How can one convert a Partnership firm to a Private Limited Company?

India is known for many start-ups.  We must have noticed that every day some of the other startups get established in our country. Due to globalization, the startup culture is showing a positive trend in recent times. This startup culture is mainly undertaken by those entrepreneurs who are ambitious and want to achieve something in their life.

With sheer determination and fire in their belly, many young aspiring entrepreneurs are going ahead with starting their own company be it a Proprietorship firm or a Partnership registration.

A Partnership is one of the most well-known forms of business constitution. It is owned, managed and controlled by an association of two or more persons solely for the purpose of making a profit. These forms of business concerns are popular among small and medium based business organizations that have limited capital. They are relatively easy to form since they require only minimum formalities.

Now suppose if your partnership is really doing well will you continue with the same business entity or would you like to take a further jump?

Obviously for no reasons one would definitely prefer to take one step ahead. Imagine what will be your goals and where would you stand 5 years down the line?

If you find that your business is flourishing and there are investors to back-up and grant funding will you still stick to the same business entity? Definitely, you will be looking for expansion so that the world will be looking at you from a different perspective. Don’t they?

This is when one can look at converting from a partnership firm to a private limited company. Due to corporatization taking place in a brisk manner the entire world is gradually inching towards single global market without creating any obstacles in trade among the countries. Expand your business reach with better funding, credibility, and security by converting to a private limited company.

The major benefit of private limited company registration is that it provides a status of a separate legal entity which a partnership firm does not offer. In case of a partnership, a partner’s personal assets are attached and they would be held personally responsible for each and every debt or liability arising out of the business. Therefore, with the expansion of business, if the partners want to increase their credibility and put limited liability on its members, it is more advisable to convert their partnership into a private limited company. Even though the legal compliances for a private limited company are much higher than those of a partnership concern, it gives the firm more opportunities to expand and flourish the business.

You will be happy when you come to know about the merits of converting from a partnership firm to a private limited company. Below listed are some of the advantages;

  • Stamp duty not required –In order to convert a partnership firm to a private limited company, there is no need to execute any transferable instruments. Hence one need not pay anything towards stamp duty charges.
  • Exempt from Capital Gain Tax-When a transfer of property takes place from a partnership firm to Pvt Ltd Company Capital Gain Tax is totally exempted.
  • To build goodwill- The primary objective of a proprietorship firm is to build goodwill. By building goodwill the brand value will remain untouched. Therefore the proprietorship firm will tend to have a better recognition globally.
  • Limited liability of the owners- The liability of the members or the directors is limited to an extent of capital contribution agreed by the members of the company. The loss or the debt of a company cannot be assigned to members even at times of winding up. Further, one member is not responsible for any negligent act or misconduct of any other member.
  • Enjoys a separate legal entity- A partnership cannot have a separate legal entity. If any of the partners leaves or retires the partnership ceases to exist and hence a new partnership has to be formed. But this is not the case of a private limited company. It enjoys a separate legal entity and also has the right to sue the third parties for any damages or misconduct.
  • Separation of management and ownership- The separate ownership and management help both the shareholders and the directors to focus on their potential work. The directors are assigned responsibility by the shareholders for operating and running the company without losing any control in form of voting.
  • Raising capital- Private Limited Company allows the members to participate without taking any personal accountability, unlike the partnership where all partners have unrestrained liability. Hence, it is very easy to raise capital as far as a private limited company is concerned.

Documents required to convert a partnership to a private limited company:

  • PAN card of the shareholders and the directors
  • Identity proof like Aadhar card, Voter ID, Passport or Driving license of the shareholders and directors.
  • Address proof such as telephone bill, electricity bill, bank account statement, Sale Deed, or a rental agreement of the shareholders and the directors.
  • Latest passport size photograph of the shareholders as well as the directors.
  • Electricity bill, telephone bill of the registered office address for the purpose of business address proof.
  • No Objection Certificate from all the partners has to be obtained.
  • A copy of the Partnership Deed and the Certificate of Registration duly verified by at least 2 partners has to be submitted.
  • A copy of the latest Income Tax Return Filing has to be furnished by the partnership firm.

Conditions that are mandatory

The partnership rule states that all the partners can mandatorily become the company’s shareholders in the same ratio where their capital accounts stand in the books on the date of conversion.

Requirements

  • A partnership firm must have at least 7 partners in order to convert to a private limited company.
  • To convert to a private limited company it should have a minimum share capital of Rs. 1 lakh.
  • The partnership deed has to be changed if it does not fulfill the above criteria.
  • It must have at least 2 minimum Directors for converting to a private limited company.
  • Partners can become the Directors as well as the shareholders.
  • All the Directors must have the Director Identification Number.
  • It is mandatory to have the Digital Signature Certificate of the two Directors.

Process for Conversion

  • For the purpose of conversion filing of requisite forms is a must.
  • Approval for the name has to be filed.
  • Proper documents with regard to incorporation have to be filed.
  • Last but not the least to receive the incorporation certificate.

Having a Pvt Ltd Company is the best form of business option and though the conversion will take some time, at Aavana our experts can guide you through the process smoothly and effectively.

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