Incorporating a company rather than a partnership firm offers business owners several benefits. Limited liability and perpetual succession are two further benefits of such a business structure. In India, the Companies Act, 2013 is responsible for regulating and governing the registration and functioning of all such entities. As per this Act, limited liability partnerships, co-operative societies, societies and partnership firms can convert themselves into a company. Do you want to learn more about turning your partnership firm into a company? If so, read on to understand the factors involved in such conversions and the benefits they provide!
What is a Partnership firm?
A partnership firm is a corporate form in which two or more people manage and administer a company in accordance with the conditions and objectives outlined in a Partnership Deed, which may or may not be registered. Members of such a business are individually partners who share the firm’s liabilities and profits in a predetermined ratio.
What Is the Difference Between a Partnership Firm and a Company?
As per Section 4 of the Indian Partnership Act, 1932, a partnership is a relation involving the sharing of profits generated by a business. The individual owners engaged in such enterprises are partners, and this business has the moniker partnership firm. On the other hand, a company has a broader definition according to Section 2 of the Companies Act, 2013. A company is any enterprise incorporated under this Act or other company laws.
What is a General Partnership?
A general partnership is a corporate structure in which two or more people manage and operate a company in accordance with the Partnership Deed’s provisions and objectives. Because its partners have unlimited liability, which means they are personally liable for the business’s obligations, this form is regarded to have lost its importance since the advent of the Limited Liability Partnership (LLP). However, for some, such as home firms that are unlikely to incur debt, the low prices, ease of setup, and limited compliance needs make it a viable option.
Companies Vs. Partnership Firms
A company has an independent identity and functions as a separate legal entity, giving it the power to sue other individuals and companies. Hence, a company functions as a different artificial person and, therefore, enjoys perpetual succession. The changes in shareholders due to death or insolvency does not affect the corporate existence of such entities. On the other hand, a partnership firm cannot sign for itself as it requires a common seal to authorise documents and make decisions. Additionally, companies offer business owners the protection of limited liability. Hence, the personal assets and properties of owners face no risk in case the company accrues debts. However, partners face unlimited liability and, therefore, a higher risk than company shareholders.
Incorporating as a public company allows entrepreneurs to transfer shares according to the guidelines of the Companies Act, 2013. However, partners cannot transfer their ownership or membership to other individuals efficiently. The members will have to draft a new partnership agreement and register it to add new members. While the Partnership deed registration governs and regulates the working of a partnership firm, a company requires Articles and Memorandum of Association. While it is not mandatory to register a partnership firm under the Partnership Act, 1932, doing so provides several benefits. Unregistered partnerships do not receive any legal protection or amenities. On the other hand, all companies must mandatorily enrol under the Companies Act, 2013.
Documents Required for Conversion
As per Rule 3(2) of the Companies Rules, 2014, the conversion of a partnership firm into a company requires the following documents:
- Duly filled e-Form URC-1
- List of names, occupations and contact details of all partners
- Details of the shareholding of all partners and consideration of shares on conversion to company
- List of directors along with their director identification number and contact details
- Consent form of all directors – DIR 2
- Memorandum and articles of association via Form INC-33 and INC-34
- Affidavit by subscribers through INC-9
- Partnership deed and bye-laws of the firm
- Certificate of registration from the registrar of firms for registered partnership firms
- No objection declaration from the firm’s creditors
- Written consent for the conversion from the majority of the partners
- Firm’s latest income tax returns
- Statement of firm’s assets and liabilities certified by a chartered accountant.
Conversion of a Partnership firm into a Company
- A one-person company must have at least one shareholder, whereas the minimum number of members required for a private company is two. If you wish to register a public company, you will need to have at least seven shareholders
- The members will then have to come up with a unique name for their business. The words ‘Limited’ or ‘Private Limited’ must be appended to the end of the approved title
- If the partners wish to become directors in the new company, they must apply for and obtain a director identification number. The members will also have to draft memorandum and articles of association for their entity to register with the Ministry of Corporate Affairs
- The firm’s members must hold a meeting to discuss the conversion and obtain the agreement of a majority of partners in writing. Next, the partners must get written consent from their secured creditors
- They must then obtain all the required documents and apply for the approval of a name with the Registrar of Companies. Finally, the partners must fill and submit e-form URC-1 along with other supporting documents to complete the process.
As you can see, the process of converting a partnership firm into a company requires careful planning and execution. Small errors made while filing forms can lead to delays and rejections, which harm your business. Hence, most entrepreneurs take the help of professional legal service providers to complete the process successfully.
How Vakilsearch Can Help
Vakilsearch has decades’ worth of experience in registering businesses and can help you convert your partnership firm into a company with ease. Once you reach out to us, our representatives will schedule an appointment to understand your needs and requirements. They will then collect the information required and apply on your behalf. Our team of legal experts will draft your memorandum and articles of association and handle all the documentation. We will keep you posted every step of the way and ensure you receive your incorporation certification at the earliest!
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