INTRODUCTION:

Conversion of a Partnership Firm into a Private Limited Company is a good option

for anyone who wishes to expand small and medium scale enterprises to a large
scale one, or for infusion of equity capital.
With the advent of Company’s Amendment Act 2017, the criteria of requiring a
minimum seven members for any entity to be converted into a Private Limited
Company has been done with. Under the Amended Section 366 of the Companies
Act, 2013 any entity be it a LLP, Partnership Firm, Co-operative Society or any
other Business Entity formed under any other law, with minimum two members
can be registered as a Private Limited Company. Such conversion to take place is
to be satisfied with other requirements such as securing approval from all partners
and secured creditors for such conversion, a notice in newspaper to be issued in
one English and one Vernacular language seeking objections and finally followed
by the incorporation process of Private Limited Company.
The alternate option available to the partners is to set up a separate Private Limited
Company and then get the entire Business of Partnership Firm transferred to the
company through a written Agreement under which the above, mentioned
requirements such as requirement for having minimum two partners, newspaper
advertisement, etc. Are not required to be satisfied but may attract Stamp Duty on
transfer of property through takeover agreement and may vary in different states.
All the Assets and Liabilities of the Partnership Firm immediately before the
conversion become the Assets and Liabilities of the Company.
No Capital Gains Tax shall be charged on transfer of property from Partnership
Firm to Company.There has to beminimum two or more partners in the existing
Partnership Firm for converting the Partnership Firm into a Private Limited
Company.The Goodwill of the Partnership Firm and its Brand Value is kept intact
and continues to enjoy the previous success story with a better Legal Recognition.
The accumulated loss and unabsorbed depreciation of Partnership Firm is deemed
to be loss/ depreciation of the successor company for the previous year in which
conversion was carried over. Thus, such loss can be carried for further eight years
in the hands of the successor company.
All Movable and Immovable Properties of the Partnership Firm automatically vest
in the Company. No instrument of transfer is required to be executed and hence no
Stamp Duty is required to be paid.
All Partners of the Partnership Firm shall become Shareholders of the Company in
the same proportion in which their Capital Accounts stood in the books of the Firm
on the date of the conversion. The Partners receive Consideration only by way of
allotment of Shares in Company and the Partners’ Shareholding in the Company in
aggregate is 50% or more of its total Voting Power.

OBJECTIVE:
As we already know, a Partnership Firm has various Limitations and the scope of
expanding is very less as compared to a Private Limited Company. Many
Partnership Firms nowadays convert into Private Limited Companies for the
various benefits that it offers, such as:
 Limited Liability,
 Transferability of Shares,
 Easy Access to Funds,
 Perpetual Succession, etc.

REASONS:
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. There can be
various reasons for the conversion such as expansion, to gain more profits, to avoid
industrial sickness because of being a single partner or a company may be having
an increase in its expenses and many more. A small unincorporated organization
which has only a few partners will not be able to grow on a large scale unless and
until it gets itself incorporated. Having limited number of partners,it will not be
able to grow and expand the firm. So eventually the partnership firm will have to
get itself converted to a company form of organization. Wherein there are a
number of partners known as shareholders and they can generate funds from the
general public. It helps to reduce personal risk. The major reason is that the
company has the status of separate legal entity and which a partnership firm
doesn’t. Company form is of structure is more transparent than other business
structures.

ESSENTIALS:
 Minimum 2 Directors and Shareholders.
 Partnership Deed must be Registered with ROC.
 No Objection Certificate from the Secured Creditors of the Partnership Firm.
 Unique Name as per the Rules of Companies Act, 2013.
 Minimum Capital Contribution.
 Registered Office.
 Preparing the MOA AOA.

ADVANTAGES:
Benefits of the process of converting Partnership Firm into a Company:
 Automatic Transfer:
 All the assets and the liabilities of the firm, just before the conversion,
become the assets and liabilities of the company.
 No Stamp Duty:
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:
No Capital Gains tax shall be charged on transfer of property from
Partnership firm to Company.
 Continuation of Brand Value:
The goodwill of the Partnership firm and its brand value is kept intact and
continues to enjoy the previous success story with a better legal recognition.
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.

