Conversion of Partnership Firm to Private Limited Company and its benefits:Step by Step Process

Conversion of Partnership Firm to Private Limited Company and its benefits:Step by Step Process. When starting a business, many entrepreneurs opt for a partnership or sole proprietorship due to lower compliance requirements and minimal costs, and these structures offer flexibility and ease of operation in the early stages. However, as businesses grow, many look to transition into a more structured form of business, such as a Private Limited Company (Pvt. Ltd.), to take advantage of the numerous benefits, such as limited liability, easier access to funding, and perpetual succession, including conversion of a partnership firm into a private limited company is governed by the Companies Act, 2013, and is increasingly becoming a popular move for businesses aiming to scale and grow.
A partnership firm is a type of business structure in which two or more individuals come together to carry on a business called as partners. On the other hand, a private limited company is a type of business structure that is separate from its owners and has limited liability. A firm can convert into a private limited company in accordance with the provisions laid under Section 366 to 374 of Companies Act, 2013 and Companies Incorporation Rules, 2014 read with Companies Amendment, 2017 by filing URC-1, required to be filed pursuant to Section 366 of the Companies Act, 2013 and Rule 3(2) of the Companies (Authorised to Registered) Rules, 2014. 
Converting a partnership firm to a private limited company can bring many benefits, such as limited liability protection for the owners, improved credibility and reputation, and easier access to funding and many more. 
Learn here: Choosing the Right Legal Structure: Sole Proprietorship, Partnership, LLP, or Company
Legal Provisions for Conversion under Section 366 to 374
The conversion of a partnership firm into a private limited company is governed by Section 366 to 374 of the Companies Act, 2013, along with Companies Amendment, 2017, and Companies Incorporation Rules, 2014, includes the legal provisions outline the necessary steps for converting your firm into a private limited entity and filing of URC-1 (Application by a company for registration under section 366 (Conversion of firm into Company and LLP into Company)
Benefits of Converting a Partnership Firm to Private Limited Company

Limited Liability: Unlike a partnership, where partners have unlimited liability, shareholders in a private limited company have liability limited to their shareholding. This limits the personal financial risk for the owners.

Perpetual Succession: A private limited company continues to exist even after the death, retirement, or insolvency of its shareholders. This ensures the longevity and continuity of the business, which is not the case in a partnership firm.

Separate Legal Entity: A private limited company is a distinct legal entity separate from its shareholders. It can own property, incur debt, sue, and be sued in its own name, unlike a partnership firm where partners are directly liable for the firm's obligations.

Easier Access to Funds: Banks, venture capitalists, and angel investors prefer to invest in private limited companies due to their transparent legal structure and limited liability protection. Additionally, private limited companies can raise funds through the sale of shares.

Transferability of Shares: Ownership in a private limited company can easily be transferred through the sale of shares, making it more flexible for investors to exit the business compared to a partnership.

Tax Benefits: Private limited companies are entitled to several tax exemptions and deductions under the Income Tax Act, 1961, which are not available to partnership firms.

Credibility: A private limited company enjoys greater credibility in the market compared to a partnership firm. It is more likely to attract business partnerships, government tenders, and customers due to its compliance with the strict governance norms of the Companies Act.

No Capital Gains Tax: When a partnership firm converts into a private limited company, there is no capital gains tax on the transfer of property and other assets, provided certain conditions are met, such as no change in the partners' rights and liabilities.

Pre-requisites for Conversion
To convert your partnership firm into a private limited company, the following conditions must be met including process is regulated under Section 366 of the Companies Act, 2013, and the Companies (Incorporation) Rules, 2014, prerequisites for conversion include:
1. The partnership deed must be registered with the Registrar of Firms before conversion and must contain the provision for conversion
2. At least two shareholders and two directors are required to form a private limited company.
3. An agreement must be entered between partners for conversion
4. If the partnership firm has secured creditors, a NOC from them is required before proceeding with the conversion.
5. All the members of the firm should become shareholders of the company in the same proportion in that their capital accounts stood in the books of the firm on the conversion date.
6. Consent of all the members for conversion in a general meeting
7. DIN and DSC to be obtained by all Directors and members post conversion
8. The new company must have a unique name ending with “Private Limited,” which must be approved by the Registrar of Companies (ROC).
9. The firm must ensure that it meets the minimum capital contribution required for a private limited company.
10. The firm must have a registered office, which will be the official address of the new private limited company.
11. Once the conversion process is complete, the company must draft its MoA and AoA, which outline the company's objectives and internal management rules, respectively.
Required Documents for Conversion

