Conversion of a Company to a Partnership
A company’s organizational structure may have significant operational, financial, and legal ramifications. Although partnerships offer flexibility, simplicity, and personal interaction, many entrepreneurs choose to transform their companies into partnerships instead of going the commercial route, particularly with private limited and public limited corporations. This blog will walk you through the benefits, as well as possible challenges, of converting a company into a partnership.
Understanding Business Structures
You must be aware of the primary difference between a company and a partnership prior to initiating the conversion process:
- Company: Companies are legally different from their owners. This business could be either public or private. It’s more rigid because the Companies Act, 2013 spells out how it all works
- Partnership: A partnership is a type of business where two or more people agree to share their profits and losses. The Indian Partnership Act of 1932 sets the rules for partnerships, which don’t have to follow as strictly as companies do.
Why Convert from Company to Partnership?
While a company structure offers advantages including limited liability, perpetual existence, as well as the capacity to raise funds through equity, business owners may choose to convert to a partnership for several reasons:
- Flexibility: Partnerships increase operational flexibility by allowing partners to act quickly without waiting for shareholder or board approval.
- Reduced Compliance: Under the Companies Act, companies must comply with several regulatory requirements, including keeping statutory registers, submitting yearly returns, and hosting annual general meetings. Partnerships, on the other hand, require fewer formalities, which lowers the cost of compliance.
- Profit Sharing: Partners in partnerships split profits, and many people believe that taxes are more beneficial than those imposed on corporations.
- Personal Involvement: A partnership enables smaller companies to take a more hands-on approach, with each partner directly participating in day-to-day operations.
Legal Framework for Conversion
In India, converting a company into a partnership includes several legal procedures and concerns. Handling this transfer carefully and adhering to the laws that apply to both partnerships and companies is imperative.
Winding Up the Company
A company cannot become a partnership unless it has undergone legal winding up. The 2013 Companies Act governs this procedure. The steps involved are as follows:
- Board Resolution: The board of directors must approve a resolution authorizing the company’s winding up and conversion to a partnership.
- Creditors’ Consent: Before starting the winding-up process, creditors’ approval is needed if the company has any outstanding liabilities or debts.
- Filing for Voluntary Winding Up: In order to begin the voluntary winding up, the company must file the required forms with the Registrar of Companies (RoC). This includes, among other required documents, the statement of finances and board resolution, as well as Form STK-2, which is an application for striking off the company.
- Clear Tax Liabilities: The company must pay all outstanding tax obligations, including income tax, GST, and other statutory dues, before winding up.
Forming the Partnership
An official company wind-up might trigger the start of a partnership. The Indian Partnership Act, 1932, governs partnerships. Here’s how to move forward:
- Partnership Agreement: The terms and conditions of the collaboration must be included in the formal partnership agreement. This agreement should include aspects such as capital contributions, profit-sharing ratios, partner responsibilities, dispute resolution processes, and exit provisions.
- Registration of Partnership: While it’s not required, partnership registration is strongly advised in India. A registered partnership company has legal benefits, including the ability to sue partners or other parties in the event of a dispute.
- PAN and GST Registration: The new organization must be issued a Permanent Account Number (PAN) by the Income Tax Department following the establishment of the partnership. In addition, the organization should be registered under the GST laws, if applicable.
Transfer of Assets and Liabilities
The conversion procedure transfers all of the company’s assets and liabilities to the newly established partnership. It guarantees fairness and transparency in the transfer of company assets to the partnership firm, it is imperative to adhere to an appropriate valuation procedure.
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Advantages of Conversion
- Simplified Compliance: Regulators closely monitor companies more than partnerships, making it easier for them to adhere to the rules.
- Tax Efficiency: Corporations are required to pay both a corporate tax and a dividend distribution tax, while partnerships are only required to pay one tax on their income.
- Management Flexibility: Because partnerships don’t have strict rules like companies do, you have more freedom in making choices and running your business.
Summary
If you want to turn the company into a partnership, you should think about the legal, financial, and managerial effects. You must carefully follow the law throughout the process, from closing the business to starting a new partnership. A partnership arrangement gives you options, makes following the rules easier, as well as can save you money on taxes. Entrepreneurs should talk to lawyers and financial experts to make sure the shift goes smoothly and legally.
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FAQ’s
A company is its own legal entity, separate from the people who own it. A partnership, on the other hand, is a business where two or more people directly share the profits and losses.
Companies could convert to a partnership in order to enjoy enhanced flexibility, reduced compliance requirements, improved profit-sharing arrangements, and more personal involvement in their daily operations.
Before establishing the partnership, the company must be wound up through board resolutions, creditor consent, tax liability clearance, and filing with the Registrar of Companies.
Registration of partnerships is not mandatory; however, it is strongly advised due to the legal advantages it offers, such as the capacity to pursue partners in the event of a dispute.
A transparent valuation process is required as the newly established partnership gets all company assets and liabilities.
Yes. Companies are required to pay both corporate tax as well as dividend distribution tax, whereas partnerships are only required to pay income tax
The application for striking off (Form STK-2), the board decision, and the financial statement must be sent to the Registrar of Companies.
Indeed, partnerships are more flexible in how they run than companies because they don’t have to follow strict rules.