After the introduction of section 115BAA and 115BAB (Only for manufacturing) of the Income-tax Act, 1961 which allows Companies to pay tax at the rate of 22% and 15% respectively as against 30% for partnership Firms and LLP’s, business houses are looking for conversion of their firms into Companies. This can be initiated in 2 ways as enumerated below:

1. Incorporation of new corporate entity and transfer the existing business to newly incorporated entity.
2. Conversion of existing entity (Partnership firm/LLP) into Company.

The 2^nd option of conversion of Partnership Firm into a corporate entity might be practical for the existing entities to switch over from one mode of business to another. The process of conversion is a step-by-step procedure, which is given below. The steps explained below are technical process, if handled with expert knowledge may be time and cost saving, as well.

Comparison of Tax in Firm and Company:

SI No.	Partnership Firm	Effective Tax Rate Turnover up to 1 crore	Effective Tax Rate Turnover above 1 crore	Company	Effective Tax Rate
1	30% for Non-manufacturing	31.2%	34.94%	22%	25.17%
2	30% for manufacturing	31.2%	34.94%	15%	17.16%

 

Step by step procedure for conversion Partnership firm into Company

STAGES	REQUIREMENTS	REMARKS
Convene a meeting for Conversion of Partnership Firm into Private Limited Company	·      To take assent of majority of its partners, not less than three-fourth of the partners should be present.   ·      To authorize two or more partners to take all steps necessary and to execute all papers, deeds, documents etc.
Apply for DSC and DIN for all directors and shareholders of the company	Obtain DSC of all directors and shareholders. In addition to that obtain written consent or No Objection Certificate from all the secured creditors of the firm, if any
Obtain name Approval in RUN form	File an application in RUN on the MCA website to obtain the name for the proposed company stating the proposal for conversion of the partnership firm, along with various attachments.
Filing of Form URC-1	According to the Rule 3(2) of the Companies (Authorized to Register) Rules, 2014, a company after obtaining availability of name, needs to furnish the required documents and information to the Registrar along with Form No. URC-1 for registering as a company	·        A list showing the names, addresses, and occupations of all persons named therein as members with details of shares held by them. ·        Also, a list of persons proposed as the first directors of the company. ·        An affidavit from each of the persons proposed as the first directors, that he is not disqualified to be a director under section 164(1). Further that all the documents filed with the Registrar for registration of the company contain correct, complete, and true information to the best of his knowledge and belief. ·        Partnership deed, along with the revised deeds, in case the firm is registered. ·        A statement of assets and liabilities of the partnership firm as on the date of conversion duly certified by a chartered accountant. ·        Further, a copy of the latest income tax return of the Partnership Firm. ·        The nominal share capital of the company and the division of shares. ·        The number of shares taken, and the amount paid on each share. ·        written consent or No Objection Certificate from all the secured creditors of the applicant. ·        written consent or No Objection Certificate from all the secured creditors of the applicant.
Publish an advertisement in Two Newspapers	As per section 374(b) of Companies Act, 2013 firm seeking registration under the provision of Part I of Chapter XXI shall publish an advertisement about registration. ·       Seeking objections if any within 21 clear days from the date of publication of the notice. ·       The said advertisement shall be in Form No. URC-2. ·       Further, these shall be published in 2 newspapers one in English and other in the principal vernacular language of the district in which the firm is located.
Draft MOA and AOA	The applicant is required to draft the Memorandum and Articles of Association and other relevant documents necessary for incorporation.
Filing of necessary forms with ROC	INC-32, INC-33, INC-34, and AGILE forms to be filed on MCA Website	·   DIR-2 Consent to Act as Director. ·   INC-9 Declaration by subscriber/first director. ·   KYC document of Directors and shareholders of the proposed converted company. ·   Utility Bill (not older than two months). ·   Lease deed/ title deed for the regd. office address of the company. ·   Detail of main and other objects of the company
Intimate ROC under which the firm was previously registered	Once Company is registered, intimate the Registrar under which the firm was previously registered along with the documents for its dissolution as a firm

FAQs

1. Is capital gain under Income-tax to be paid on transfer of Assets from Partnership firm to Private Limited Company?

No. Certain transactions like transfer of assets by a sole proprietorship or a firm to a company on conversion are not regarded as transfer under the provisions of section 47(xiv) and section 47(xiii) of Income-tax Act, 1961. Therefore, No capital gain tax applicable on conversion of Partnership firm to Private Limited.

2. Is stamp duty to be paid on conversion in connection to transfer of property to Private Limited Company?

No. stamp duty shall not be charged on transfer of property from Partnership firm to a Private Limited Company.

3. What are the minimum requirements to convert partnership into private limited Company?

• Appointment of minimum 2 directors, out of which one must be a resident of India.
• Minimum requirement of 2 shareholders for this registration. Further, an individual may become shareholder and director at the same time.
• A place of business in India must be provided as a registered office.

4. Are 7 members/Partners mandatory for the purpose of conversion?

No. With effect from July 5, 2018 Seven members/Partners are not mandatory. Only two members/Partners are mandatory to conversion.

A company with less than seven members shall register as a private company.

5. What is the Procedure for Conversion Sole Proprietorship to Company?

There is no procedure specified for conversion of sole proprietorship to company in companies Act,2013.

Therefore, incorporate a Private Company and then take over the business of sole proprietorship by executing the takeover agreement between a proprietor and the Company. For incorporating private company there should be at least two members out of which one should be the sole proprietor holding at least 51 percent of total share of the Company.