Converting Your Partnership Firm to a Company: All You Need to Know

Thinking of converting your partnership firm into a private limited company? This can be a strategic move for business expansion, credibility, and limited liability protection. However, the conversion process has several legal and procedural considerations. Here’s everything you need to know before making the transition.

Eligibility Criteria for Conversion

Conversion of a partnership firm into a private limited company is permitted under the Companies Act, 2013, provided certain conditions are met. The two most critical factors are:

1. Registered Partnership Deed: Your partnership firm must be registered with the Registrar of Firms (ROF). If your firm is not registered, you will need to complete the registration process first.
2. Deed Permitting Conversion: The existing partnership deed must explicitly include a clause that allows conversion to a company. If such a clause is missing, the deed must be amended to incorporate this provision and then re-registered with the ROF.

Step-by-Step Process of Conversion of Partnership Firm to a Company

Here’s a structured approach to converting your partnership firm into a private limited company:

1. STEP 1 – Obtain Digital Signature Certificates (DSC) and Director Identification Numbers (DIN)
   • All proposed directors must acquire DSC and DIN from the Ministry of Corporate Affairs (MCA).
2. STEP 2 – Name Approval from MCA
   • Apply for name approval through the RUN (Reserve Unique Name) service on the MCA portal.
   • The new company name should ideally include “Private Limited” and should not be identical to existing names.
3. STEP 3 – Draft and File Necessary Documents
   • Incorporation Documents: File SPICe+ (INC-32) along with e-MoA (INC-33) and e-AoA (INC-34).
   • Declaration by Directors and Partners: File necessary declarations stating compliance with the conversion process.
4. STEP 4 – Execution of Asset and Liability Transfer Agreement
   • The partnership firm must execute an agreement transferring all assets and liabilities to the new company.
5. STEP 5 – Obtain New Registrations (PAN, TAN, GST, etc.)
   • Since the legal entity changes, a new PAN, TAN, and GST registration must be obtained for the company.
6. STEP 6 – Closure of Partnership Firm’s Bank Account
   • Once the private limited company is incorporated, the firm’s bank accounts must be closed, and a new account opened in the company’s name.
7. STEP 7 – Apply for Business Licenses and Compliances
   • Licenses such as GST, MSME, and professional tax must be re-registered in the company’s name.

Tax Implications of Conversion

The conversion process has some tax consequences that businesses should be aware of:

• Capital Gains Tax: If the firm’s assets appreciate in value, capital gains tax may be applicable upon transfer.
• Income Tax Impact: The new company must comply with corporate tax laws, which may differ from partnership taxation.
• GST Considerations: Any pending GST liabilities must be settled, and unutilized GST input credit can be transferred to the new entity.
• Stamp Duty: Depending on the state, a stamp duty may be levied on asset transfer agreements.

Impact on Existing Contracts & Licenses

• Contracts with Clients & Vendors: All agreements with suppliers, customers, and vendors must be reviewed and transferred to the new company.
• Loan & Bank Agreements: Any outstanding loans in the firm’s name may need to be renegotiated or transferred.
• Intellectual Property (IP) & Trademarks: If the partnership owns a trademark or patent, it must be formally assigned to the new company.

Employee Considerations

• Employment Contracts: Employee agreements must be revised under the new corporate entity.
• Provident Fund (PF) & ESIC Registration: If the firm had PF registration, a new registration under the company’s name is required.
• Tax Deduction at Source (TDS) on Salaries: A new TAN registration must be obtained to deduct TDS on employee salaries.

Timeframe and Legal Complexities

Amending and re-registering the partnership deed can be a time-consuming process, often taking anywhere from 6 to 8 months. The reason for this is that registration with the ROF is still largely a physical process, requiring submission of multiple documents and approvals.

While your core business operations can continue without interruption, it’s essential to factor in this timeframe when planning your transition to a private limited company.

Key Procedural Changes Upon Conversion

Once your firm is converted to a company, several backend processes require immediate attention:

1. New Registrations Required
   • PAN (Permanent Account Number): Since the legal entity changes, the company will require a fresh PAN. The PAN of the partnership firm cannot be transferred.
   • TAN (Tax Deduction and Collection Account Number): A new TAN is needed for the company to deduct tax at source (TDS) for employees, vendors, and other payments.
   • GST (Goods and Services Tax): GST registration must be obtained afresh for the new company, as GST registrations are PAN-based.
   • PT (Professional Tax): Professional Tax registrations also need to be updated under the new entity’s name.
2. Transfer of Assets & Liabilities
   • The company must take over all assets and liabilities of the partnership firm. A proper valuation and transfer agreement are essential to ensure a smooth transition.
   • Intangible assets such as goodwill, brand value, and customer contracts must be assigned correctly to the new entity.

What Happens to Your GST Input Credit?

If you are looking to convert partnership to a company, a significant advantage is that GST input credit can be carried forward. This means any unutilized input tax credit from the partnership firm can be transferred to the new company, ensuring that you don’t lose financial benefits during the transition.

Post-Conversion Compliance Requirements

After incorporation, a private limited company must adhere to ongoing legal and financial compliance requirements:

• Annual Filings with ROC: Financial statements and annual returns must be filed with the MCA.
• Board Meetings: Conduct board meetings at least four times a year.
• Statutory Audit: A registered auditor must audit the company’s financial statements annually.
• Income Tax Filings: The company must file annual income tax returns and deduct TDS for employees and vendors.

Why Convert? The Key Benefits

• Limited Liability Protection: The company structure shields personal assets from business liabilities.
• Better Credibility: A private limited company is perceived as more reliable and stable by investors, banks, and customers.
• Easier Fundraising: Raising capital from investors and financial institutions becomes easier with a corporate structure.
• Perpetual Succession: Unlike a partnership, a company continues to exist beyond the lifetime or exit of its founders.

Conclusion

Converting your partnership firm into a pvt. ltd. company can be a game-changer for your business, but it requires careful planning and compliance with legal formalities. Ensuring that your partnership deed permits conversion and preparing for new registrations can make the transition smoother.

If you are considering this move, consulting a legal and financial expert can help streamline the process and avoid unnecessary delays.