This article has been written by M. Rakshita, pursuing a Diploma in Companies Act, Corporate Governance and SEBI Regulations from LawSikho.
“Men may come and men may go but the company goes on forever.” It has always been more advantageous to incorporate a company over a partnership firm. The members of the company enjoy the advantage of limited liability and perpetual succession. Section 366 of the Companies Act, 2013 deals with the entities capable of being registered under the Act. According to this section a co-operative society, an LLP, partnership firm, society or any other form of business entity formed under any other shall be converted into a company.
Meaning and Characteristics
Section 4 of Indian Partnership Act of 1932 defines partnership as “the relation between a person who has agreed to share profits of a business carried on by all or any of them acting for all.” Owners of the partnership business are individually called “partners” and can collectively be called a “firm”.
Section 2(20) of the Companies Act, 2013 defines “company” means a company incorporated under this Act or under any previous company law.
The important characteristics of a Company are:
- A company incorporated under the Companies Act is a Separate Legal Entity which means the company has legal capacity of an individual, including the power to sue and be sued in its own name. The House of Lord in Saloman v. Saloman affirmed the Doctrine of separate Legal Entity in which a company is a different ‘artificial’ person.
- The Company being an Artificial person established by law does not affect by the changes in its shareholders i.e it is said to have Perpetual succession. Even the death or insolvency of a member or all the members does not affect the corporate existence of the Company.
- The firm is an Artificial person and therefore, cannot sign in its own name by itself. This creates the need for a Common seal that can be used for representing the Company and the decisions made by it.
- Limited Liability states that the Members including the shareholders are not personally liable for any of their company’s debt.
- An important advantage of incorporating a Public company is transferability of Shares at any time. The shareholders of a Public company can easily transfer their shares as per the rules and guidelines in the Articles of Association and the provisions of Companies Act, 2013.
Difference between partnership firm and a company
Draft of Documents
Any Partnership is governed by Partnership deed whereas, the Companies are governed by Articles and Memorandum of Association which are important documents submitted to the Registrar of Companies at the time of incorporation of Company.
Registration and Representation
It is not compulsory to register a partnership firm as per the Partnership Act, 1932. However, a company cannot be incorporated if it is not registered under the Companies Act, 2013. A partnership firm is represented by its partners whereas a company is represented by Promoters before its registration and by its Board of Directors after the registration has separate legal entity and is identified as a legal person.
The liability of the partners of a partnership firm is Unlimited which means the personal assets of the partner shall be utilised to pay the debts of the firm whereas, because the company is identified as a separate legal person the representatives of the company cannot be held personally liable for the debts of the company. However, in certain circumstances the members of the company and the company are held as one and the same. This concept is known as lifting of Corporate Veil.
In a Partnership Firm, the partners enter into contracts on behalf of the firm because the company is a separate person it can enter into a contract in its own name whereas, the a company after incorporation is an ‘artificial legal person’ it can enter into contracts in its own name.
Transferability of Ownership
Section 56 of the Companies Act, 2013 allows transfer of shares. A shareholder can easily transfer its shares to any person capable of entering into contracts whereas, in a partnership firm a partner shall not transfer his partnership in the firm to any other person. If a partner is admitted or if there is any change with the partners the earlier partnership has to be dissolved and a new partnership Agreement has to be formed.
Requirements for Conversion of a Partnership firm into a Company
- The minimum number of members required to incorporate a company one in case of a one person company, two in case of a private company and seven in case of a public company.
- The name of the Company, with addition of the word “Limited” or “Private Limited” shall be added at the end of the approved name.
- The partners of the firm if want to become the directors of the company shall obtain a DIN for the same.
- The members of the company being incorporated shall draft the Memorandum and Articles of Association after the approval of e-form URC-1.
- List of Documents required for the process of conversion according to Rule 3(2) of The Companies (Authorised to register) Rules, 2014 are as follows:
The firms applying for conversion are required to file e-form URC-1 along with the documents mentioned below:
- A list of the names, addresses and occupations of all the partners with details of their shareholding and the consideration of such shares allotted in case the company to be registered is limited by shares. In case, the company is limited by guarantee or is an unlimited company, who on a day, not being more than six clear days before the day of seeking registration, were partners of the firm, with the proof of membership.
- A list of persons proposed to be the first directors of the Company and also their Director Identification Number (DIN), passport Number, residential addresses, and their interests in other Companies and body corporates and their consent to be the directors shall be submitted to the Registrar of Companies. This shall be duly verified by any two or more proposed directors. All the Subscribers should have Digital Signature.
- In case of a firm, the partnership deed (including the latest deed), bye-laws and other documents regulating the firm. In the case of a registered firm, the Certificate of Registration issued by the Registrar of Firms.
- No objection Declaration or written consent from creditors of the firm, if any.
- Written consent from the majority of the partners (can also be given by proxy) at the general meeting held for approval of partners for such conversion.
- A copy of the latest income tax returns of the firm.
- An Undertaking that the Directors comply with the requirements of the Indian Stamp Act, 1899.
- A statement of assets and liabilities of the partnership firm duly certified by a chartered accountant.
Procedure for Conversion of a Partnership firm into a Company
- Holding a meeting for Conversion of a partnership into a Company – The assent of the partners is mandatory to convert a partnership into a company. This can be done by entering into a contract in writing to this effect to which the partners agree for conversion. The partners shall also have to execute a settlement deed. In this meeting, two or more partners are authorized to take necessary steps that are required to complete the process of conversion of the firm into a Company.
- Consent from the Secured Creditors – Written consent or no objection certificate is to be obtained from the secured creditors of the firm.
- Apply for the approval of name – An application needs to be filed with the Register of Companies (RoC) to obtain the name in Reserve Unique Name (RUN) to obtain the name proposed after conversion. This application is to be filed with attachments stating that the partnership firm is proposed to be converted into a company. After obtaining the approval of the name, the firm shall file the documents required as mentioned above with the Registrar of Companies within 30 days from the approval of name
- Affidavit – File an affidavit, duly notarized, from all the partners to provide that in the event of registration, necessary documents or papers shall be submitted to the authority with which the firm was earlier registered, for its dissolution as partnership firm consequent to its conversion into private limited company.
- Filing the forms with ROC – The firm applying for conversion shall file the list of documents mentioned above with the Registrar of Companies (RoC). Company required filing e-form INC-32/ INC-33/ INC-34 along with URC-1 as linked form with all the attachment as required in normal Incorporation of Company. Form INC- 32 for Reservation of name and Application and allotment of DIN.
After filing the documents the authorized partners shall draft the Memorandum of Association in the form INC-33 and Articles of Association (INC-34).
INC-9 Affidavit / declaration by first subscribers and directors on duly authorized Stamp Papers.
Declaration from first Directors along with Copy of Proof of Identity and residential address (DIR-2)
Once all the above mentioned forms are filed with the Registrar of Companies, a Certificate of Incorporation (CIN) is issued. This certificate shall be the conclusive evidence of the company’s existence as an artificial legal person.
Is it mandatory to change the name of the firm while converting it into a company?
Yes, as per the Companies Act, 2013 the words Limited or Private limited has to be added at the end of the name of the company depending on its nature.
In how many days the documents have to be filed with the Registrar of Companies?
The documents have to be filed within 30 days from the date of approval of the name of the firm.
Whether a Certificate of Registration issued by the Registrar of firms is mandatory?
The Certificate of Registration is to be filed if the partnership firm is registered, in other cases it is not required.
Is there a need to file a separate form for PAN and TAN?
There is no need to file a separate form, the details required for generating PAN and TAN are included in e-form INC-32.
Can SPICe- forms INC 33 and INC 34 be uploaded separately?
SPICe eMOA and eAOA have to be uploaded as ‘linked forms’ to SPICe (INC-32).
What is the maximum upload size od SPICe forms?
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