DISADVANTAGES:
 A partnership is an agreement between two or more persons who come
together to carry out a business and share profit & losses mutually. A
 company is an incorporated association, also called an artificial person
having a separate identity, common seal and perpetual succession.
 The registration of the partnership firm is not compulsory whereas to form a
company; it needs to be registered.
 For the creation of a partnership, there must be at least two partners. For the
formation of a company, there must be at least two members in case of
private companies and 7 in regard to public companies.
 The limit for the maximum number of partners in a partnership firm is 100.
On the other hand, the maximum number of partners in case of a public
company is unlimited and in the case of a private company that limit is 200.
 The next major difference between them is, there is no minimum capital
requirement for starting a partnership firm. Conversely, the minimum capital
requirement for a public company is 5 lakhs and for a private company, it is
1 lakh.
 In the event of dissolution of the partnership firm, there are no legal
formalities. In opposition to this, a company has many legal formalities for
winding up.
 A partnership firm can be dissolved by any one of the partners. In contrast to
this, the company cannot be wound up, by any one of the members.
 A partnership firm is not bound to use the word limited or private limited at
the end of its name while a company has to add the word ‘limited’ if it is a
public company and ‘private limited’ if it is a private company.
 The liability of the partners is unlimited whereas the liability of the company
is limited to the extent of shares held by every member or guarantee given
by them.
  As a company is an artificial person so that it can enter into contracts in its
own name, the members are not held liable for the acts of the company. But
in the case of a partnership firm, a partner can enter into a contract in their
own name with the mutual consent of the other partners, and they can also
be sued for the acts done by the firm.

MODES & CONDITIONS:

After understanding the advantages and disadvantages of conversion we came
across modes and conditions of conversion. Various ways for conversion of a
partnership firm into a company were mentioned. It stated that either the company
should be made a partner of the firm and then the firm should be dissolved by the
retirement of all other partners or the firm can be outrightly sold as a going
concern. The firm can also be converted by the sale of assets of the partnership
firm to the company at the specified price for each asset which can be executed
under the provisions of part ix of the companies act, 2013. For conversion of the
firm, a couple of conditions like the partners must have fifty percent or more stake
of its total voting power, they should become the shareholders in the same
proportion as their capital and receive considerations by way of allotment of shares
and last but not the least the shareholding pattern should be unaltered for a period
of 5 years need to be fulfilled.

PROCEDURE:
 Step1:Holding a Meeting of the Partners:
To take assent of majority of its partners. To authorize two or more partners
to take all steps necessary and to execute all papers, deeds, documents etc.
 Step2: Approval of Name:
 Partnership firm have to apply for availability of the name. One of the major
advantages is that the business can be run under the same name as that of the
partnership (subject to availability of name) the words ‘limited’ or ‘private
limited’ has to be added.
 Step3: Filing Forms
Obtaining the approval of name, the firm shall file the following forms along
with required documents with the registrar of companies within 30 days
from the date of approval of name.
 e-form urc-1 along with the following details:
A list showing the names, addresses, and occupationsof all persons
named therein as members with details of shares held by them.
A listshowing the particulars of proposed as the first directors of the
company.
An affidavitfrom each of the persons proposed as the first directors,
that he is not disqualified to be a director under sub-section (1) of
section 164 and that all the documents filed with the registrar for
registration of the company contain information that is correct and
complete and true 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 liabilitiesof the partnership firm duly
certified by a chartered accountant.
A copy of latest income tax return of the partnership firm.
A statement specifying the following particulars:
The nominal share capitalof the company and the number of shares
into which it is divided.
The number of shares takenand the amount paid on each share.
  MOA& AOA:
After obtaining name approval, and approval of e-form urc-1 from
the registrar, the applicant is required to draft the memorandum and
articles of association and other relevant documents required for in-
corporation.
 file e-forms:
The applicant shall file various documents including moa and aoa in
respective e-forms with registrar of companies. The registrar on being
satisfied on compliance shall issue a certificate of incorporation.

DOCUMENTATION AND FORMS:

Following Documents are required:
 A copy of MOA of the Pvt. Ltd. or Ltd. Company as the case may be, which
clearly states that the said Partnership Firm has been converted into Pvt. Ltd.
or Ltd. Company as per the provision of the Companies Act.
 Forwarding letter on the letterhead of the Pvt. Ltd. or Ltd. Company to be
signed by one of the Director.
 Another letter is required on the letterhead of the Partnership Firm to be
signed by one of the Partner of the Firm, other than the person signing the
letter on the letterhead of the Pvt. Ltd. or Ltd. Company.
 A copy of the Partnership Deed.
 A copy of PAN Card and VAT/GST Certificate of Pvt. Ltd. or Ltd. Co.
 Form to Update GS1 India Records
 Fee, as applicable, towards updating the Company’s Name.

