares, ownership can be transferred

6. Private Limited Company involves unique characteristics and can possess/obtain and alienate property in its name. Property owned could be anything like Trademarks, Copyrights,  Patents, Intangible Assets, Building, Residential property, Land, Factory and others.

Essential Criteria to convert Partnership Firm into Private Limited Company

1. Entire assets and liability of the partnership becomes assets and liability of the newly created private limited company

2. The partners get consideration only by means of issuance of shares in the company and the partners' share-holding in the company is 50% or more of its total voting power. It continues to be the same for 5 years from the date of conversion.

Method to convert Partnership Firm into Private Limited Company

Step 1 - Meeting of Partners - The Partners of the Partnership Firm shall organize a meeting and offer their approval to convert Partnership Firm into Private Limited Company.

Step 2 - DIN and DSC - Get Director Identification Number and Digital Signature Certificate

Step 3 - Company Name – Approval of Name must be done from the Registrar of Companies by filing an application in E·FORM INC 1.

Step 4 - E-Form URC-1 – As soon as name approval is performed by the Registrar of Companies, applicant should file the E-FORM URC-1 along with the necessary documents.

Step 5 - Memorandum of Association and Articles of Association – Once name approval and approval of E-FORM URC-1 is done by the Registrar, the applicant needs to prepare Memorandum of Association and Articles of Association and other important documents needed for incorporation.

Step 6 - Filing of E-Forms - The applicant requires filing different documents along with Memorandum of Association and Articles of Association in particular E-forms with Registrar of Companies. On being satisfied on compliance, the Registrar shall issue a Certificate of Incorporation.

Necessary Documents for Conversion of Partnership to Private Limited Company

Identity Proof - Aadhaar card, Voter ID/ Driving License / Passport of Shareholders and Directors

PAN Card - PAN Card of shareholders and Directors. Passport has to be produced in case of foreign nationals.

Photograph - Most recent Passport size photograph of Shareholders and Directors

Address Proof - Electricity Bill / Telephone Bill / Latest Bank Account Statement of Shareholders and Directors

NOC from Customers - The applicant must acquire a No Objection Certificate from all the secured creditors

Business Address Proof - Telephone Bill / Electricity Bill of the registered office address

Verification - A photocopy of Partnership deed and Certificate of Registration verified by minimum 2 partners of the partnership firm.

Rent Agreement - Rent Agreement of the registered office if any must be offered

Copy of Income Tax Return - A copy of latest income tax return should be filed by the Partnership firm

Frequently Asked Questions

Ques: What are the minimum needs for conversion of partnership into private limited company?

Following requirements must be fulfilled in order to complete Private Company registration :

1. At least 2 directors should be appointed out of which 1 should be a resident of India.

2. At least 2 shareholders are needed for this registration. Here, an individual may become shareholder and director together.

3. A registered office address is compulsory that's why a place of business in India must be provided.

Ques: What is the minimum need of capital?

While registration, minimum authorized capital must be Rs 1 Lakh. The necessity of minimum paid-up capital is eliminated since Government plans to simplify business registration procedure in India. Still, each shareholder should subscribe at least 1 share for the registration procedure and introduce enough money to run a business.

Ques: Who is eligible to become a director in a Private Limited Company?

As soon as Director Identification Number (DIN) is obtained by an individual older than 18 years, he or she can become a director in the company. A foreign national can become a director also since there are no restrictions regarding citizenship or residency. The application for allotment of DIN is now combined with the application to form a company depending on a limit of maximum 3 DIN.

Ques: What are the statutory compliances needed for a Private Limited Company?

A private limited company should convene a Board Meeting at least once in every 3 months. Besides, Board Meetings and an Annual General Meeting must be organized by the Private Limited Company once in every year.

Ques: What are FDI rules for foreigners for foreigners in a private limited company?

Foreign Direct Investment is permitted in India in different industries as par the Automatic Route. According to the Automatic Route, only a post-investment filing is essential with the RBI specifying the nature of investment. There are a number of industries that require prior approval from the RBI and in such cases approval must be acquired from RBI before the investment.

Ques: What is known by Common Seal and its significance?

There is not any idea of common seal in case of partnership firm. But a private limited company includes a common seal that represents the signature of the company and every company must possess its individual common seal.

Ques: Is capital gain or stamp duty chargeable on conversion?

Capital Gains or stamp duty is not chargeable while transferring property from Partnership firm to a Private Limited Company.

Ques: What happens to the unabsorbed depreciation and loss of the partnership firm upon conversion?

The accumulated loss and unabsorbed depreciation of Partnership firm are judged to be loss/ depreciation of the successor company for the previous year in which conversion was performed. Therefore, such a loss can be accomplished for more 8 years in the hands of the successor company.

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