Convert Partnership to Private Limited Company
Are you a partner in a successful business and looking to reduce your liability and protect your personal assets? Converting your partnership firm to a private limited company might just be the solution you’re looking for. The process of conversion is governed by the Companies Act of 2013 and can provide numerous benefits such as easier fund raising, safeguarding personal assets, and allowing for changes to shareholding and management without disrupting company policies. But what are the prerequisites and steps involved in this process? Read on to find out all about how to convert your partnership firm to a private limited company in India.
I. Introduction
Importance of corporatization and converting partnership firms into private limited companies
The process of converting a partnership firm into a private limited company has become more desirable as the benefits of having a separate legal entity are immense. A private limited company gives businesses access to equity capital and provides a stronger identity, making it an attractive option for businesses looking to grow. Additionally, with the world moving towards one international market, corporatization is becoming increasingly necessary to ensure a business’ viability. The conversion process involves holding meetings for consent of the majority of partners, authorization of partners to take necessary actions, and taking consent from secured creditors, among others. It is important to note that the shareholding pattern should remain the same as that of the partners’ capital ratio. The conversion process also involves steps such as name reservation, publication in two newspapers, and submission of necessary forms to the Registrar of Companies. Corporatization provides a strong foundation for businesses and opens up opportunities for financial growth, making the conversion process to a private limited company an attractive option for businesses. [1][2]
Process and prerequisites of converting a partnership firm into a private limited company
The process of converting a partnership firm into a private limited company involves a few prerequisites that must be met before the conversion can take place. Firstly, a meeting must be held to obtain consent from the majority of partners and authorize two or more partners to take necessary actions for the conversion. Secondly, a clause for conversion must be included in the partnership deed or added through an amendment if it’s not already there. The assets of the partnership firm cannot be revalued in the previous three years, and the shareholding pattern must remain the same as the partners’ capital ratio.
Other prerequisites that must be met before the conversion can take place include taking consent from secured creditors (if any) and submitting a name reservation application through e-RUN form. There must also be a publication of Form URC-2 in two newspapers to take note of any objection by anyone within 21 days of publishing. Finally, Form URC-1 with all the necessary details and documents must be submitted to the Registrar of Companies. It’s also noteworthy that no mandatory audit is required if there are no operations, but audit is mandatory even if there are none in the company [3][4]
II. Prerequisites for Conversion
Holding meeting for consent of majority of partners
It is important to involve all the partners in the process of converting a partnership firm into a private limited company. Holding a meeting for consent of the majority of partners is a prerequisite before proceeding with the conversion process. Two or more partners should be authorized to take all necessary actions for the conversion. Consent from secured creditors, if any, must also be obtained. The partnership deed must have a clause for conversion, and there should be no asset revaluation in the previous three years. The shareholding pattern should remain the same as that of the partners’ capital ratio. Registration will not affect the rights/liabilities of the company in respect of deeds done before registration of the company. The idea is to ensure that everyone is on the same page and agrees to the conversion process before proceeding further. By doing so, it will avoid any conflicts or disputes that may arise in the future. [5][6]
Registration with Registrar of Firms (desirable but not mandatory)
Although it is not mandatory, registering a partnership firm with the Registrar of Firms is highly desirable. A registered partnership firm gains certain legal benefits and acknowledges the existence of the business. While registration involves some formalities, it is a relatively easy process. The Registrar of Firms is responsible for registering the partnership firms. During registration, a name is selected for the partnership firm, which is not registered and can be chosen by the partners. However, this allows other people to use the same business name unless trademark registration is obtained. Partnership firms are not required to file annual accounts with the Registrar of Companies each year. After registering, a partnership firm enjoys privileges such as financial assistance from banks, legal recognition, and liability protection. By registering the partnership firm, a partner gets the power to file a suit against the partners and the firm for any breach of contract. In summary, registering the partnership firm is not mandatory, but it provides a better position while conducting business. [7][8]
Authorizing partners to take necessary actions
After holding a meeting and obtaining the consent of the majority of partners, it is important to authorize two or more partners to take all necessary actions to convert the partnership firm into a private limited company. This includes executing all required documentation and deeds. Additionally, consent must be taken from secured creditors, if any. It is crucial to have a clause in the partnership deed for conversion; in case it is not available, the deed needs to be amended for the addition of the conversion clause. The shareholding pattern must remain the same as that of the partners’ capital ratio, and there should not be any revaluation of assets in the preceding three years. Registration will not affect the rights/liabilities of the company in respect of deeds done before the registration of the company. By authorizing partners to take necessary actions, the conversion process can proceed efficiently and effectively. [9][10]
Taking consent from secured creditors (if any)
When converting a partnership firm into a private limited company, it is important to take the consent from secured creditors, if any. This is necessary to ensure that the interests of all parties are protected during the conversion process. The written consent or No Objection Certificate must be obtained from the secured creditors of the firm, and attached to the necessary forms to be filed with the Registrar of Companies (RoC). It is also advisable to include a clause in the partnership deed about the conversion to private limited company, to ensure that the process can be carried out smoothly when necessary. By taking the necessary steps to secure the consent of secured creditors, firms can ensure that they meet all requirements for the conversion process and avoid any potential legal hurdles that may arise in the future. [11][12]
Having a clause in partnership deed for conversion
It is important to ensure that your partnership deed has a clause for conversion in case you decide to convert your partnership firm into a private limited company. This clause is necessary as it will allow you to smoothly transition from a partnership to a private limited company without any legal hiccups or complications. If the partnership deed does not have this clause, it can be amended to include it. However, it is crucial to ensure that the amendment is done before starting the conversion process. Another important factor to keep in mind while converting a partnership firm into a private limited company is that the shareholding pattern should remain the same as the partners’ capital ratio. This ensures that the transition is smooth and that the partnership firm’s assets and liabilities immediately become the company’s assets and liabilities. With proper planning and following the necessary steps and prerequisites, converting a partnership firm into a private limited company can be a seamless process. [13][14]
No revaluation of assets in previous 3 years
When converting a partnership firm into a private limited company in India, it is important to note that there should be no revaluation of the assets of the partnership firm in the previous preceding three years. This means that the value of the assets should remain the same as recorded in the partnership firm’s financial statements for the prior three years. The reason for this is to ensure that the conversion process is fair and transparent for all stakeholders involved. Revaluation of assets can lead to different valuation figures, which could result in disputes and conflicts among partners. Therefore, it is crucial to follow this prerequisite for conversion to maintain the trust and integrity of the process. Overall, converting a partnership firm into a private limited company is a significant step towards corporatization and can offer various benefits, such as limited liability, perpetual succession, transferability of shares, and easier access to funds. [15][16]
Shareholding pattern to remain same as partners’ capital ratio
When a partnership firm into a private limited company, it is crucial to maintain the shareholding pattern as the partners’ capital ratio. This means that the percentage of shares held by each partner should be the same as their respective capital contribution to the partnership firm. This ensures that each partner retains their proportional ownership in the newly converted private limited company. It is essential to note that no revaluation of assets should have occurred in the three years preceding the conversion. This is to prevent any unfair advantages or disadvantages accruing to any partner due to changes in the value of assets. By retaining the same shareholding pattern, partners can continue to play an active role in the new company and have a proportional say in its decision-making process. This can go a long way in maintaining trust and goodwill among partners and ensure a smooth transition into the private limited company [17][18]
III. Steps for Conversion
Name reservation application through e-RUN form
The Indian government has launched a new web service called RUN (Reserve Unique Name) that makes reserving the name of a proposed company or changing the name of an existing company easier and faster. The RUN web form allows entrepreneurs to reserve a company name in a few minutes and without requiring the download of forms or the use of a digital signature. The fee for reserving a name through the RUN web-form is Rs. 1000, which is non-refundable. When creating an account, users can choose between two categories: register user or business user. MCA personnel at the Central Registration Centre (CRC) will check the requested name against existing company names, LLPs, and trademarks to test for similarity. The company name will either be approved or rejected, with no resubmission allowed. The approved name is valid for 20 days for a new company or 60 days for a change of name of an existing company. The RUN service aims to make the company incorporation process speedy, smooth, and simple. [19][20]
Publication of Form URC-2 in two newspapers
According to the process for converting a partnership firm into a private limited company, after reserving a unique name through the RUN form, the company must publish the URC-2 form in two newspapers, one in English and the other in a vernacular language. This is to provide notice to anyone who may object to the registration of the company. The advertisement for the URC-2 form should be published within 20 days of obtaining name approval and circulated in the district where the office is situated. This form provides details about the registration of the company and seeks any objections from the public. A notarized affidavit from all partners stating that the necessary documents for the dissolution of the firm will be submitted to the respective authorities must also be attached with the URC-1 form. All necessary details and documents, including the NOC from secured creditors and the partnership deed, are required to be attached with the filing of the URC-1 form for approval of conversion. Proper adherence to these processes is important for the smooth conversion of a partnership firm into a private limited company. [21][22]
Submission of Form URC-1 to Registrar of Companies with necessary details and documents
After completing all the necessary formalities, it is time to submit the Form URC-1 to the Registrar of Companies. This form is used for registering an entity as a Part I Company under the Companies Act 2013. In order to file this form, the applicant needs to access the official website of the Ministry of Corporate Affairs and log in to the portal. The approved SRN of eForm INC-1 filed for reservation of the firm name must be provided, along with the registration number of the existing entity and the type of entity from the drop-down menu. The number of members in the entity as on the date of the application must also be furnished. Additionally, the details through which the existing business entity or joint-stock company has been constituted, along with the date of the general meeting and details of resolution passed by members authorizing company registration with limited liability must be furnished. The eForm URC-1 should be filed along with eForm INC-7. By following these steps and submitting the necessary documents, the process of converting a partnership firm into a private limited company can be completed successfully. [23][24]