ACCOUNTING PROCEDURE:
Accounting procedure for conversion of a partnership into limited company
These days, partnership firms are converting into limited companies for getting the
benefit of limited liabilities. At this time firms’ book is closed just like dissolution
of firms.
In the books of firms, the following journal entries are passed:
 For Closing the Accounts of Assets:
Realization account debit
Assets account credit (at book value)
 For Sale of Assets and Amount Received:
Cash /bank account debit
Assets account credit
Realization account credit
 For Closing the Account of Liabilities:
Liabilities account debit
Realization account credit
 For Payment of Liabilities:
Realization account debit (loss of payment)
Liabilities account debit
Cash / bank account credit
 For Assets and Liabilities are taken over by New Company:
New company account debit (purchase price = agreed value of assets -
agreed value of liabilities)
Realization account credit
 For Payment of Expenses of Realization:
 If paid by Partner:
Realization account debit
 Cash / bank account credit
 If Paid by New Company:
New company account debit
Cash /bank account credit
 Closing of Realization Account:
 If Profit
Realization account debit
Partner's capital account credit
 Receipt of Purchase Price:
Cash / bank /shares / debentures account debit
Purchasing company account credit
 On distribution of Shares / Debenture and Cash from Purchasing Company:
Partner's capital account debit (dividing in adjusted capital ratio)
Cash/bank/ shares /debenture account
After journal entry, you can transfer into ledger for making realization account,
company account, partner's capital account

TAXATION BENEFITS AND IMPACTS:

 Partnership Deed must be Registered with the Registrar of Firms.
 The Partners receive Consideration only by way of Allotment of Shares in
Company and the Partners Shareholding in the Company in aggregate is
50% or more of its total Voting Power.
 The accumulated loss and unabsorbed depreciation of Partnership firm is
deemed to be loss/ depreciation of the successor company for the previous
year in which conversion was affected. Thus, such loss can be carried for
further eight years in the hands of the successor.
  All Movable and Immovable Properties of the Partnership Firm
automatically vest in the Company. No instrument of transfer is required to
be executed and hence no Stamp Duty is required to be Paid.

PURCHASE CONSIDERATION:
On Sale or Conversion, Limited Company takes over the Business of the Firm for
an agreed price. The price is known as Purchased Consideration. It is the price paid
for taking over the net Assets of the Firm. The price may be settled by the
Company partly by paying Cash and partly by allotting it Shares and Debentures to
the Partners. The amount of Purchase Consideration maybe determined by three
methods, as follows:
 Lump Sum Method
 Payment Method
 Net Assets Method

OVERVIEW:
Initially, many individuals start their Business as a Sole Proprietorship or
Partnership Firm because of its low budget and compliance requirements, with the
thought process that the Partnership Business will grow, and the revenues involved
will become more. Further, to limit the Liability and to avail the benefits of a
Private Limited Company, the Partnership Business often gets converted into a
Private Limited Company, By, converting a Partnership Firm to a Private Limited
Company, which becomes a separate Legal Entity, reduce the risk of Liability,
Raising the Fund is easier in the Company, as there is no restriction on the number
of Shareholders and the Personal Assets will remain untouched except in case of
Fraud. The incorporation and compliance procedure of a Private Limited Company
is as per the Companies act, 2013, and the Shares are held Privately.

CONCLUSION:
The most important benefit of registering a private limited company is that it gives
a position of a separate legal entity that a partnership firm does not have. In case of
a partnership, a partner’s personal assets are attached and they would be held
personally answerable for each and every debt or liability that the business suffers.
Henceforth, with the growth of the business, if partners want to increase their
trustworthiness and put the limited liability on its members, it is more fortunate for
the partners to convert their partnership into a private limited company. Even
though statutory compliance for a private limited company is greater than those of
the firm, it gives the business more chances to flourish and magnify its reach.

CASE STUDY:
Conversion of partnership firm into company under part IX of the
Companies Act, did not attract the provisions of s. 45(4) as there was no
dist... Partnership Firm prepared on the preceding data of conversion i.e.,
on 6-1-2008. The said asset was very much part of the balance sheet of
the partnership firm on that day. Our at...agreements entered into by the
partnership firm with the outside parties in the course of business for
distribution of cable TV signals. Had the partnership firm sold these
assets to any into by the partnership firm with the outside parties in the
course of business for distribution of cable TV signals. Had the
partnership firm sold these assets to any third party, the de...conversion
of the partnership firm into the private limited company by operation of
law, the TV cable network rights became the property of the company as
per...provisions of Section 575 of the Companies Act, which prescribes
the provisions concerning the conversion of partnership.

