procedure to convert a partnership firm to a company

[pramod sabot]

Dear Members,

Pls provide me the procedures/steps to be undertaken to convert an unregistered , 6 member partnership firm, existing for last 2 years, in to a private company.

Regards,

Pramod Sabot

Practicing Company Secretary

[CS Shainshad Aduvanni]

Dear Mr.Pramod,

CONVERSION OF A PARTNERSHIP FIRM INTO A LIMITED COMPANY

The company may acquire the assets and liabilities of any running business, which may belong to an individual, or to a sole proprietary concern, or to a partnership firm, or for that matter, to a limited company, in accordance with the terms and conditions of an agreement that may be entered into by and between the company and the seller(s) of the existing business.

Such an agreement may be made, before the incorporation of the company, by the promoters of the company with the seller of the business, which, on incorporation, may be ratified by the company through its authorised agent or representative. However, the promoters are duty bound to ensure that such pre- incorporation agreements are fair and in the interest of the company, and if the promoters make any profit or take any undue advantage from such agreements, they are liable to compensate the company to the extent the company suffers any loss.

If a particular partnership firm has the required number of persons, who may form a limited company as per the requirements of the Companies Act, they may become subscribers to the memorandum and also the promoters of the company.

The assets and liabilities of the firm can be taken over by the company on incorporation on the basis of their valuation done by experts and the promoters or the erstwhile partners of the firm are allotted shares in the company according to the value of their shares in the firm.

On incorporation of the company, the assets and liabilities of the partnership firm may be taken over by the company, as per terms and conditions of the agreement executed by and between the promoters of the company, which is ratified by the company on its incorporation or by and between the company after its incorporation and the partners of the firm, in their capacity as partners of the firm and not in their capacity as subscribers to the memorandum of association of the company or as members of the company.

After all the assets and liabilities of the partnership firm have been taken over by the company and the partners have been paid by the company either in cash or in the form of shares in the company, the existence of the firm comes to an end.

The company is a separate legal entity, which is quite distinct and independent of its members. Members of a company may come and go but the company continues to exist till it is wound up or is declared defunct by the Registrar of Companies, according to due process of law. The mere fact that the assets and liabilities of a partnership firm have been taken over by a company and its partners have either been paid in cash or have been allotted shares in the company does not by itself mean that the company retains its character of partnership. [Official Liquidator v.Ram Swarup (1997) 26CLA 90 (All)].

If and when the partners of a partnership firm propose to form a private limited company or a public limited company, they have to ensure that their number is sufficient to form such a company as per provisions of Section 12 of the Companies Act, 1956. After having mustered the required number, they may proceed to form a limited company as per procedure laid down in Section 12 of the Companies Act, 1956.

The persons, who take steps for the formation of a company, are known as promoters of the company. They subscribe to the memorandum of association of the company and on incorporation, their names are entered in the register of members of the company as they shall be deemed to have agreed to become members of the company as per provisions of Section 41(1) of the Companies Act, 1956.

After having decided to form a company to take over the business of their partnership firm, the partners should take the following procedural steps for the formation and registration of the company:

PROCEDURE FOR CONVERSION OF A SOLE PROPRIETOR CONCERN OR  PARTNERSHIP FIRM INTO A LIMITED COMPANY

(A) An existing business (that is sole proprietorship or partnership) can be converted into a company in any of the following ways:

(a) by outright sale;

(b) by making partners of the firm the only shareholders of the newly     incorporated company;

(c) a company becoming a partner of the firm which will be dissolved thereafter;

(d) by amalgamation under Sections 391 to 394 of the Companies Act, 1956;

(e) by registration of existing joint stock companies under the Companies Act     (Section 567).

(B) In cases of items (a), (b) and (c), following procedure should be followed:

(1) The existing business should be converted into a partnership firm and the newly incorporated company be admitted as its partner.

(2) At the time of forming the new company, it should be ensured that the proprietor of the existing business and any other individual are the subscribers to that company’s memorandum of association, thereupon that other individual must also be admitted as a partner of the converted firm.

(3) Distribution of all assets and liabilities of the firm to one of the partners who will pay the difference to other partners must be provided in the partnership deed.

(4) It must be ensured that the memorandum of association of the newly formed    company includes a clause permitting the company to acquire the undertakings of an existing business.

(5) It must also be ensured that the articles of association of the newly formed company gives power to its directors to enter into agreement facilitating the acquisition of business.

(6) An agreement with the directors of the newly formed company for facilitating the acquisition of the partnership firm must be entered into.

(7) A copy of the agreement must be filed with the Registrar within 30 days of  entering into the agreement (Section 192), after paying the requisite fee as prescribed under Schedule X to the Companies Act, 1956.

(8) Thereupon a Board resolution for allotment of shares to the other partners of the firm as consideration of such acquisition should be passed.

(9) A return of allotment in e-form 2 along with the attachments should be filed with the Registrar within 30 days of making the allotment (Section 75).

(10) If the partnership firm being a joint stock company within the meaning of  Section 566 wants to be registered as a company, then all the following documents should be delivered to the Registrar of Companies:        (i) an application in electronic form No. 37 of the Companies (Central Government’s) General Rules and Forms, 1956;       (ii) a list showing the names, addresses and occupations of all persons who on a day not more than 6 clear days before the day of registration were members of the company and the shares or stock held by each one of them respectively, distinguishing each share by its number in case the shares are numbered;      (iii) a copy of the partnership deed;      (iv) a statement containing the following particulars:           (a) the nominal share capital of the company and the number of shares  into which it is divided or the amount of stock of which it consists; (b) the number of shares taken and the amount paid on each share; (c) the name of the company and the addition of the word ‘Limited’ or  ‘Private Limited’ as its last words; (d) a copy of the resolution declaring the amount of guarantee if you  want to register it as a guarantee company (Section 567).

Regards

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Shainshad Aduvanni
Company Secretary
Coimbatore

09841414439

[BINDU MADHAVA]

Must ensure 7(seven) partners before conversion
Please refer section 565(1)(a)

regards
Bindu Madhava K G

On Apr 4, 2013 5:46 PM, "CS Shainshad Aduvanni" <csupt...@gmail.com> wrote:

[ULHAS BHAT]

Pramod,
Be very careful about the taxation and stamp duty aspect before you go for conversion. Thorough preparation and homework is a must, and also it is better to discuss with the ROC once after you've kept the plan ready and just before you finalise the draft. The partnership deed is the most important aspect of the conversion. Regard should be had to provisions of Section 47 of the Income Tax Act and section 565 of the Companies Act, 1956. The partnership deed must be similar in structure to a Memorandum of Association with share of partners divided into fixed shares. Revaluation of assets will be required. It is better to chalk out the plan with a good chartered accountant, preferably the firm's auditor. If he's not that competent, you could advise the firm to go in for a good knowledgeable chartered accountant.
If drafting is wrong, then your Client could end up paying huge capital gains tax.
Regards,
Ulhas

[ULHAS BHAT]

Another thing-as others said here, 7 partners are a must. For this you'll have to make a reconstituted partnership deed including one other partner. Never go in for back-dated drafting. It is unhealthy and not advisable.
ROCs are reluctant to allow conversion of firm to company i.e. part IX registration as these are done to avoid taxes and stamp duty.
Another way to do it is to form a completely new company and follow provisions of Section 47 (xiii) of Income Tax Act by taking over the existing partnership firm. However, in this case property registration and stamp duty payment is a must.

Regards,
Ulhas

On Thursday, April 4, 2013 5:30:56 PM UTC+5:30, pramod sabot wrote: