Conversion of partnership firm to pvt ltd co.

This query is : Resolved

Querist : Anonymous

Querist : Anonymous (Querist)

30 May 2012 Hi Experts

What is the procedure to convert Partnership firm to a Pvt Ltd Co. and What are tax implications on the same ?

Ca Anand Dubey

Ca Anand Dubey (Expert)
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30 May 2012 You have to register a new company then take over the business and/or assets of partnership firm. Tax will be applicable on partnership if there is gain due to the transaction

Querist : Anonymous

Querist : Anonymous (Querist)

30 May 2012 Pls provide me step by step procedure for conversion.

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Asha Kanta Sharma

Asha Kanta Sharma

(Expert)
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20 July 2024 Converting a partnership firm into a Private Limited Company (Pvt Ltd Co.) involves several procedural steps and considerations, including tax implications. Here’s a detailed outline of the procedure and tax implications for such a conversion:

### Procedure to Convert Partnership Firm to Pvt Ltd Company:

1. **Approval and Resolution:**
- Obtain approval from all partners through a partnership resolution to convert the firm into a company.
- Decide on the terms of conversion, including valuation of assets, liabilities, and issuance of shares to partners.

2. **Incorporation of Company:**
- Incorporate a new Private Limited Company under the provisions of the Companies Act, 2013.
- Select a unique name for the company and ensure availability through name reservation.
- Prepare Memorandum of Association (MOA) and Articles of Association (AOA) of the company.

3. **Application for Conversion:**
- File Form URC-1 (Application by a firm for registration under section 366 of the Companies Act, 2013) with the Registrar of Companies (ROC).
- Submit required documents including partnership deed, consent of partners, MOA, AOA, etc., along with prescribed fees.

4. **Issue of Shares:**
- All partners of the partnership firm become shareholders of the new Pvt Ltd Company in proportion to their partnership interests.
- Issue shares to partners as per agreed terms and conditions.

5. **Registration and Compliance:**
- Obtain Certificate of Incorporation from ROC once the application is approved.
- Update statutory records and comply with ongoing regulatory requirements applicable to Pvt Ltd Companies.

### Tax Implications:

1. **Capital Gains Tax (CGT):**
- **Section 47(xiii) Exemption:** Capital gains arising from transfer of capital assets of the partnership firm to the new Pvt Ltd Company, in consideration of allotment of shares, are exempt from capital gains tax under Section 47(xiii) of the Income Tax Act, 1961.
- Ensure compliance with conditions under Section 47(xiii), such as continuation of business and ownership of shares by partners.

2. **Income Tax:**
- The new Pvt Ltd Company will be liable to pay income tax on its profits as per the applicable tax rates.
- Partners will need to comply with income tax regulations related to capital gains, if applicable, and dividends received from the Pvt Ltd Company.

3. **Other Taxes:**
- Ensure compliance with GST/VAT, if applicable, by updating registrations and complying with ongoing tax filings.

### Practical Considerations:

- **Assets and Liabilities Transfer:** Proper valuation and transfer of assets and liabilities from the partnership firm to the Pvt Ltd Company should be documented to avoid future disputes.
- **Legal Documentation:** Ensure all agreements, resolutions, and filings are prepared and submitted correctly to ROC and tax authorities.
- **Professional Advice:** Consult with a chartered accountant or legal advisor to navigate through the complexities of conversion, comply with regulatory requirements, and manage tax implications effectively.

By following these procedures and considerations, the conversion of a partnership firm into a Pvt Ltd Company can be executed smoothly while adhering to legal and tax requirements. Each jurisdiction may have specific rules and procedures, so professional guidance is essential to ensure compliance with local laws.