Conversion of a partnership firm into a company is known as corporatization, which is the need of the hour. The entire world is gradually becoming a global market, while every world leader is trying to reduce any kind of trade barrier which might be existing. A small unincorporated organization which only has a few partners will not be able to grow on a large scale until and unless it is incorporates itself.
Conversion of a partnership firm into a company- The benefits and the Process
Corporatization or Conversion of a partnership firm into a company always has its own advantages like limited liability, perpetual succession, easy access to funds, transferability of shares and lot more. Let us consider the key benefits of the process. Firstly, there is no automatic transfer i.e. all the assets and the liabilities of the firm, just before the conversion, becomes the assets and liabilities of the company. There is no stamp duty. The entire movable and the immovable properties of the firm get vested into the company automatically.
Benefits of converting Partnership firm as a Corporate Entity
Corporatization always has its own advantages like limited liability, perpetual succession, easy access to funds, transferability of shares and lot more.
Let us consider the key benefits of the process of converting Partnership Firm into a Corporate Entity.
- Firstly, there is no automatic transfer i.e. all the assets and the liabilities of the firm, just before the conversion, become the assets and liabilities of the company.
- There is no stamp duty on such transfer from Firm to Limited Company. The entire movable and the immovable properties of the firm get vested into the company automatically. There is no requirement of an instrument of transfer to be executed, so there is no stamp duty required to be paid.
- No capital gain tax is also charged on transfer of property from partnership firm to company. The goodwill of the partnership firm and its brand value is always kept intact and one can continue enjoying the previous success story with a better legal recognition.
- The accumulated loss and un-absorbed depreciation of partnership firm are considered to be loss/depreciation of the successor company for the previous year in which the conversion was done.
- This loss can be carried forward for the next eight years by the successor company.
- The partnership firm and the private limited company are entirely two different legal entities. They also have different legal liabilities.
When a firm is converted into a private limited company, some of the following capital benefits are derived from them:
- They have limited liability of the shareholders.
- The capital base is widened.
- There is easy expansion and diversification.
- They can be easily funded by the banks and the financial institutions.
- One can change shareholding and management without disturbing the flow of the business.
- Immovable property can be transferred by just transferring the shares as a result of which stamp duty and other complications can be avoided.
- Transfer of interest can be easily done as one can just invest in the form of shares.
Modes of conversionof Partnership firm into a Limited Company
- There are various ways by which the conversion can be done. Firstly, the company can be made a partner of the firm and then dissolution can be done by the retirement of all other partners except the company.
- Secondly, the firm can be out rightly sold as a going concern.
- Thirdly, the assets of the partnership firm can be sold into the company at the specified price for each asset. The firm can be converted into a company under the provisions of Part IX of the Companies Act, 1956.
Key conditions for the conversion of Partnership firm into a Limited Company
The key conditions for the conversion are:
- All partners should become the shareholders in the same proportion in which their capital accounts stand in the books.
- The partners will receive considerations by way of allotment of shares in the company.
- The partners shareholding in the company in aggregate should be 50% or more of its total voting power.
- Partners will not change their shareholding pattern for a period of 5 years from date of such conversion
Related Read- Transfer of Assets from Partnership firm to Limited Company -not Subject to Capital Gains Tax