CONVERSION OF A PARTNERSHIP FIRM INTO A PRIVATE LIMITED COMPANY
CS Rantu Das
CS Rantu Das is the Founder and Managing Partner of M/s. Rantu Das & Associates, a firm established in 2010. As a Fellow Member of ICSI and a law graduate (LL.B., LL.M.), with an M.Com from Calcutta University, he has over 13 years of expertise in corporate laws, SEBI matters, FEMA, RBI regulations, and compliance audits. He regularly represents cases before NCLT and NCLAT under the Companies Act, 2013, and IBC, 2016.
In the era of corporatization, it is noteworthy that Company Law allows the conversion of a partnership firm into a limited company—whether by shares, by guarantee, or as an unlimited company. However, a specific process must be followed in addition to the basic formalities of incorporating a new company. Let’s discuss the process and desideratum of converting a partnership firm into a private limited company.
Sections 366–374 of the Companies Act, 2013, and the Companies (Authorized to Register) Rules, 2018, must be followed.
Some pre-requisites for conversion are:
- Holding a meeting to obtain the consent of a majority of partners.
- Although registration with the Registrar of Firms is recommended, it is not mandatory.
- Authorizing two or more partners to undertake all necessary actions for conversion.
- Obtaining consent from secured creditors, if applicable.
- The partnership deed must contain a clause allowing for the conversion of the firm into a company as needed. If such a clause is absent, the deed must be amended to include it.
- The assets of the partnership firm must not have been revalued in the preceding three years.
- The shareholding pattern will remain the same as the partners’ capital ratio. Registration will not affect the rights/liabilities of the company in respect to deeds done before registration of the
Steps to be taken for conversion
- A name reservation application must be submitted through the Spice-Part-A (Reserve of Name) form within 20 days from name approval.
- Form URC-2, which provides details about company registration must be published in two newspapers: one in English and the other in a vernacular language. This is done to record any objections raised within 21 days of publication.
- Spice-Part-B which includes Form URC-1, E-MOA; E-AOA; AGILE-PRO and Form-INC-9 is to be submitted to the Registrar of Companies (RoC) along with the usual forms associated with the incorporation like SPICE+, Details to be filled in URC-1 are SRN of the RUN form, name of firm/ registration no., no. of partners, date of partnership deed and resolution, amount of property, and secured debts, if any. Some of the documents that need to be attached to the form are the details of partners and proposed first directors; copy of the principal and revised partnership deed; NOC from secured creditors; copy of the latest IT return; declaration from the directors that they will comply with The Indian Stamp Act, 1899; notarized affidavit of dissolution of the firm; copy of URC-2 advertisement; a certificate from CA/ CS/ CMA certifying the compliance.
- Most other documentation remains the same as that required for incorporating a new company.
Partnership vs Company
Serial No | Partnership Firm | Company |
1 | Higher Tax rate @ 30 percent | Tax rate @ 15/22/25 percent |
2 | No DIN requirement | DIN is mandatory for Directors |
3 | No mandatory audit for no operations | The audit is mandatory even if no operations in the company |
4 | No specified minimum capital requirement | Minimum Capital of Rs 1 lac for Pvt Ltd Company |
5 | Unlimited liability of partners | Limited Liability of Shareholders |
6 | Private investors are reluctant to invest | Easier availability of funds from pvt investors |
7 | Difficult to remove/ add partners | It is quite easy to add/remove directors |
8 | The burden of compliance is less | The burden of compliance is more |
Concluding Remarks
The conversion of a partnership firm into a company has both advantages and disadvantages. Since the difference in tax rate has come into the picture, many firms have started converting into companies to save taxes, and this will continue to be the case in the future.
With the world leaning toward corporatization and startup culture taking firm root in the Indian economy, traditional legal entities like partnership firms may become obsolete unless the government introduces measures to enhance their attractiveness. Government initiatives for such conversions make prospective partnership firms come into a corporatization environment, making it easier for partners to obtain loans from banks and other financial institutions, to expand their business.
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