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Partnership is a kind of organization, in which, few like-minded persons pool up their resources to form a partnership firm. Section 4 of the Partnership Act, 1932, defines partnership as "The relation between persons who have agreed to share profits of business carried on by all or any of them acting for all."

This definition chiefly brings out the following features of partnership:- Contractual Relationship - Existence of Business - Sharing of Profits - Mutual Agency Partnership is an ideal form of an organization for medium scale business operations which require greater amount of capital and risk than sole proprietorship or Hindu Undivided Family.


The partnership firm intended to convert into company will firstly made an agreement. Such an agreement may be made, before the incorporation of the company, by the promoters of the company with the seller of business, which on incorporation, may be ratified by the company through its authorised agents or representative. However, the promoters are duly bound to ensure that such pre-incorporation agreement are fair and in the interest of the company, and if the promoters makes any profit or take any undue advantage from such agreement, they are liable to compensate the company to the extent the company suffers any loss.

If a particular partnership firm has the required number of persons, who may form a limited company as per the requirements of the Companies Act, 1956, they may become subscribers to the memorandum and also the promoters of the company. The assets and liabilities of the firm can be taken over by the company on incorporation on the basis of fair valuation done by experts and the promoters or the erstwhile partners of the firm are allotted shares in the company according to the value of their shares in the firm. On incorporation of the company, the assets and liabilities of the partnership firm may be taken over by the company, as per the terms and conditions of the agreement executed by and between the promoters of the company, which is ratified by the company on its incorporation and the partners of the firm, in their capacity as partners of the firm and not in their capacity as subscribers to the memorandum of association of the company or as members of the company. After all the assets and liabilities of the partnership firm have been taken over by the company and the partners have been paid by the company either in cash or in the form of shares in the company, the existence of the firm comes to an end. The company is a separate legal entity, which is quite distinct and independent of its members. Members of a company may come and go but the company continues to exist till it is wound up or is declared defunct by the Registrar of Companies, according to due process of law. The mere fact that the assets and liabilities of a partnership firm have been taken over by a company and its partners have either been paid in cash or have been allotted shares in the company does not by itself mean that the company retains its character of partnership. [Official Liquidator v. Ram Swarup (1997) 26 CLA 90 (All)]. If and when the partners of the partnership firm propose to form a private limited company or a public limited company, they have to ensure that their number is sufficient to form such a company as per provisions of section 12 of the Companies Act, 1956. After having mustered the required number, they may proceed to form a limited company as per provisions of section 41(1) of the Companies Act, 1956.


After having decided to form a company to take over the business of their partnership firm, the partners should take the following procedural steps for the formation and registration of the company:

1. An existing business of partnership can be converted into a company in any of the following ways:

(i) by outright sale;

(ii) by making partners of the firm the only shareholders of the newly incorporated company;

(iii) a company becoming a partner of the firm which will be disclosed thereafter;

(iv) by amalgamation under section 391 to 394 of the Companies Act, 1956;

(v) by registration of existing joint stock companies under section 567 of the Companies Act, 1956 2.

2. In case of above items (i), (ii) and (iii), following procedure should be followed:

a. The existing business should be converted into a partnership firm and the newly incorporated company be admitted as its partner.

b. At the time of forming the new company, it should be ensure that the proprietor of the existing business and any other individual are the subscribers to that company's memorandum of association, thereupon that other individual must also be admitted as a partner of the converted firm.

c. Distribution of all assets and liabilities of the firm to one of the partners who will pay the difference to other partners must be provided in the partnership deed.

d. It must be ensured that the memorandum of association of the newly formed company includes a clause permitting the company to acquire the undertaking of an existing business.

e. It must be ensured that the articles of association of the newly formed company give power to its directors to enter into agreement facilitating the acquisition of business.

f. An agreement with the directors of the newly formed company for facilitating the acquisition of the partnership firm must be entered into.

g. A copy of the agreement must be filed with the Registrar within 30 days of entering into the agreement (section 192), after paying the requisite fee as prescribed under schedule X to the Companies Act, 1956.

h. Thereupon a Board Resolution for allotment of shares to the other partners of the firm as consideration of such acquisition should be passed.

i. A return of allotment in e-form-2 along with the attachment should be filed with the Registrar within 30 days of making the allotment as per section 75 of the Companies Act, 1956.

3. If the partnership firm being a joint stock company within the meaning of section 566 wants to be registered as a company, then all the following documents should be delivered to the Registrar of Companies:

(i) an application in electronic Form-37

(ii) a list showing the names, address and occupations of all persons who on a day not more than 6 clear days before the day of registration where members of the company and the shares or stock held by each one of them respectively, distinguishing each share by its number in case the shares are numbered;

(iii) a copy of the partnership deed;

(iv) a statement containing the following particulars:

(a) the nominal share capital of the company and the number of shares into which it is divided or the amount of stock of which it consists;

(b) the number of shares taken and the amount paid on each shares; (c) the name of the company and the addition of the world "Limited" or "Private Limited" as its last words; (d) a copy of the resolution declaring the amount of guarantee if you want to register it as a guarantee company (Section 567).


o Once the new company is formed, the takeover agreement would be entered between the Partnership Firm and the newly incorporated company.

o Convene a Board Meeting after giving notice to all the directors of the newly incorporated company immediately after incorporation as per section 286 of the Companies Act, 1956 to adopt the agreement entered into by the company and the partner of the firm for the acquisition of business of the firm. o In such a situation, the entire business of the firm along with all its assets and liabilities is transferred to the company.

o The company may issue shares or other securities to the Partner of the firm.

Thanks & Regards

CS Ajay Mishra

Published by

Ajay Mishra
(Company Secretary)
Category Corporate Law   Report

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