Procedure of conversion of partnership firm into public/private company

Introduction

Government reduced the tax rate on domestic companies from 30% to 25% in the budget of 2018 to increase corporatization and formalization of businesses in India. Earlier, Government took number of steps to increase corporate entities like Simplification of Company Registration process, Amendments in Companies Act, 2017, simplification in DIN and name approval system, Startup India and Make in India schemes etc etc.   

Most of today's small and midsize businesses operate in 'Partnership and Proprietorship Model” and face the same age-old difficulties of financial crunch, quality control, Manpower issues, justifying capital expenditure, negotiating favorable deals with suppliers, balancing quality and costs, and predicting market demand. All these problems have one fundamental solution i.e 'Corporatization”.  

Though, traditionally the SME Community has never believed in the need for corporatizing primarily because they think that my business is my best financial security and that it is the best investment as long as it is under my control. But now young generation entrepreneurs and startups are using Company and LLP Model for their business.

The biggest merit of corporate structure is to have limited liability of member. In partnership or sole proprietorship firm where partners have unlimited liability i.e. if the assets of the firm are inadequate to pay the liabilities of the firm, the creditors can require the partners to make good the deficit from their personal assets.

In this article, we tried to summarize entire process of conversion of Partnership firm into Company.

Pre-Requisites before Conversion of Partnership firm into Company

• Partnership firm to be registered with the Registrar of Firms (RoF)
• Partnership deed must contain the provision for conversion of firm into Company.
• Partnership firm should have minimum 7 Partners for conversion into Public Company and Minimum 3 directors in case of Public Company. (2 in case of Private Company)
• All partners of the partnership firm shall become shareholders of the company in the same proportion in which their capital accounts stood in the books of the firm on the date of the conversion.
• The partners receive consideration only by way of allotment of shares in company.
• If the above requirement is not fulfilled by the firm, then the Partnership deed should be altered.

Procedure for Conversion of Partnership firm into Public Company

Convene Meeting of Partners

• To execute a supplementary Partnership Deed to align it with the requirement of the act.
• To Take assent of 3/4th partners at a general meeting summoned for the purpose of registering the firm as a company.
• To authorize one or more partners to take all steps necessary and to execute all papers, deeds, documents etc. pursuant to registration of the firm as a Company.

Apply for Digital Signature of proposed Directors.

Apply for Director Identification Number (DIN) of Proposed Director in Form DIR-3.

Documents required for DIN

- Aaadhar Card
- PAN Card
- Passport size Photo

Apply for Name in 'Reserve Unique Name (RUN)”

Publish Newspaper Advertisement:

A notice in the form of URC-2 is required to be published in the 2 newspapers, One English daily and another in regional language where the office of the partnership is situated.

Format of Newspaper Advertisement

FORM NO. URC.2

Advertisement giving notice about registration under Part I of Chapter XXI

[Pursuant to section 374(b) of the companies Act, 2013 and rule 4(1) of the companies (Authorized to Register) Rules, 2014]

Notice is hereby given that in pursuance of sub-section (2) of section 366 of the Companies Act, 2013, an application has been made to the Registrar at …………… that …………… a partnership firm/LLP/Co-operative Society/Society/a business entity( delete what is not applicable) may be registered under Part I of Chapter XXI of the Companies Act 2013, as a company limited by shares, or as a company limited by guarantee or as an unlimited company (delete whichever is not applicable)

The principal objects of the company are as follows:

..................................
..................................
..................................

A copy of the draft memorandum and articles of association of the proposed company may be inspected at the office at ……………] [give the address here].

Notice is hereby given that any person objecting to this application may communicate their objection in writing to the Registrar at (address), within twenty one days from the date of publication of this notice, with a copy to the company at its registered office.

Dated this ……………… day of ……………… 20 ………

Name(s) of Applicant

1. ………………………
2. ………………………

File form URC-1

Following Details required for filing URC-1

- SRN of of RUN
- Name of Partnership firm / Registration No(if any), Number of Partners,
- Date of Partnership deed
- Date of partners resolution
- Total amount of Property
- Secured debt (if any)

Attachments in form URC-1

- Particulars of Partners and Shares held by them;
- Affidavit duly notarized from all the partners for dissolution of the firm;
- Declaration by 2 directors verifying the particulars of members;
- Copy of the Partnership deed;
- Copy of certificate of registration of the entity, if any;
- Copy of Newspaper advertisement; (FORMAT GIVEN)
- Certificate from a CA/CS/CWA certifying the compliance with all the provisions of Stamp Act, to the extent applicable;
- A copy of latest IT return;
- Undertaking from Directors for compliance with requirements of Indian Stamp Act, 1899;

File Form SPICE-32, e-MOA and e-AOA

- Affidavit and declaration by first subscriber(s) and director(s)
- Proof of Office address (Conveyance/ Lease deed/ Rent Agreement etc. along with rent receipts)
- Copy of the utility bills (not older than two months)
- Resolution of Partners regarding Conversion

Benefits of Conversion of Partnership Firm into Company

• All the assets and liabilities of the firm immediately before the conversion become the assets and liabilities of the company.
• All movable and immovable properties of the firm automatically vest in the Company. No instrument of transfer is required to be executed and hence no stamp duty is required to be paid.
• No Capital Gains tax shall be charged on transfer of property from Proprietorship firm to Company.
• The goodwill of the Proprietorship firm and its brand value is kept intact and continues to enjoy the previous success story with a better legal recognition.
• The accumulated loss and unabsorbed depreciation of Partnership firm is deemed to be loss/ depreciation of the successor company for the previous year in which conversion was effected. Thus such loss can be carried for further eight years in the hands of the successor company.