Many people start their business as a Sole Proprietorship or Partnership to save money and comply with regulations. Moreover, with the expectation that the Partnership business will develop and the revenues involved will increase. Furthermore, the Partnership firm is frequently transformed into a Private Limited company registration to limit responsibility and take advantage of the benefits of a Private Limited Company. With this in mind, here is how the conversion of partnership firm into private limited company is done.
By converting a partnership to a private limited company, which becomes a separate legal body, the risk of responsibility is reduces., Also, the personal assets are safe, unless in the event of fraud.
The Companies Act, 2013, and the Companies Regulations govern the formation and compliance of a private limited company.
Partnership Firms VS Private Limited Company
- 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.
- The liability of a private limited company is limited.
- Partners in a partnership firm, on the other hand, are personally liable for all debts.
- 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.
- If the shareholders agree, the ownership of the company is transferable. In the case of a Partnership Firm, however, the partner cannot transfer his or her share without first consulting the Partnership deed.
- In comparison to a partnership firm, there are many more compliances in a private limited company.
Advantages of Converting a Partnership to a Private Limited Company
Corporatization, we feel, is a necessity of the hour. The entire world is progressively becoming a global market, and every entrepreneur is attempting to lower trade barriers in their industry. A partnership with a small number of partners will be unable to expand on a large scale until it transforms into a corporation.
The following are some of the advantages of transforming a partnership into a private limited company:
- Shareholders are only liable to a certain extent.
- The corporation makes it easier to raise funds because there are no restrictions on the number of stockholders.
- Legally distinct entity.
- Expansion and Diversification
- Shareholding and management changes and revisions can be made without disrupting corporate policies.
- Outsiders cannot take control of the company.
- Assets and obligations transfers.
- On the transfer of property from one corporation to another, there will be no capital gain tax.
- Constant succession is something he enjoys.
Steps for Conversion of Partnership Firm into Private Limited Company
1. Call a meeting of the board of directors
Hold a meeting with all of the partners of the Partnership Firm and get their approval for the conversion.
Because the members of the business’s liability are unlimited, when a firm wants to register as a limited company, it needs the consent of the majority, which means that at least three-quarters of the partners must be present in person.
2. Consent of the firm’s secured creditors
If any must also provide written consent or a No Objection Certificate.
3. Obtaining RUN Approval for the Proposed Company’s Name
To get the name for the prospective company after conversion, an application must submit with the Registrar of Companies (ROC). Along with various attachments declaring that the partnership firm is to convert under the Companies Act, 2013.
4. Publication of the Ad in Two Newspapers (English Daily and Vernacular)
According to clause (b) of section 374 of the Act, a firm seeking registration under the provisions of Part I of Chapter XXI shall publish an advertisement about registration under the said Part, seeking objections, if any, within twenty-one days from the date of publication of the notice.
Moreover, the said advertisement shall be in Form No. URC. 2 which shall be published in a newspaper, in both English and the principal vernacular language of the district in which the office of registration is located.
5. Affidavit
File a affidavit from each partner stating that, in the event of registration, all necessary documents or papers will submit to the authority. Along with which the firm previously registers for the firm’s dissolution as a partnership firm. as a result of its conversion to a private limited company.
6. Submitting all required forms to the ROC
Filing of necessary forms with the ROC for approval of conversion and registration of the firm as a Private Limited Company, along with all necessary attachments that specify the fact of conversion. Also, all other basis charter documents such as MOA, AOA, and other documents are mandatory in case of company registration under the Companies Act, 2013.
Documents Required For Conversion Of Partnership Firm Into Private Limited Company
- PAN Card – PAN Card Of Shareholders And Directors
- Passports (required for foreign nationals)- The identity of Shareholders and Directors must show proof of voter ID, passport, or driver’s licence.
- Address Proof – Telephone Bill/Electricity Bill/Latest Shareholders
- Directors’ Bank Account Statement
- Latest Photograph of Shareholders and directors’ (Passport Size Photograph)
- Business Address Proof – The Registered Office Address’s Most Recent Electricity/Telephone Bill
- Statements of Financial Position – Copy of the most recent audited financial statements that have been duly certified
- Copy of ITR – A copy of the partnership firm’s most recent income tax return.
- A copy of the partnership deed must be provided.
Frequently Asked Questions
- Is it possible to convert an unregistered Partnership into a Private Limited Company?
Unregistered entities with two or more members can choose for Conversion of Partnership Firm into Private Limited Company starting on August 15, 2018.
- Is DIR-2 a must-have in SPICE+?
Yes, DIR-2 is mandatory for SPICE+. It is the agreement to serve on the board of directors of the proposed company.
- Is it possible for a single person to form a Private Limited Company?
A private limited company must have at least two directors. In the case of a One Person Company, however, a single person can form a private limited company. Thus, if a person wishes to form a corporation on his or her own, he or she can do so with only one director.
- Is it necessary for Private Limited Companies in India to register?
Yes, registration for a Private Limited Firm is required because a company cannot exist without registration. And you can register it from anywhere for instance go for company registration in Mumbai or Chennai.
- What requirements must be met before forming a private limited company?
-
DSC
-
DIN
-
DIR-2
- Is it required to include the words “Private Limited” after the company’s name?
Yes, adding a Private Limited Company after the company’s name is required if the company is formed as a Private Limited Company.
Highlights of a Partnership Firm’s Conversion to a Private Limited Company
-
Before the conversion, all of the Partnership firm’s assets and liabilities become the company’s assets and liabilities.
-
On the transfer of property from a partnership firm to a corporation, there will be no capital gains tax.
-
To convert a Partnership firm into a Private Limited Company, there must be at least two Partners in the present Partnership firm.
-
The Partnership firm’s goodwill and brand worth are preserves, and it continues to enjoy the past success story with legal recognition.
-
The Partnership firm’s cumulative loss and unabsorb depreciation are constituting the successor company’s loss/depreciation for the prior year in which the conversion took place. As a result, the successor firm can carry on with the loss for another eight years.
-
The Partnership firm’s movable and immovable properties automatically vest in the Company. There is no requirement to execute a transfer instrument, and hence no stamp duty must be paid.
-
All partners in a partnership firm will become shareholders of the company. In fact, in the same proportion as their capital accounts in the firm’s books on the conversion date.
-
The partners solely receive compensation in the form of company shares. Their combined shareholding in the company is equal to or greater than 50% of the company’s total voting power.