Generally, partnership is most suitable for the medium sized business which involves limited capital. Even the partnership is having its advantages at the same time, it has its own disadvantages like unlimited liability, lack of visibility, higher tax rate, expansion and restrictions on transfer of shares.
As the business and risk grows, conversion of a firm to a private limited company is a natural choice.
This document covers
- Can we convert the partnership Firm to Private Limited Company?
- Impact of Taxation on conversion of partnership to private limited company
1. Can we convert the partnership Firm to Private Limited Company?
Yes, the partnership firm can be converted in to private limited company either by Conversion of partnership to private limited company under companies act or Sale of existing partnership business to private limited company
2. Impact of Taxation on conversion of partnership to private limited company
- Income Tax: There is No Capital gains tax on transfer of assets from partnership firm to private limited company on the event of conversion. However, following conditions must be satisfied to avoid capital gains tax
- All the assets and liabilities of the partnership firm should become the assets and liabilities of private limited company
- All the partners of the partnership firm should become the shareholders of the private limited company in the same proportion of their capital accounts on the date of conversion.
- The partners of the firm should not receive any consideration or any other benefit other than allotment of shares in the company
- All the partners of the firm should hold minimum 50% of the total voting power in the company for a period of 5 years from the date of conversion
- Carry Forward of Losses: Private Limited company can carry forward the losses of partnership firm.
- GST: Private limited can carry forward the Input tax credit of Partnership firm
- Stamp Duty: As all the assets becomes the assets of private limited company, there is no need to execute sale deed separately and no stamp duty is required to be paid