Conversion of Partnership Firm Into a Company

On the 20th of September 2019, Taxation (Amendment) Ordinance 2019  has been introduced by the Government of India. There are many tax beneficiary amendments which have been introducing through this ordinance.

Conversion of Partnership Firm into a company

Like the rate for corporate tax has been reduced for domestic companies to @ 22% (Section 115BAA) and the new tax rate was introduced for manufacturing companies of 15% Section 115BAB. Also, the MAT rate has been reduced from 18.5% to 15%.

Due to these amendments, For availing the benefit of the new tax rate, many firms are converting into the company.

Exemption from Capital Gain:

As per section 47(xiii) of the Income-tax Act, 1961 read with The Gujarat High Court (HC) stated that conversion of a firm into a company will not be considered as a transfer and would not be subject to capital gains tax. (refer case law of Gujarat HC or delete reference of Gujarat high court)

  • Following provisions of Governing Laws, Rules, Regulation in respect of Conversion of Partnership firm Into Company
  1. Section 366 of Companies Act, 2013.
  2. Companies (Authorized to Register) Rules, 2014.
  3. Section 47(XIII) of Income Tax Act, 1961.
  4. State’s Stamp Notification.

Company Registration

  • What are the Prerequisite Formalities required for Conversion of Partnership firm Into Company
  1. Firm Registration Certificate.
  2. Amended Partnership deed by Adding the clause of conversion.
  3. No Objection Certificate or written consent from all the secured creditors.
  4. Written consent from the majority of Partners.
  5. 21 clear days of advertisement in Form No. URC. 2 which shall be published in an official gazette in English and in any local language.
  6. Filling of Form URC-2 with ROF.
  7. Audited financial statements of Accounts prepared for a period not later than 15 days preceding the date of seeking registration.
  8. The latest copy of income tax return.
  9. There should be no revaluation has been done of the assets of the Partnership firm in the preceding 3 financial years.
  10. an affidavit from every person proposed to become a director that he is not disqualified to become director u/s 164
  • What are the forms required to be filled for Conversion of the firm into the Company
  1. Form URC-1
  2. Spice-32
  3. Spice-33
  4. Spice-34
  5. e.Form-AGILE
  • Explain the Process for Conversion of Partnership firm Into Company
    The process for the conversion has been bifurcated into the steps which are as follows:

First, Step:

  • Take assent of the majority of partners by holding a meeting of the partners to authorize one or more partners to take all necessary steps.
  • As discussed above, No Objection Certificate or written consent from all the secured creditors required.
  • Partnership firms will have to apply for the availability of the name in RUN.

Second Step:

In this step, we will discuss the documents required to be attached to the forms as specified above:

Form URC-1

  • List of names, addresses, and occupations of all partners with details of capital contribution.
  • List of first directors along with residential addresses, passport number, if any, with an expiry date, and their interests in the entity.
  • Form DIR-2 i.e. consent to act as Director 
  • Partnership Deed, Firm Registration Certificate and Supplementary Deed.
  • No Objection Certificate or written consent from all the secured creditors.
  • Written consent of the majority of Partners.
  • Take an undertaking that the proposed directors shall comply with the requirements of the Indian Stamp Act, 1899.
  • Certificate from a CA/CS/CWA certifying that all the provisions of Stamp Act 1899has been complied with.
  • NOC from the concerned Registrar of Firms.
  • For the dissolution of the firm, Affidavit from all the partners.
  • List of pending proceedings, if any, by or against the partnership firm.

Partnership firm

Form Spice-32

  • Declaration by a first subscriber(s) and director(s) in form INC-9
  • DIR-2 declaration from first Directors along with Copy of residential address and Proof of Identity.
  • Rent agreement/NOC from the owner of the property.
  • Address Proof as the address of the Office.
  • Copy of the electricity bills

Form Spice-33

  • Filing of Memorandum of Association of the Company

Form Spice-34

  • Copy of Article of Association of the Company

Form-AGILE

  • This form is used for the registration of GSTIN, EPFO, and ESIC (if required)

3rd Step

  1. Intimation to Registrar of firms
  2. Acknowledgment of registration of the firm within 15 days from the date of registration.
  • What will be the Tax Benefit for the Conversion of Partnership firm Into Company
As per Section 115BAB, the rate of Corporate tax for new manufacturing companies (If Total income is exceeding Rs. 1 Crore) will be as follows:
Business Status Partnership Firm Company Difference
Tax Rate 30% 15% 15%
Surcharge 12% 10% 2%
Health and Education Cess 4% 4% 0%
Effective Tax rate 34.94% 17.17% 17.78%
For domestic companies not carrying Manu. Activities (If Total income is exceeding Rs. 1 Crore) the tax rates as per Section 115BAA shall be:
Business Status Partnership Firm Company Difference
Tax Rate 30% 22% 8%
Surcharge 12% 10% 2%
Health and Education Cess 4% 4% 0%
Effective Tax rate 34.94% 25.17% 9.77%
  • Whether it is possible under the Companies Act, 2013 of the said merger of Partnership Firms?

As per M/s. Kediya Ceramics (NCLT Ahemdabad) CA(CAA) No. 95/NCLT/AHM/2017, a partnership firm can be converted into the company under a scheme of amalgamation under section 366 of the Companies Act, 2013.

Leave a Comment