A partnership firm cannot think of growth on large scale without converting itself into Private Limited/Public Limited Company. Conversion of Partnership firms into a Company has its own advantages such as Limited Liability, Perpetual Succession, Transferability of shares, easy access to funds etc. Corporatisation is the need of the hour. Section 366 of Companies Act, 2013 provides the Companies capable of being to registered under the Act.
As per the provision of Section 366(1) the Companies Act, 2013, “Company" includes any Partnership Firm, Limited Liability Partnership, Cooperative Society, Society or any other business entity formed under any other law for the time being in force which applies for registration under this Part.
Key benefits of conversion
1. Automatic Transfer:
All the assets and liabilities of the firm immediately before the conversion become the assets and liabilities of the company.
2. No Capital Gain Tax:
No Capital Gains tax shall be charged on transfer of property from firm to Company (upon fulfilment of certain conditions mentioned under heading "Effect of Tax on conversion" below in this Article).
3. Continuation of Brand Value:
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.
4. Carry Forward and Set off Losses and Unabsorbed Depreciation:
The accumulated loss and unabsorbed 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 company.
5. No Stamp Duty:
All movable and immovable properties of the 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.
Mandatory Conditions for Conversion
Effect of tax on conversion
Capital Gains : Section 45(1) of the Income tax Act, 1961 provides that any profits or gains arising from the transfer of a capital asset effected in the previous year shall, save as otherwise provided in sections 54, 54B, 54D, 54E, 54EA, 54EB, 54F, 54Gand 54H, be chargeable to income-tax under the head "Capital gains", and shall be deemed to be the income of the previous year in which the transfer took place.
Before a levy on the capital gain can be imposed, it must be ensured that, such a gain has arisen from the disposal of the asset by any one of the mode, referred to in the definition of the term ‘transfer’ in Section 2(47) of the Income Tax Act, 1961.
Section 45(4) provides for the chargeable of the tax on the transfer of a capital asset of a firm or other association of persons or body of individuals. The Section provides that the profits or gains arising from the transfer of a capital asset by way of distribution of capital assets on the dissolution of a firm or other association of persons or body of individuals (not being a company or a co-operative society) or otherwise, shall be chargeable to tax as the income of the firm, association or body, of the previous year in which the said transfer takes place and, for the purposes of section 48, the fair market value of the asset on the date of such transfer shall be deemed to be the full value of the consideration received or accruing as a result of the transfer.
Under Section 45(4) of the Act two conditions are required to be satisfied for the levy of tax on capital gains-
In case of conversion of a partnership firm into a company no capital gain shall arise if the following conditions are fulfilled:-
Requirements towards conversion under Companies Act, 2013
Procedures for conversion of Partnership Firm to Private Company
STEP 1: Hold a meeting of the partners to transact the following business
(If the above requirement is not fulfilled by the firm, then the Partnership deed should be altered)
STEP 2: Obtaining the Name Approval in INC 1 for Proposed Company
Step 3: Publishing the Advertisement in Two Newspaper (English Daily and Vernacular)
For the purpose of clause (b) of section 374 of the Act, every ‘company’ seeking registration under the provision of Section 366 shall publish an advertisement about registration under the said Part, seeking objections, if any within twenty one clear days from the date of publication of notice and the said advertisement shall be in Form No. URC. 2, which shall be published in a newspaper and in English and the in the principal vernacular language of the district in which Partnership is in existence and circulated in that district.
Step 4: Affidavit
File an affidavit, duly notarised, from all the members or partners to provide that in the event of registration under this Part, necessary documents or papers shall be submitted to the registering or other authority with which the company was earlier registered, for its dissolution as partnership firm, limited liability partnership, cooperative society, society or any other business entity, as the case may be.
Step 5: Filing of E form URC 1 with ROC with Following Attachments:- (For Companies limited by Shares)
f)statement of accounts, prepared not later than fifteen days preceding the date of seeking registration and certified by the Auditor together with the Audited Financial Statements of the previous year, wherever applicable shall be attached with Form No. URC. 1
If the assets of the existing company during the immediately preceding three years are revalued for the purpose of vesting of its assets with the company to be incorporated under this Act, the surplus arising out of such revaluation shall not be deemed to have been credited to the capital account or current account of partners.
Step 6: Certificate of Incorporation
If the Registrar is satisfied on the basis of documents and information filed by the applicants, decides that the applicant should be registered, he shall issue a certificate of incorporation in Form No. INC.11
NOTE – As per Section 366(2) and Rule 3 of The Companies (Authorised to Registered) Rules, 2016. There shall be seven or more members for the purposes of registration of a company under this sub-rule and Section.
Step 7: Other Obligation of Companies Seeking Registration
where a firm has obtained a certificate of registration under section 367, an intimation to this effect shall be given within fifteen days of such registration to the concerned Registrar of firms under which it was originally registered, along with papers for its dissolution as a firm.
Therefore, for enlarging or growth of a small scale business led by few partners into a large scale business, corporatization of firm is the needed.
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