BIBLIOGRAPHY:
 https://corpbiz.io/conversion-of-partnership-firm-into-private-limited-
company
 http://www.svtuition.org/2008/12/accounting-procedure-for-convertion-
of.html?m=1
 http://www.svtuition.org
 https://www.companysuggestion.com
 https://www.jstor.org/stable/40686722
 https://www.jstor.org/stable/40686131

SUMS –

Illustration 4
Abhishek, Aishwarya and Aradhya were partners sharing Profit and Loss in the ratio of 2 : 1 : 1. Their
Balance sheet as on 31/12/2018 was as follows:
Liabilities Rs. Assets Rs.
Creditors 60,000 Bank 30,000
Capital Debtors 60,000
Abhishek 1,80,000 Bills Received 30,000
Aishwarya 1,50,000 Fixed Assets 3,00,000
Aradhya 30,000
4,20,000 4,20,000
On 1/1/2019; they farmed a Ltd. Co. “Pink Ad Films Ltd.” on the following conditions:
1) Distribute the bank balance amongst themselves.
2) The Company would discharge the P.C. through
a) 10% Debentures - `60,000
b) 15% Preference shares - `1,20,000
c) 15,000 equity shares of `10 each of `12 share
3) The partners agreed to share the debentures as : Aishwarya - `30,000 & Aradhya - `30,000 4) The
Preference shares were to be allotted in the PSR and the equity shares will adjust the remaining capital
balances.

Prepare the Realisation A/c and partners capital in the books of the partnership firm and Balance sheet of
the new Co.

Solution :
Calculation of P.C.
1) 10% Debentures 60,000
2) 15% Preference shares 1,20,000
3) Equity shares (15,000 x 12) 1,80,000
(Equity Capital - 15,000 x 10 = 1,50,000 3,60,000 (PC)
Sec Premium - 15,000 x 2 = 30,000)
Realisation A/c

To Debtors 60,000 By Creditors 60,000

To Bill Received 30,000 By Pink Advising 3,60,000
Films Ltd. (PC)
To Fixed Assets 3,00,000

To Partners’ Capital*
Abhishek (2/4) 15,000
Aishwarya (1/4) 7,500
30,000
Aradhya (1/4) 7,500
4,20,000 4,20,000

*(Profit on Realisation = `30,000)

Partners Capital A/c
 Abhishek Aishwarya Aradhya Abhishek Aishwarya Aradhya
To Bank 15000 7500 7500 By 1,80,000 1,50,000 30,000
(PSR) Balance
b/d
To 10% -- 30,000 30,000 By 15,000 7,500 7,500
Debentures Realisation
To 80,000 46,000 --
Preference
Shares
(PSR)
To Equity 1,00,000 80,000 --
Shares
(Balance)
1,95,000 1,57,500 37,500 1,95,000 1,57,500 37,500

*Note- As the capital and dues of Aradhya are settled through Bank and debentures she will not be given
preference and equity shares.

Pink Ad Films Ltd.

Balance sheet as on 1/1/2019

1) Share holders funds

a) Share Capital 1 2,70,000
b) Reserves & surplus 2 30,000
2) Non Current Liability 3 60,000
3) Current Liabilities 4 60,000
Total 4,20,000
Assets
1) Non Current Assets 5 3,00,000
2) Current Assets 6 1,20,000

4,20,000
Total

Notes to Accounts
Note 1 : Share Capital
15% Preference Share Capital 1,20,000
Equity Share Capital 1,50,000
2,70,000
(The entire shares have been issued to the vendors; hence no consideration is received here upon.)
Note 2 : Reserves & Surplus
Security Premium 30,000
(Refer P.C. Calculation)
Note 3: Non Current Liabilities
10% Debentures 60,000
*(The debentures have been issued to the vendors hence there is no amount received from them.)
Note 4: Current Liabilities
Creditors 60,000
Note 5: Non Current Assets
Fixed Assets 3, 00,000
Note 6 : Current Assets
Debtors 60,000
Bills Received 30,000
90,000

