A partnership firm converting into a company concerns various regulations, form fill-ups, and tax implications. Of course, we will talk about those. But, before all that, one should know some of the significant benefits of registering as a company. 

When you function as a company, you get a separate legal entity. This lets the company start operating in its name. And, the private limited company allows for limited liability of the owners. You can also find it easier to gather funds via raising shares.

Alongside these benefits, some new amendments in the corporate tax rates are also why many leading entrepreneurs are converting their partnership firm into a company. 

So, without wasting any further time, let’s get into the things you need to know for converting a partnership firm into a company. 

Laws and Rules that Concern the Conversion

When it comes to converting a partnership into a company, four different governing laws and rules guide the formalities that need to be followed. These include:

  • Section 366 of the Companies Act, 2013
  • Company Rules, 2014 (Authorized to Register)
  • State’s Stamp Notification
  • Section 47 (XIII) of the Indian Income Tax laws

Documents Needed for Converting a Partnership Firm into a Company

Let’s first see what documents you need to keep handy to begin the conversion process.

  • Firm or partnership registration certificate
  • Copy of GST/ PAN registrations
  • Amended Partnership Deed (You can add the clause for conversion in the deed if needed)
  • No Objection Declaration or written consent from the partners
  • Evidence of the registered office
  • A statement of accounts that is drafted 15 days before you register
  • A clear advertisement in Form URC 2 needs to be published in an English newspaper. It also needs to be printed in a newspaper, in the primary vernacular language of your district. 
  • Copy of the income tax returns (including the latest one) 

What Forms Does one Need to Fill?

The conversion process also involves filling up several forms. These forms need to be filled on the MCA portal to the assigned ROC (Registrar of Companies). Some of these forms are:

  • Form AGILE: It is needed to get registration under many laws and regulations.
  • Form URC 1: This Form is required by a partnership firm or LLP that wants to convert into a company. 
  • Form URC 2: As specified in the previous section on documents, this Form is the one you will need for publishing advertisements in the newspaper.
  • SPICe 32: This Form initiates the company registration process with the concerned ROC.
  • SPICe 33: In this Form, you lay out the MOA or Memorandum of Association.
  • SPICe 34: This Form involves putting forth the Article of Association.

Process of Conversion of a Partnership into a Company

Here are the steps to help you convert the partnership firm into a company.

Step 1: Convene a meeting of the partners

  • A meeting needs to be scheduled, wherein the majority (that is, not less than three-fourth) of the members should be present, and they should affirm the decision on conversion.
  • Next, the people present in the meeting will authorize two or more partners to look into the steps involved in the conversion process.

Step 2: Deciding and confirming the name of the company

  • The partnership firms have to decide on a name and check for its availability. The plus point here is that your company can have the same name as your partnership had, provided it is available. Also, remember that the words “limited” or “private limited” need to be added. 
  • After you have decided on the name, you have to check the name availability on the RUN application of the MOA website.

Step 3: Filling of the forms

After you have received the confirmation on the name, you need to fill the forms (along with the necessary documents) mentioned in the previous section. Also, do remember that these forms need to be filed within 30days from the date of the company name approval.

  1. Form URC 1 along with the following documents:
  • A list comprising the details such as names, addresses, and profession of all the partners along with the number of shares held by them.
  • A list that clearly states the details of the ones proposed to be the first directors of the company
  • An affidavit that confirms that the proposed first director is not unqualified as per sub-section 1 of section 164.
  • Partnership deeds and certificates (if the partnership was registered)
  • Copy of the latest income tax filings
  • A statement that clears the liabilities and the assets of the partnership firm. Note that this needs to be certified by a practicing Chartered Accountant.
  1. MOA and AOA:

Once the company’s name has been approved and the concerned registrar has cleared the URC 1 form, it’s time to draft the Articles of Association, the Memorandum, and other essential documents. These form fill-ups are concerned with in-corporation. 

  1. Filling e-forms
  • Alongside the AOA and the MOA, various e-forms also need to be filled with the Registrar of Companies. 
  • If the Registrar finds all the formalities satisfactory, he will issue a Certificate of Incorporation.

What Tax Benefits can You get on Conversion?

In September 2019, the Finance Minister announced several tax beneficiary amendments, which have caused a sudden surge in the conversion of partnership firms into companies. Here are some of the new amendments.

  • A new provision has been inserted in the Income Tax laws, which states that any domestic company will be liable to income tax payments at a rate of 22%. But this rate will only be applicable if they do not avail of any exemptions or incentives. It came into effect in the FY 2019-20.
  • The manufacturing companies that have opened after the 1st of October will have to pay tax @ 15%. And, the effective rate for these new manufacturing companies after the inclusion of surcharge and tax will be 17.01%.

Regarding Capital Gains

Under Section 368 of the Companies Act, no question of the capital gain will arise in the following cases:

  • The assets held by the partnership firm become the assets of the Company just before the succession.
  • All the partners of the partnership firm become the shareholders of the company, and this should happen right before the succession. 
  • The partners or the shareholders should not benefit from how the shares have been allotted in the company.

Key Takeaway

We understand that the conversion of partnerships into companies involves a lot of documentation, tax implications, etc. So, we suggest you skim through the details well before you decide on conversion. 

And, for further information, you can always reach out to us!