Conversion of Partnership firm into Private Limited – Why, Pre- requisites, Taxation Benefits & Impact and Procedure

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Conversion of Partnership firm into Private Limited

Why:

Most of the business started as sole proprietorship or partnership firm due to its easy & lesser compliance and low cost. Although, once the business grows enough in terms of revenue, profit, operation area, number of employees, it would become obvious to convert the same into private limited company considering under mentioned:

  1. Separate Legal Entity
  2. Limited Liability
  3. Easy capital infusion & expansions
  5. Helps in funding/getting loans
  6. Most organized form of any business
  7. Better impact on its customers & employees.
  8. Perpetual Succession
  9. Changes and alterations related to shareholding and management can be done without interrupting the business policies.

In addition to the above, most significant benefit of the conversion is income tax benefits as detailed under:

Income Tax Rate Comparison

Nature of Business Partnership Firm Private Limited Company Benefit of Income Tax in case of Private Limited
Total Income up to 1 Cr. Total Income Exceeds 1 Cr. Any amount of Income Total Income up to 1 Cr. Total Income Exceeds 1 Cr.
If Incorporated as Manufacturing entity after 01.10.2019 30*1.04 = 31.20% 30*1.12*1.04 =34.94% 15*1.10*1.04 = 17.16% 31.2-17.16 =14.04% 34.94-17.16 =17.78%
Other than above 30*1.04 = 31.20% 30*1.12*1.04 =34.94% 22*1.1*1.04 = 25.17% 31.2-25.17 =6.03% 34.94-25.17 =9.77%

Pre- requisites for conversion of Partnership firm into Company:

  1. Partnership deed must be registered with the Registrar of firms.
  2. There must be a clause in the Partnership deed for Conversion of firm into company as and when needed, if the same is not available then the deed needs to be amended for addition of that clause.
  3. The partners receive consideration only by way of allotment of shares in company and the partners shareholding in the company in aggregate is 50% or more of its total voting power.
  4. All the Partners shall become the shareholders of the company in the proportion of their capital contribution in the Partnership firm on the date of the conversion.
  5. Minimum two directors are required. The existing partner may become the directors.
  6. There should not be revaluation of the assets of the Partnership firm in the previous preceding three years.
  7. NOC from all the Secured Creditors.

Taxation Benefits & Impact of Conversion:

  1. No Capital Gains tax shall be charged on transfer of property from Partnership firm to Company.
  2. Carry forward all your Input GST
  3. The accumulated loss and absorbed 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. All the assets and liabilities of the Partnership firm immediately before the conversion become the assets and liabilities of the company.
  4. The goodwill of the Partnership firm and its brand value is kept intact and continues to enjoy the previous success story with a better legal recognition.
  5. All movable and immovable properties of the Partnership 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.

Guidelines for Conversion of Partnership Firm in to Private Limited company:

  1. Hold a meeting of the member: 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
  2. Consent from secured creditors of firm: Also written consent or No Objection Certificate is to be obtained from the secured creditors of the firm, if any.
  3. A statement of assets and liabilities of the Partnership firm duly certified by a chartered accountant in practice which is made as on a date not earlier than thirty days of the filing of form no.URC-1.
  4. Notice Publishing in News Papers & Service of it to ROF: A copy of the notice, as published in the newspaper and the copy of the notice served on to the concerned Registrar of firms along with proof of service, is required to be submitted.
  5. Rest of the procedure is almost same as of incorporation of new private limited company.

Checklist of Work to be performed after the conversion:

  1. Application for New GST Registration of the company in case not opted to register under GST while conversion in the ROC forms.
  2. Filing of form for transfer of Input Credit available in the Partnership firm to company.
  3. Surrender of GST registration of the Partnership firm and filing final return under GST.
  4. Surrender of PAN & TAN of the Partnership Firm.
  5. Updation in PF & ESI registration.
  6. Intimation to banks and secured creditors.
  7. Intimation to all the concerned institutions and organizations likewise electricity board, Customs, Pollution Control board, Telephone exchange etc.