Illustration 5
Following is the Balance sheet of Amar and Naman sharing Profit & Loss in the ratio of 2 : 3.
Liabilities Rs. Assets Rs.
Capital Plant & Machinery 4,00,000
Aman 4,00,000 Equipment 4,00,000
Naman 5,00,000 Stock 65,000
Bank Loan 75,000 Debtors 50,000
Creditors 50,000 Bills Received 45,000
Bank 65,000
10,25,000 10,25,000
Aman & Naman sold their business to Mr. Shaman who formed a new company Namaste Ltd. The Co.
took over all the assets at book values excluding equipment which was taken at `3,00,000. The Co. settled
the P.C. by issuing.

i) 40,000 equity shares of `10 each

ii) 4000 10% Preference shares of `100 each &
iii) 11% Debentures - `1,50,000

Close the books of the partnership firm and prepare the Balance sheet of the Co.
Solution :
Calculation of P.C.
1) Equity shares (40,000 x `10) 4,00,000
2) 10% Preference shares (4000 x `100) 4,00,000
3) 11% Debentures 1,50,000
P.C. 9,50,000
Calculation of assets & liabilities taken over for finding out goodwill / Capital reserves
Assets
Plant & Machinery 4,00,000
Equipment 3,00,000
Stock 65,000
Debtors 50,000
Bills Receive 45,000
Bank 65,000
9,25,000
Less : Liabilities
Bank Loan 75,000
Creditors 50,000 1,25,000
Net Assets 8,00,000
**Point to Remember
1) PC > NA = Goodwill
2) PC < NA = Capital Reserve
**In this case, the Company will have Goodwill of `1,50,000. (PC Rs. 9,25,000- Net Assets Rs.
8,00,000= 1,50,000)
Realisation A/c
To Plant & Machinery 4,00,000 By Bank Loan 75,000
To Equipment 4,00,000 By Creditors 50,000
To Stock 65,000 By Namaste Ltd. 9,50,000
To Debtors 50,000 (PC)
To B / R 45,000
To Bank 65,000
To Partner’s Capital
Aman (2/5) 20,000
Naman (3/5) 30,000 50,000
10,75,000 10,75,000

Namaste Ltd. A/c

To Realisation 9,50,000 By Equity Shares 4,00,000
By Preference Shares 4,00,000
By Debentures 1,50,000

9,50,000 9,50,000

Partners Capital A/c

Amar Akbar Amar Akbar
To Equity Shares 1,60,000 2,40,000 Balance b/d 4,00,000 5,00,000
To Preference 1,60,000 2,40,000 Realization 20,000 30,000
shares
To Debentures 1,00,000 50,000
(Balance)
4,20,000 5,30,000 4,20,000 5,30,000

Equity Shares in Namaste Ltd. A/c

To Namaste Ltd. 4,00,000 By Aman (2/5) 1,60,000
By Naman (3/5) 2,40,000
 4,00,000 4,00,000

Preference Shares in Namaste Ltd. A/c

To Namaste Ltd. 4,00,000 By Aman 1,60,000
By Naman 2,40,000
4,00,000 4,00,000

Debentures in Namaste Ltd. A/c

To Namaste Ltd. 1,50,000 By Aman 1,00,000
By Naman 50,000
1,50,000 1,50,000

Note : As the apportionment ratios are not given, one of the disbursement has to be used for settling
the partners capital A/c. (Here debentures are settled based on the partners capital’s pending
settlement)

Namaste Ltd
Balance sheet as on
I) Capital and Liabilities

1) Share holder’s funds

a) Share Capital 1 8,00,000
b) Reserves & surplus
2) Non Current Liabilities 2 2,25,000
3) Current Liabilities 3 50,000
Total 10,75,000
Assets
1) Non Current Assets 4 8,50,000
2) Current Assets 5 2,25,000
Total 10,75,000
Notes to Accounts
1) Share Capital
10% Preference Share of `100 each 4,00,000
 Equity share of `10 each 4,00,000
8,00,000
(These shares are issued to the vendors hence no consideration is received here upon)

2) Non Current Liabilities

11% Debentures 1,50,000
Bank Loan 75,000
2,25,000
(The Debentures are issued to the vendor for the settlement of PC hence no consideration is
received here upon)

3) Current Liabilities
Creditors 50,000
4) Non Current Assets
Intangible
Goodwill (refer **Point to remember) 1,50,000
Tangible
Plant & Machinery 4,00,000
Equipment 3,00,000
8,50,000
5) Current Assets
Stock 65,000
Debtors 50,000
Bills Received 45,000
Bank 65,000
2,25,000