Business Structure Conversion
How to Convert a Partnership Firm into a Private Limited Company (Form URC-1)
Ahmedabad, Gujarat
Short answer: Yes, a partnership firm can become a private limited company. Under section 366 of the Companies Act, 2013, a firm with two or more partners can register as a company, and with fewer than seven members it registers as a private company. The firm advertises the proposal in Form URC-2, files Form URC-1 with the Registrar of Companies, and gets a certificate of incorporation in Form INC-11. The firm's property passes to the company, and the partners then apply to the Registrar of Firms to dissolve the firm. Both registered and unregistered firms can use this route.
The legal basis
- Section 366(1) lists a partnership firm among the entities that can register as a company under Part I of Chapter XXI.
- Section 366(2) requires two or more members (changed from "seven or more" with effect from 15 August 2018). A company with fewer than seven members registers as a private company, and the conversion needs the assent of a majority of members.
- Section 374 requires the consent or no objection of secured creditors, a newspaper advertisement inviting objections, and an affidavit from all partners that the documents for dissolving the firm will be submitted to the authority where it was registered.
- Section 368: all the firm's property, movable and immovable, vests in the company. Section 369: its existing rights, debts and contracts continue. Section 370: pending legal proceedings continue.
- The procedure is in the Companies (Authorised to Register) Rules, 2014, as amended up to 2023.
Step-by-step process
- Partners agree. Pass a resolution approving registration as a private limited company. Section 366 needs a majority; check whether your partnership deed requires all partners.
- Secured creditors. If the firm has secured loans, get a no objection certificate from each secured creditor and charge holder.
- Company documents. Rule 3(1) applies the normal incorporation provisions of Chapter II, so the company needs an approved name, memorandum and articles, and first directors with a DIN who consent to act.
- URC-2 advertisement. Publish the notice in Form URC-2 in a newspaper in English and one in a vernacular language, circulating in the district where the firm is situated, inviting objections within 21 clear days. Serve a copy on the Registrar of Firms (rule 4(1) and (2)).
- File Form URC-1 with the documents in the table below. The lists of members and directors are verified by a declaration of two or more proposed directors (rule 3(5)).
- Certificate of incorporation. The Registrar considers objections received within 30 days of the advertisement and issues the certificate in Form INC-11 (rule 4(3) and (4)).
- Dissolve the firm. As undertaken, submit the papers to the Registrar of Firms (or the authority where the firm was registered) to dissolve the firm (rule 3(4); section 374(c)).
Documents filed with URC-1
| Document | Source |
|---|---|
| List of partners with names, addresses and occupations, and the shares each will hold (cash and non-cash consideration shown separately), as on a day not more than six clear days before applying | Rule 3(2)(a)(i) |
| List of proposed first directors with DIN, passport number if any, residential address, interests in other firms or bodies corporate, and consent to act | Rule 3(2)(a)(ii) |
| Partnership deed, with all earlier and later deeds if it was ever revised, and the Registrar of Firms' registration certificate if the firm is registered | Rule 3(2)(a)(iii) |
| No objection certificate from secured creditors and charge holders, if any | Rule 3(2)(a)(iv) |
| Copy of the firm's latest income tax return | Rule 3(2)(a)(vii) |
| Undertaking from all partners to submit papers for dissolution of the firm | Rule 3(4) |
| URC-2 notice as published, and copy of the notice served on the Registrar of Firms with proof of service | Rule 4(2) |
The Companies (Authorised to Register) Amendment Rules, 2023 removed two older attachments: a separate written consent of the majority of members, and an undertaking about stamp duty.
After registration
- PAN, bank and GST. The company has its own PAN, so open a new current account and take a new GST registration. The GST rules on transfer of a business let unused input tax credit move to the company (Form GST ITC-02). See GST registration.
- Contracts and licences. Property and contracts vest in the company by law (sections 368 and 369), but update the name on licences, bank records, property records and with customers and suppliers.
- Income tax. Whether the transfer of the firm's assets to the company is free of capital gains tax depends on conditions in the income-tax law. Under the Income-tax Act, 1961, for example, all partners had to become shareholders in the same proportion as their capital accounts, take payment only in shares, and together hold at least 50% of the voting power for five years. A conversion on or after 1 April 2026 falls under the Income-tax Act, 2025, so ask your Chartered Accountant to confirm the exemption and its conditions under that Act before you file.
If the firm is an LLP rather than a partnership, the route is similar but the LLP is dissolved automatically; see LLP to private limited company. For a sole proprietorship, see proprietorship to private limited company. To register a new firm instead, see partnership firm registration.