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Conversion of Partnership to Private Limited Company

The real benefit of creating a private limited company is that it provides the status of an independent legal entity, which a partnership firm can't. In the case of a partnership, a partner's assets are attached, and they are individually liable for the firm’s debts and liabilities but in case of company Director’s liability is limited. When a result, as a firm grows, it is more advantageous for partners to transform their partnership into a private limited company to strengthen its credibility and restrict the liability of its members.

Requirements

  • The Partnership deed must include a provision for transforming the firm into a corporation.
  • There must be a shared agreement between the partners. To convert the firm into a company.
  • If the firm does not meet the above criteria, the Partnership deed should be changed.
  • There should be at least two shareholders and directors.
  • At the time of conversion DSC and DIN must be required for partners to becoming a Director in a proposed company.

Pre-requisites to Convert Partnership Firm to PLC

  • There should be two or more partners.
  • NOC from all secured creditors.
  • In addition, all partners in a partnership firm will become shareholders of the company in   the same proportion as their capital accounts in the firm's books on the day of conversion.
  • Modify the Partnership Deed — If necessary, add a conversion clause to the deed.

Steps in the Registration Process

PARTNERS' MEETING

The Partners of the Partnership Firm must call a meeting and give their approval to the Partnership Firm's conversion to a Private Limited Company.

DSC & DIN

Get a Director Identification Number and a Certificate of Digital Signature.

NAME OF THE COMPANY

The Registrar of Companies must approve the name by applying to E-FORM INC-1 to the Registrar of Companies.

URC-1 E-FORM

The applicant must compile and file the E-FORM URC-1 and the appropriate documentation after receiving name permission from the Registrar of Companies.

AOA and MOA

After gaining name approval and Registrar approval of E-FORM URC-1, the applicant must file Memorandum and AOA and other necessary documents for incorporation at MCA portal.

Documents Required

  • A copy of the partnership deed.
  • A certified copy of the financial statement.
  • A copy of the firm's ITR.
  • Passport Size Photograph.
  • PAN Card.
  • ID Proof (anyone).
  • Aadhar Card/Voter ID /Driving License /Passport
  • Address Proof
  • Bank Statement/Electricity Bill /Telephone Bill / Mobile Bill

Documents for Registered Office Address

  • If Property Owned by Directors /Shareholder
  • Sale Deed of Property
  • NOC from the owner (format given by our company)

If you've rented a property, you'll need a letter of authorization from the owner (format given by our company)

  • Rent Agreement.
  • NOC from the Owner (format given by our company).

Conversion's Advantages

Company Directors have less liability than partners in a partnership firm.

Easy access to capital, such as borrowing money from banks and financial organizations to expand.

Increase the company's capital base.

Share transferability, i.e., easier adjustments and alterations in shareholding, and the ability to issue share capital in various ways, as per the Companies Act of 2013.

There is no capital gain tax on property transferred from a partnership to a private limited company.

There is no stamp duty on property transfers from a partnership to a private limited company.

From an income tax perspective, the Current business's loss and unabsorbed depreciation of firm are now a loss/depreciation of the company after conversion, which can be carried forward for the next eight years.

FAQ's

Unregistered entities with two or more members can choose to convert their partnership into a corporation.

A minimum authorized capital of one lakh should be submitted at the time of registration. The necessity for a certain amount of paid-up capital has been removed.

Major difference between a Partnership and a Private Limited Company is, a partnership does not have its own identity; it is formed when two or more persons join forces to form a partnership. On the other hand, a company is a distinct legal entity that is considered as if it is a person in the eyes of the law.

The Partnership firm's cumulative loss and unabsorbed depreciation constitute the successor company's loss/depreciation for the prior year in which the conversion took place. In the hands of the successor company, such a loss can be carried out for another eight years.

What is a Director Identification Number (DIN), and what does it mean?

On incorporation, the Ministry of Corporate Affairs will provide a director identification number to anyone who wishes to become a director of a company.