Conversion of Partnership to Company – Procedure, Rules & Tax Effect.

Due to a rise in regulatory policies for ease of doing business for companies and announcement of a special reduction in the corporate tax rate through the Taxation Laws (Amendment) Ordinance, 2019, many leading entrepreneurs and firms are opting to convert their partnership firm to company.

While for new entrepreneurs company formation from scratch is a simple company incorporation process with the Ministry of Corporate Affairs (“MCA”), however for existing business owners especially for the partnership firms proper migration requires a great deal of professional experience and legal knowledge.

Section 366 of the Companies Act, 2013 and the Companies (Authorised to Register) Rules, 2014 guides about the eligibility, restrictions, and perquisites essential for incorporation or conversion of entities to the company in India.

This post gives you an overview of all regulatory terms and procedures to undertake, for the conversion of partnership firm to company consider the aspects which are as follows:

#1.  Prepare all necessary documents

The following documents would essentially be required in the process:

  • Partnership Registration Certificate (If registered with Registrar).
  • Amended Partnership deed (After inclusion of a provision of conversion in the deed).
  • Written consent or no objection declaration from creditors and partners of the firm.
  • Copy of Income tax returns of Partnership for past years (Including the latest return filed).
  • Certification of Financial statements/tax returns from the auditor (if required by Registrar of Companies or ‘ROC’)
  • Copy of PAN/GST registrations.
  • Proof of registered office of business (Electricity bill/ Rent agreement). 

#2 Filing of forms

The following forms have to be filed on MCA Portal to the concerned Registrar of Companies (ROC) :

#3 Procedure for conversion

  1. Take approval of partners and add a clause in the partnership deed for the conversion of entity to other forms.
  2. Obtain written consent of partners/creditors for the conversion of partnership.
  3. Submit advertisement to any popular daily newspaper to be published in the English language and the vernacular language in prescribed  Form URC – 2.
  4. File form URC -2 with the registrar of firms in the prescribed time frame of publication of the notice.
  5. Form URC -1 to be filed with ROC specifying all details of partners, about their occupation, capital contribution, directors to be appointed, passport details of partners and their interest in other firms or body corporate.
  6. Obtain written consent of partners for approving partners’ appointments as directors.
  7. Obtain Consent of the creditors of the partnership, if any.
  8. Obtain undertaking from the partners going to become directors to comply with requirements of the Indian Stamp Act, 1899.
  9. Submit affidavit stating compliance of all Acts and regulations applicable to the partnership by the partners.
  10. File form SPICe – 32 including INC-9 and DIR-2 declarations specifying the first subscriber and directors details along with the proof of registered address of the business .
  11. File SPICe – 33, 34 and AGILE with ROC duly filled and certified by the professionals involved in the incorporation for compliance of all necessary steps as applicable.

ROC after completion of all formalities after taking into consideration the filings made, the objections made, the provision for creditors if any, resolution of objections in the prescribed time period of 30 days of submission of application will approve the conversion of partnership firm to company form and will grant the Incorporation Certificate to the entity. 

Tax Benefits of Conversion:

  1. Reduction in corporate tax rate :

With the introduction of the Taxation Laws (Amendment) Ordinance, 2019, a comparative view in tax savings can be seen of both entities –  For instance, for income up to Rs. 10 crores:

  Partnership Domestic Foreign
  Manufacturing  Company  (Section 115BAB) Other Company (Section 115BAA) Business Income Other Income
Tax Rate 30% 15% 22% 40% 50%
Surcharge 12% 10% 10% 2% 2%
Cess 4% 4% 4% 4% 4%
Effective Rate 34.9% 17.1% 25.17% 42.43% 53.04%

 

* The tax rate defined for companies in Section 115BAB, and Section 115BAA of the Income Tax Act, 1961 shall be applicable to companies incorporated after 1st Oct 2019.

  1. No capital gain on transfer of an asset to the company: As per Section 368 of the Companies Act, 2013 for the conversion of partnership firm to the company no capital gain shall arise if :

– all assets of the partnership become the asset of the company immediately before succession.

– all partners of the firm become the shareholders in the company before the succession.

–  the partners do not receive any benefit directly or indirectly or in any form or manner by way of allotment of shares in the company.

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Also Read: How to Claim HRA in Income Tax Return