Process on Conversion of a Partnership Firm to Private Limited Company
Do you want to convert your Partnership Firm to a Private Limited Company? This article will help you in clearing your thoughts related to the conversion of a Private Limited Company. Information such as “How to convert Partnership Firm to PVT LTD Company?”, conversion of a Partnership Firm to a Private Limited Company, and information on the conversion of Partnership Firm to the Company under Companies Act, 2013.
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Introduction:
Many individuals start their business as a Sole Proprietorship or Partnership to save costs and comply with regulations. However, as the Partnership business grows and the need for limited liability and other benefits arises, it is common to convert the Partnership Firm into a Private Limited Company. This conversion provides the business with separate legal status, reduces the risk of personal liability, and protects personal assets (except in cases of fraud). The incorporation and compliance procedures of a Private Limited Company are governed by the Companies Act of 2013, and its shares are privately held. Before delving into the conversion process and its benefits, let’s briefly understand what a Partnership Firm and a Private Limited Company are.
What is a Partnership Firm?
A Partnership Firm is a business entity formed by two or more individuals to operate a profit-making enterprise. Each member of the group is known as a partner, and the collective entity is referred to as a Partnership Firm.
What is a Private Limited Company?
A Private Limited Company (PLC) is a privately owned small-scale corporate entity. In a Private Limited Company, the liability of the members is limited to the extent of their shareholding, and the shares cannot be publicly traded.
Benefits of converting a Partnership Firm into a Private Limited Company:
1. Limited liability for shareholders.
2. Ease of raising funds due to no restrictions on the number of shareholders.
3. Separate legal entity status.
4. Flexibility for changes in shareholding and management without disrupting company policies.
5. Protection against outsiders taking control of the company.
6. Transfer of assets and liabilities.
7. No capital gains tax on the transfer of property between companies.
8. Perpetual succession.
Conditions for converting a Partnership Firm to a Private Limited Company:
1. The Partnership Firm must be registered and have at least two partners.
2. The Partnership Deed should include a provision for the transformation of the firm into a Company.
3. Agreement among the partners to convert the firm into a Company.
4. If the firm does not meet the mentioned conditions, the Partnership Deed needs to be amended.
5. At least two shareholders and directors are required, and they can be the same individuals.
6. All assets and liabilities of the Partnership Firm before conversion become the assets and liabilities of the Company.
Documents required for converting a Partnership Firm to a Private Limited Company:
1. PAN cards of shareholders and directors.
2. Passport copy of the Partnership firm’s PAN/GST registrations.
3. Aadhar card, Voter ID/Passport/Driving License of shareholders and directors.
4. Latest bank account statements, telephone bills, or electricity bills of shareholders and directors.
5. No Objection Certificate signed by secured creditors.
6. Written consent or letter of no objection from the partners of the Firm.
7. At least two general Partnership partners should verify a copy of the Partnership Deed and the Certificate of Registration.
8. Amended Deed of Partnership (after inclusion of the provision for conversion).
Conversion process from Partnership Firm to Private Limited Company:
Step 1: Conduct a meeting among the partners to authorize one or more partners to take necessary actions and execute required paperwork for the firm’s registration as a corporation. Implement a supplemental partnership agreement aligning with the conversion requirements.
Step 2: Prepare a settlement deed and advertise it in the newspaper using the URC 2 form.
Step 3: Obtain Digital Signature Certificates (DSC).
Step 4: Obtain Director Identification Numbers (DIN) in DIR-3 format.
Step 5: Submit an application for reserving a unique name (RUN).
Step 6: Advertise the registration in two newspapers (vernacular and English) using the E-form URC-2 to check for any opposition within 21 days.
Step 7: Submit all required documents and information, including form URC-1 (conversion form), to the Registrar of Companies.
Step 8: Submit Spice+ form with details related to directors and others for the conversion.
FAQs on converting a Partnership Firm to a Private Limited Company:
1. Is there a capital gains tax or stamp duty on the conversion?
No, there is no capital gains tax or stamp duty on the transfer of property from a Partnership Firm to a Private Limited Company.
2. Is DIR-2 necessary for SPICE+?
Yes, DIR-2 is required for SPICE+. It is an agreement to serve on the board of directors of the proposed company.
3. Is it mandatory to include “Private Limited” in the company’s name?
Yes, it is necessary to include “Private Limited” in the company’s name.
4. What are the requirements for forming a Private Limited Company?
A minimum of two shareholders and two directors are required.
5. Is filing annual returns mandatory for a Private Limited Company?
Yes, all companies registered with the Ministry of Corporate Affairs (MCA) are required to file annual returns with the Registrar of Companies.
Conclusion:
Converting a Partnership Firm into a Private Limited Company offers several advantages, including the separate legal entity status that a Partnership Firm lacks. Private Limited Companies provide greater transparency and access to benefits like limited liability, perpetual succession, and easy fund access, which are not available to Partnership Firms.
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