After the introduction of section 115BAA and 115BAB (Only for manufacturing) of the Income-tax Act, 1961 which allows Companies to pay tax at the rate of 22% and 15% respectively as against 30% for partnership Firms and LLP’s, business houses are looking for conversion of their firms into Companies. This can be initiated in 2 ways as enumerated below:
The 2 nd option of conversion of Partnership Firm into a corporate entity might be practical for the existing entities to switch over from one mode of business to another. The process of conversion is a step-by-step procedure, which is given below. The steps explained below are technical process, if handled with expert knowledge may be time and cost saving, as well.
Comparison of Tax in Firm and Company:
| SI No. | Partnership Firm | Effective Tax Rate Turnover up to 1 crore | Effective Tax Rate Turnover above 1 crore | Company | Effective Tax Rate |
| 1 | 30% for Non-manufacturing | 31.2% | 34.94% | 22% | 25.17% |
| 2 | 30% for manufacturing | 31.2% | 34.94% | 15% | 17.16% |
Step by step procedure for conversion Partnership firm into Company
| STAGES | REQUIREMENTS | REMARKS |
| Convene a meeting for Conversion of Partnership Firm into Private Limited Company | · To take assent of majority of its partners, not less than three-fourth of the partners should be present. |
· To authorize two or more partners to take all steps necessary and to execute all papers, deeds, documents etc.
· Also, a list of persons proposed as the first directors of the company.
· An affidavit from each of the persons proposed as the first directors, that he is not disqualified to be a director under section 164(1). Further that all the documents filed with the Registrar for registration of the company contain correct, complete, and true information to the best of his knowledge and belief.
· Partnership deed, along with the revised deeds, in case the firm is registered.
· A statement of assets and liabilities of the partnership firm as on the date of conversion duly certified by a chartered accountant.
· Further, a copy of the latest income tax return of the Partnership Firm.
· The nominal share capital of the company and the division of shares.
· The number of shares taken, and the amount paid on each share.
· written consent or No Objection Certificate from all the secured creditors of the applicant.
· written consent or No Objection Certificate from all the secured creditors of the applicant.
· Seeking objections if any within 21 clear days from the date of publication of the notice.
· The said advertisement shall be in Form No. URC-2.
· INC-9 Declaration by subscriber/first director.
· KYC document of Directors and shareholders of the proposed converted company.
· Utility Bill (not older than two months).
· Lease deed/ title deed for the regd. office address of the company.
FAQs
No. Certain transactions like transfer of assets by a sole proprietorship or a firm to a company on conversion are not regarded as transfer under the provisions of section 47(xiv) and section 47(xiii) of Income-tax Act, 1961. Therefore, No capital gain tax applicable on conversion of Partnership firm to Private Limited.
No. stamp duty shall not be charged on transfer of property from Partnership firm to a Private Limited Company.
No. With effect from July 5, 2018 Seven members/Partners are not mandatory. Only two members/Partners are mandatory to conversion.
A company with less than seven members shall register as a private company.
There is no procedure specified for conversion of sole proprietorship to company in companies Act,2013.
Therefore, incorporate a Private Company and then take over the business of sole proprietorship by executing the takeover agreement between a proprietor and the Company. For incorporating private company there should be at least two members out of which one should be the sole proprietor holding at least 51 percent of total share of the Company.
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