Partnership Deed of Partnership Firm

PAN Card of Partnership Firm

Copy of Latest Income Tax return of Partnership Firm

Statement of Affairs of Partnership Firm

PAN Card of all the Partners

Address Proof of all the partners

Photograph of all the partners

Registered Office Proof

Mobile Number of every partner

Email Id of every partner

Consent of all the partners

Consent of all the Creditors

Digital Signature of all the partners

NOC from Regulatory Authorities, if applicable

Step-by-step guide on how to convert a partnership firm to private limited:
Step-1: Hold a meeting to obtain the consent:
The first step is to hold a meeting with all partners to discuss and obtain their consent for converting the partnership firm into a private limited company. A resolution must be passed, and the partners must authorize two or more individuals to carry out the conversion process on behalf of the firm.
Step-2: Apply for Name Approval by CRC 
The company name must be unique and in compliance with the Companies Act, 2013. The name should be applied for through the Reserve Unique Name (RUN) service on the MCA portal. The name must end with “Private Limited.”
Step-3: Publish Advertisement in Newspapers
Upon receiving name approval, the firm must publish an advertisement in Form URC-2 in two newspapers, one in English and one in the local vernacular language ( (English and Vernacular) per the clause (b) of Section 374 of the Act, under Part I chapter XXI) and advertisement is to inform the public about the conversion and allow any objections within 21 days.
Step-4: Prepare the necessary documents & File Form URC-1 
1. Conversion in e-form URC-1 within 30 days of the name approval along with the necessary documents with -MCA CRC.
2. Drafting of Memorandum of Association (MoA) and Articles of Association (AoA) – MoA document which outlines the objectives and powers of the company, as well as the rights and duties of the shareholders and AoA which outlines the rules and regulations that govern the internal management of the company.
3. Documents to be attached in e-form URC-1

Details of partners, identity and address proof

Particulars of members, identity and address proof

Particulars of first directors

Affidavit from first director under section 164(1) of Act.

Copy of partnership deed

Statement of assets and liabilities of firm certified by a Practicing Chartered Accountant not earlier than period of 30 days of filing the form URC-1

Income tax related documents

Consent of partners and creditors

Copy of newspaper advertisement (URC-2)

Step-5: Obtain a Digital Signature Certificate (DSC):
In order to file documents and forms online with MCA, Digital Signature Certificate (DSC) is to be obtained from any certifying authority by submitting the self-attested copy of identity proof.
Step-6: File SPICe+ form for incorporation: 
Once the necessary documents are prepared including URC-1, the SPICe+ form is filed online for the incorporation of the private limited company, applicant shall file the SPICe+ web form with the MCA to register the conversion of the Partnership firm to Private Limited Company.In respect of a new company an application for allotment of DIN shall be made only through SPICe e-form at the time of its incorporation.
Step-7: Obtain the certificate of incorporation:
Once the MCA has approved the forms, you will receive a certificate of incorporation, which serves as proof that the partnership firm has been converted into a private limited company.
Converting a partnership firm into a private limited company is a strategic decision for businesses looking to expand and secure greater legal protections. The process involves obtaining the consent of all partners, securing name approval, publishing notices, and filing various forms with the ROC. Although the process may seem complex, the benefits such as limited liability, perpetual succession, tax advantages, and enhanced credibility make it a worthwhile endeavor for any growing business. By following the step-by-step guide outlined above with the help of Compliance Calendar LLP, directors or partners can ensure a smooth transition to a private limited company and unlock new opportunities for growth and success.
Frequently Asked Questions (FAQs)
Q1. Is there a fee for stamp duty or capital gains tax on conversion?
Ans. No, there is no capital gains tax or stamp duty imposed on the conversion of a partnership firm into a private limited company, provided the rights and obligations of the partners remain unchanged, and no assets or liabilities are transferred.
Q2.  What is the role of DIR-2 in the conversion process?
Ans. DIR-2 is a form that contains the consent of individuals who are appointed as directors. It is mandatory for filing with the SPICe+ form during the incorporation process.
Q3. Is it mandatory to include "Private Limited" in the company name?
Ans. Yes, it is mandatory for the new company name to end with "Private Limited" as per the Companies Act, 2013, to reflect the company’s legal status.
Q4.  What are the minimum requirements to form a Private Limited Company?
Ans. A private limited company must have at least two shareholders, two directors, a registered office, and comply with the regulations of the Companies Act, 2013.
Q5. Why is a private limited company better than a partnership firm?
Ans. A private limited company offers limited liability protection, better access to funding, perpetual succession, and separate legal status, making it a more robust and scalable business structure compared to a partnership.
Q6.  What happens to the losses and depreciation of the partnership firm upon conversion?
A: The unabsorbed depreciation and accumulated losses of the partnership firm can be carried forward to the private limited company and utilized by the successor company for up to eight years.

When starting a business, many entrepreneurs opt for a partnership or sole proprietorship due to lower compliance requirements and minimal costs, and these structures offer flexibility and ease of operation in the early stages. However, as businesses grow, many look to transition into a more structured form of business, such as a Private Limited Company (Pvt. Ltd.), to take advantage of the numerous benefits, such as limited liability, easier access to funding, and perpetual succession, including conversion of a partnership firm into a private limited company is governed by the Companies Act, 2013, and is increasingly becoming a popular move for businesses aiming to scale and grow.

A partnership firm is a type of business structure in which two or more individuals come together to carry on a business called as partners. On the other hand, a private limited company is a type of business structure that is separate from its owners and has limited liability. A firm can convert into a private limited company in accordance with the provisions laid under Section 366 to 374 of Companies Act, 2013 and Companies Incorporation Rules, 2014 read with Companies Amendment, 2017 by filing URC-1, required to be filed pursuant to Section 366 of the Companies Act, 2013 and Rule 3(2) of the Companies (Authorised to Registered) Rules, 2014.

Converting a partnership firm to a private limited company can bring many benefits, such as limited liability protection for the owners, improved credibility and reputation, and easier access to funding and many more.

Learn here: Choosing the Right Legal Structure: Sole Proprietorship, Partnership, LLP, or Company

Legal Provisions for Conversion under Section 366 to 374

The conversion of a partnership firm into a private limited company is governed by Section 366 to 374 of the Companies Act, 2013, along with Companies Amendment, 2017, and Companies Incorporation Rules, 2014, includes the legal provisions outline the necessary steps for converting your firm into a private limited entity and filing of URC-1 (Application by a company for registration under section 366 (Conversion of firm into Company and LLP into Company)

Benefits of Converting a Partnership Firm to Private Limited Company

Limited Liability: Unlike a partnership, where partners have unlimited liability, shareholders in a private limited company have liability limited to their shareholding. This limits the personal financial risk for the owners.
Perpetual Succession: A private limited company continues to exist even after the death, retirement, or insolvency of its shareholders. This ensures the longevity and continuity of the business, which is not the case in a partnership firm.
Separate Legal Entity: A private limited company is a distinct legal entity separate from its shareholders. It can own property, incur debt, sue, and be sued in its own name, unlike a partnership firm where partners are directly liable for the firm's obligations.
Easier Access to Funds: Banks, venture capitalists, and angel investors prefer to invest in private limited companies due to their transparent legal structure and limited liability protection. Additionally, private limited companies can raise funds through the sale of shares.
Transferability of Shares: Ownership in a private limited company can easily be transferred through the sale of shares, making it more flexible for investors to exit the business compared to a partnership.
Tax Benefits: Private limited companies are entitled to several tax exemptions and deductions under the Income Tax Act, 1961, which are not available to partnership firms.
Credibility: A private limited company enjoys greater credibility in the market compared to a partnership firm. It is more likely to attract business partnerships, government tenders, and customers due to its compliance with the strict governance norms of the Companies Act.
No Capital Gains Tax: When a partnership firm converts into a private limited company, there is no capital gains tax on the transfer of property and other assets, provided certain conditions are met, such as no change in the partners' rights and liabilities.

Pre-requisites for Conversion

To convert your partnership firm into a private limited company, the following conditions must be met including process is regulated under Section 366 of the Companies Act, 2013, and the Companies (Incorporation) Rules, 2014, prerequisites for conversion include:

1. The partnership deed must be registered with the Registrar of Firms before conversion and must contain the provision for conversion

2. At least two shareholders and two directors are required to form a private limited company.

3. An agreement must be entered between partners for conversion

4. If the partnership firm has secured creditors, a NOC from them is required before proceeding with the conversion.

5. All the members of the firm should become shareholders of the company in the same proportion in that their capital accounts stood in the books of the firm on the conversion date.

6. Consent of all the members for conversion in a general meeting

7. DIN and DSC to be obtained by all Directors and members post conversion

8. The new company must have a unique name ending with “Private Limited,” which must be approved by the Registrar of Companies (ROC).

9. The firm must ensure that it meets the minimum capital contribution required for a private limited company.

10. The firm must have a registered office, which will be the official address of the new private limited company.

11. Once the conversion process is complete, the company must draft its MoA and AoA, which outline the company's objectives and internal management rules, respectively.

