Overview on Conversion of Partnership Firm into a Private Limited Company

In the starting of their business, people opt for a Sole Proprietorship or Partnership because of its low budget and compliance requirements, with the thought process that the Partnership business will grow, and the revenues involved will become more. Further, to limit the liability and to avail of the benefits of a Private limited company, the Partnership business often gets converted into a Private Limited Company.

Converting a Partnership firm to a private limited company, which becomes a separate legal entity, reduces the risk of liability, and the personal assets will remain untouched except in case of fraud. The incorporation and compliance procedure of a private limited company is as per the Companies act, 2013, and the shares are held privately.

Essentials for Converting the Partnership firm into a Private Limited Company

The essential pre-requisite conditions for converting the Partnership firm into a Private Limited Company are-

• There should be a minimum of two directors and shareholders for the conversion of a partnership firm to a private limited company.
• The Partnership deed must be registered with the Registrar of companies.
• The No Objection Certificate must be obtained from the secured creditors of the partnership firm.
• The partnership firm must obtain a unique name, and the name should end with Pvt. Ltd.
• There should be the contribution of the minimum capital.
• There should be a registered office of the partnership firm.
• After completing the appropriate procedure of conversion, the company should form their MOA and AOA for Incorporation.

Benefits of Converting a Partnership firm into a Private Limited Company

The followings are the benefits of converting a partnership firm into a private limited company:

• The advantage of converting the Partnership firm into a Private Limited Company is that the Private Limited Company enjoys the status of a separate legal entity that a Partnership firm does not. 
• Private Limited Company has Limited Liability. However, in the case of the Partnership firm, partners are personally liable for every debt.
• The formation of a Private Limited company is more transparent than other business structures. A Private Limited Company has its advantages, such as Limited Liability, Perpetual Succession, easy access to funds, etc., which the Partnership firm does not possess.
• The ownership gets transferred if the shareholders provide their consent. However, in the case of a Partnership Firm, the partner cannot transfer its share without referring to the Partnership deed.
• Compliances are more in Private Limited Company as compared to Partnership firm.

Below mentioned are some of the additional benefits of converting a Partnership firm into a Private Limited Company-

• Shareholders have limited liability.
• Raising the fund is easier in the company, as there is no restriction on the number of shareholders.
• Separate legal entity.
• Expansion and Diversification.
• Changes and alterations related to shareholding and management can be done without interrupting the business policies.
• Control of the company cannot be lost to outsiders.
• Transfer of assets and liabilities.
• No Capital gain tax shall be charged on the transfer of property from firm to company.
• The private company enjoys perpetual succession.

Documents Required for Converting a Partnership Firm to a Private Limited Company

The following is the list of documents required for the conversion of a Partnership firm into a Private Limited Company-

Documents required in E-form URC-1

• Particulars of the members reflect the names, addresses, and occupations of all, along with details of shares held by them.
• Particular of the first directors of the company.
• An affidavit from all the 1st directors that he is not disqualified from being a director under section 164(1). Additionally, all the documents filed with the ROC for the Incorporation of the company contain information that is accurate and true to the best of the applicant’s knowledge and belief.
• Details of the partners of the partnership firm, such as their Identity and Address Proof. 
• Copy of Partnership Deed. Also, in case the Partnership deed was revised at any time in the past, copies of the principal and all altered deeds. Additionally, if the firm is registered, the certificate of the registration issued by the Registrar of Firms is also required.
• A statement of assets and liabilities of the Partnership Firm duly certified by a Practicing Chartered Accountant which is made on a date not earlier than 30 days of the filing of form no.URC-1
• All the Income tax-related documents of the Partnership Firm.
• A copy of the Newspaper Advertisement.
• No Objection Certificate from all the secured creditors of the applicant firm.
• A Consent from the majority of Partners.
• A statement specifying-

1. The nominal Share Capital of the company,
2. The number of shares,
3. The number of shares taken, and
4. The amount paid on each share,
5. The name of the company, with the addition of the word “Private Limited”.

Documents required in Spice+ form

• DIR-2 Declaration from the first Directors,
• Copy of ID and Address proof of the shareholders and directors,
• NOC from the owner of the property,
• Proof of Commercial address (Rent Agreement or lease deed),
• Copy of the utility bills (not older than two months)

The procedure of Conversion of a Partnership Firm into a Private Limited Company

Requisite steps to be followed for the conversion of a Partnership Firm into a Private Limited Company are:

Step 1-Conducting a meeting of the partners for the Conversion of the Partnership Firm into a Private Limited Company

Consent of the majority of the partners, not less than 3/4thof the partners should be present in person.

To authorize two or more partners to take all steps required and to execute the conversion process along with the documentation.

Consent Of the Secured Creditors- Before conversion, the partners must obtain written consent from the secured creditors of the firm, if any.

Apply For DSC And DIN For All Proposed Directors and Shareholders of The Company- It is one of the pre-requisites to apply for DSC and DIN of the proposed directors and shareholders.

Step -2 Obtain name Approval in the RUN form.

File an application in the RUN form on the MCA website to get the Incorporation done for the proposed company after conversion.

A Partnership firm can apply for the same name, provided the name should be unique as per the rules of the Companies Incorporation Rules 2014 and subject to the availability of the name.

The proposed director or shareholder shall provide the necessary attachments along with the proposal for the conversion of the partnership firm.

Step -3 File Form URC-1

File Form URC-1 within 30 days of name approval along with the necessary documents in the form of attachments with ROC.

Step - 4 Publish an advertisement in Two Newspaper

As per section 374(b) of the Companies Act, 2013 firm opting for Incorporation under the provision of Part I of Chapter XXI shall publish an advertisement about Incorporation.

An advertisement shall be in Form No. URC-2. Further, the advertisement shall be published in 2 newspapers-

• 1 in English and,
• The other is in the principal vernacular language of the district.

Step – 5 Draft MOA and AOA

Once the Name and E-FORM URC-1 are approved by the Registrar, the applicant company is required to draft the Memorandum and Articles of Association and other relevant documents required for Incorporation.

Step -6 Issue of Certificate of Incorporation

File SPICE+ along with the required documents and if the Registrar is satisfied with the documents and information filed by the applicants. The Registrar shall issue a COI (Certificate of Incorporation) to the applicant company.

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