Convert Partnership Firm to Pvt Ltd | Director Loan Guide

Introduction


Converting your partnership firm (₹1 Cr capital) into a private limited company with ₹10 L authorised capital—while showing the remaining ₹90 L as unsecured loans from directors—is fully legal and tax‑efficient when done correctly. This guide covers every step to ensure compliance and maximize benefits.

Brief explanation of Section 66 and URC Forms for conversion under the Companies Act.

Here’s a concise overview of Section 66 (reduction of share capital) and the URC forms used for converting partnerships, LLPs, and other entities into companies under the Companies Act, 2013.


Section 66 – Reduction of Share Capital

Section 66 of the Companies Act, 2013 allows a company to decrease its issued, subscribed, and paid‑up share capital by following a prescribed process.
Under Section 66(1), a company limited by shares or guarantee may, by special resolution and subject to NCLT confirmation, reduce its share capital in various ways—such as cancelling paid‑up capital that is unrepresented by assets, extinguishing unpaid liability on shares, or returning excess capital to shareholders.
The reduction cannot apply to a buy‑back of securities under Section 68, which is governed separately.


An application under Rule 3 of the NCLT (Procedure for Reduction of Share Capital) Rules, 2016 must accompany—among other things—a certificate from the company’s auditor confirming compliance with accounting standards (Section 133) and proof that creditors’ claims are secured or discharged.
Once the Tribunal confirms the reduction, the company must publish the order as directed and file a certified copy along with a minute showing the new capital structure with the ROC within 30 days.
Failure to comply with the publication requirement or procedural safeguards can attract fines (₹5 lakh–₹25 lakh) and penalties under Sections 447–449 for false statements or concealment.


URC Forms (Section 366 & Chapter XXI) – Converting Entities into Companies

1. Legal Basis (Section 366)

Section 366 defines which entities—partnership firms, LLPs, co‑operative societies, or other business entities—may register under the Companies Act, 2013 as a company limited by shares, guarantee, or as an unlimited company.

2. eForm URC‑1 (Application for Registration)

  • Purpose: To apply for registration of an existing entity (partnership, LLP, etc.) as a private or public company under Part I of Chapter XXI.
  • Statutory Reference: Filed pursuant to Section 366 and Rule 3(2) of the Companies (Authorised to Register) Rules, 2014, typically alongside SPICe+ or eForm INC‑7.
  • Key Attachments:
    1. List of partners/members with share details and addresses.
    2. List of proposed first directors.
    3. Statement of assets & liabilities (CPA/CA certificate dated within 15 days).
    4. Copy of LLP agreement (if applicable) and incorporation certificate.
    5. No‑objection certificates from secured creditors.
    6. Special resolution of the existing entity agreeing to conversion.
    7. Draft Memorandum & Articles of Association.

3. Form URC‑2 (Public Notice of Registration)

  • Purpose: To advertise the conversion proposal, seeking objections within 21 clear days, as required by Section 374(b) and Rule 4(1) of the Companies (Authorised to Register) Rules, 2014.
  • Contents:
    1. Name and address of the entity applying.
    2. Principal objects of the proposed company.
    3. Venue for inspecting draft MOA/AOA.
    4. Objection procedure and timeline.

4. Post‑Objection & Incorporation

If no valid objections arise (or once resolved), proceed with:

  1. Filing SPICe+ (INC‑32), e‑MOA, e‑AOA, AGILE‑PRO, and INC‑9.
  2. Issuance of Certificate of Incorporation by the ROC.

Key Takeaway:

  • Section 66 sets out a formal, NCLT‑based process for reducing share capital in a company.
  • URC‑1/URC‑2 under Section 366 and Chapter XXI provide a clear statutory route to convert existing partnerships, LLPs, and similar entities into companies, ensuring transparency through creditor safeguards and public notice.

Sample Template link:

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Harshaditya Kabra
+91-88277-53530
https://www.linkedin.com/in/ca-harshaditya/
https://accorgconsulting.com/

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