Required Documents for Conversion

Partnership Deed of Partnership Firm
PAN Card of Partnership Firm
Copy of Latest Income Tax return of Partnership Firm
Statement of Affairs of Partnership Firm
PAN Card of all the Partners
Address Proof of all the partners
Photograph of all the partners
Registered Office Proof
Mobile Number of every partner
Email Id of every partner
Consent of all the partners
Consent of all the Creditors
Digital Signature of all the partners
NOC from Regulatory Authorities, if applicable

Step-by-step guide on how to convert a partnership firm to private limited:

Step-1: Hold a meeting to obtain the consent:

The first step is to hold a meeting with all partners to discuss and obtain their consent for converting the partnership firm into a private limited company. A resolution must be passed, and the partners must authorize two or more individuals to carry out the conversion process on behalf of the firm.

Step-2: Apply for Name Approval by CRC

The company name must be unique and in compliance with the Companies Act, 2013. The name should be applied for through the Reserve Unique Name (RUN) service on the MCA portal. The name must end with “Private Limited.”

Step-3: Publish Advertisement in Newspapers

Upon receiving name approval, the firm must publish an advertisement in Form URC-2 in two newspapers, one in English and one in the local vernacular language ( (English and Vernacular) per the clause (b) of Section 374 of the Act, under Part I chapter XXI) and advertisement is to inform the public about the conversion and allow any objections within 21 days.

Step-4: Prepare the necessary documents & File Form URC-1

1. Conversion in e-form URC-1 within 30 days of the name approval along with the necessary documents with -MCA CRC.

2. Drafting of Memorandum of Association (MoA) and Articles of Association (AoA) – MoA document which outlines the objectives and powers of the company, as well as the rights and duties of the shareholders and AoA which outlines the rules and regulations that govern the internal management of the company.

3. Documents to be attached in e-form URC-1

Details of partners, identity and address proof
Particulars of members, identity and address proof
Particulars of first directors
Affidavit from first director under section 164(1) of Act.
Copy of partnership deed
Statement of assets and liabilities of firm certified by a Practicing Chartered Accountant not earlier than period of 30 days of filing the form URC-1
Income tax related documents
Consent of partners and creditors
Copy of newspaper advertisement (URC-2)

Step-5: Obtain a Digital Signature Certificate (DSC):

In order to file documents and forms online with MCA, Digital Signature Certificate (DSC) is to be obtained from any certifying authority by submitting the self-attested copy of identity proof.

Step-6: File SPICe+ form for incorporation:

Once the necessary documents are prepared including URC-1, the SPICe+ form is filed online for the incorporation of the private limited company, applicant shall file the SPICe+ web form with the MCA to register the conversion of the Partnership firm to Private Limited Company.In respect of a new company an application for allotment of DIN shall be made only through SPICe e-form at the time of its incorporation.

Step-7: Obtain the certificate of incorporation:

Once the MCA has approved the forms, you will receive a certificate of incorporation, which serves as proof that the partnership firm has been converted into a private limited company.

Converting a partnership firm into a private limited company is a strategic decision for businesses looking to expand and secure greater legal protections. The process involves obtaining the consent of all partners, securing name approval, publishing notices, and filing various forms with the ROC. Although the process may seem complex, the benefits such as limited liability, perpetual succession, tax advantages, and enhanced credibility make it a worthwhile endeavor for any growing business. By following the step-by-step guide outlined above with the help of Compliance Calendar LLP, directors or partners can ensure a smooth transition to a private limited company and unlock new opportunities for growth and success.

Frequently Asked Questions (FAQs)

Q1. Is there a fee for stamp duty or capital gains tax on conversion?

Ans. No, there is no capital gains tax or stamp duty imposed on the conversion of a partnership firm into a private limited company, provided the rights and obligations of the partners remain unchanged, and no assets or liabilities are transferred.

Q2. What is the role of DIR-2 in the conversion process?

Ans. DIR-2 is a form that contains the consent of individuals who are appointed as directors. It is mandatory for filing with the SPICe+ form during the incorporation process.

Q3. Is it mandatory to include "Private Limited" in the company name?

Ans. Yes, it is mandatory for the new company name to end with "Private Limited" as per the Companies Act, 2013, to reflect the company’s legal status.

Q4. What are the minimum requirements to form a Private Limited Company?

Ans. A private limited company must have at least two shareholders, two directors, a registered office, and comply with the regulations of the Companies Act, 2013.

Q5. Why is a private limited company better than a partnership firm?

Ans. A private limited company offers limited liability protection, better access to funding, perpetual succession, and separate legal status, making it a more robust and scalable business structure compared to a partnership.

Q6. What happens to the losses and depreciation of the partnership firm upon conversion?

A: The unabsorbed depreciation and accumulated losses of the partnership firm can be carried forward to the private limited company and utilized by the successor company for up to eight years.