Compliances

How to Change Business Entity? – Detailed Conversion Procedure of Different Business Entities

Conversion of business entity is the process of changing one type of business structure to another type of business structure i.e. the continuance of one business entity into another form of business entity. After the conversion of business entities, the converting entity results into a Converted business entity. However, the process of conversion changes the legal status of the entity for different reasons. The procedure for conversion of a business entity involves-

• Choose a form of business entity
• Reason for conversion and why to change the business entity forms
• Statutory and legal compliances.
• Plan of conversion
• Following the conversion process and its certification.
• Documents of formation for the converted entity.

The conversion of business takes place in domestic entities. A Statutory conversion is the most efficient way to change one entity from another entity.

What are the ways of conversion of Business Entity?

There are different ways of conversion of Business Entity mentioned below-

• Dissolution of the original entity and Formation of the new entity

This is the most time taking, complicated and expensive way to change entity forms. As the procedure involves dissolution, and dissolving a business entity can be complex, and further, a new entity is formed. For the same, the agreements have to be entered into to transfer the original entity’s assets and liabilities to the newly formed entity.

Under this method, the original entity gets dissolved, and a new entity is formed.

• Merge over/Inter-entity merger

Merge over/Inter-entity merger is the method where the new entity type is formed, and the old entity type is merged into the new one. As a matter of statute, the significance of a merger over dissolution/formation is that the former entity will cease to exist, its assets and liabilities will vest in the later (new) entity and its owners will become owners of the new entity.

• Statutory Conversion

Statutory conversion is the least complex expensive way to change business entity forms, and a document is filed with the authority to change from one entity form to another. In statutory conversion, there is no need to form a new entity, and similar to a merger, the assets and liabilities, and ownership interests are transferred by law. A conversion plan is drafted containing the terms and conditions of the transactions.

Conversion of Business Entity into different type of Business Entities

Converting the business entity is a significant decision that may affect the legal structure including liability and taxes.

There are different types of conversion of business entity mentioned below-

I. Conversion of Sole proprietorship to any other Business Entity

Sole proprietorship is the simplest form of formation of a business entity. It only requires capital, for starting the Sole proprietorship business, as an individual a person only requires a layout of the new business and contributing capital.

But converting a Sole proprietorship into a Partnership Firm or Company is a complex process. As for partnership firm, the partners are required to comply with the Partnership Act 1932 and by signing a Partnership Deed.

Forming a company, is a more advanced type of business organization which requires more statutory compliances, legal formalities, lengthy procedures, reporting to the appropriate authorities and paperwork. Companies are also required to establish by-laws and to conduct the meetings i.e. Board meetings, Annual General Meeting and Extra-Ordinary General Meeting.

II.Conversion of Partnership Firm into a Company

Conversion of Partnership firm into a company represents a change of a business entity from one formalized type to another. The procedure involves forming a new company and to dissolve the partnership entity.

Further, it also involves the transfer of assets and liabilities from Partnership firm to the new one i.e. a company which is done through one of the following three methods:

• A Direct way of transfer of assets and liabilities from the old entity i.e. From Partnership into the new entity i.e. Company,
• Distribution of the assets and liabilities to the owners who will then transfer them to the new Company, or
• Contributing partnership shares to the Company.

The conversion is technically tax-free and reduction in liability.

The Procedure is as follows:

• For converting a partnership into a Company there must be a provision in the Partnership deed.
• The Partnership must fulfill the criteria of having at least 2 Directors in case of Private Company and 3 directors in case of Public company along with the DIN and DSC of the directors.
• To hold the meeting of all the Partners and to take the consent for the conversion and consent of all the creditors are also required.
• Obtaining the name approval for the proposed company through RUN along with the required attachments stating that the partnership firm is proposed to be converted into the Company.
•  Advertisement in 2 Newspaper that the firm seeking registration shall publish an advertisement about the registration, for seeking objections, if any within 21 days from the date of issuance of notice and the advertisement shall be  in Form URC-2 which shall be published in 2 newspaper i.e. one English Newspaper and one Vernacular newspaper in which such firm is situated.
• Further, necessary documents and affidavit, duly notarized shall be filed to the ROC for the approval of the conversion of Partnership into a Company.

III. Conversion of Private Company into Public Company

The procedure for conversion of Private Company into a Public Company involves approval of the Board of the directors and the members/shareholders of the company. The procedure of conversion of Private Company into Public Company is mentioned below-

• Convene the Board meeting to approve the proposal of conversion of private company into Public company.
• To fix the day, date, time and venue for holding the general meeting of the company for passing the required special resolution.
• To approve the notice for the general meeting along with the explanatory statement
• For issuing the notice of the general meeting on behalf of the board it is required to authorize the Company secretary or any other competent officer.
• Issue notice to all the shareholders/members of the company.
• Hold the annual general meeting and to pass the special resolutions for alteration of MOA and AOA.
• MGT-14 is to be filed to the Registrar of the company within 30 days.The copy of documents required as the attachment in Form MGT-14 are-
• Special resolution along with the explanatory statement
• Altered Memorandum of Association and Articles of Association.
• E-form INC-27 to be filed to ROC for the conversion of Private Company into a Public Company.
• A fresh certificate of Incorporation is obtained from the Registrar of the Companies, consequent upon conversion of Private Company into a Public Company.

IV. Conversion of Public Company into a Private Company

Many Public companies have converted or in the process to convert it into a Public Company, keeping in view the relaxations provided to a Private Company. The conversion takes place from the date of receipt of the approval from the registrar and after the issue of a fresh certificate of incorporation.

A Public Company within the limits imposed upon the private companies may become a private company by following the below-mentioned procedures-

• Convene the Board meeting for the purpose of approving the proposal of conversion of Public Company into Private Company.
• To fix the day, date, time and venue for holding the general meeting of the company for passing the required special resolution.
• To approve the notice for the general meeting along with the explanatory statement.
• For issuing the notice of the general meeting on behalf of the board it is required to authorize the Company secretary or any other competent officer.
• Issue notice to all the shareholders/members of the company.
• Advertisement in Form INC-25A, at least 21 days before the date of filing of the application in a vernacular language in the vernacular newspaper and the English language in an English newspaper
• Hold the annual general meeting and to pass the special resolutions for the alteration of MOA and AOA.
• MGT-14 is to be filed to the Registrar of the company within 30 days. The copy of documents required as the attachment in Form MGT-14 are-
• Special resolution along with the explanatory statement
• Amended Memorandum of Association and Articles of Association.
• Along with the application, a list of creditors and debenture holders shall be attached.
• An application for the Conversion of Public Company into Private Company shall be filed to the Regional Director. Following details are required to be mentioned in the Application:
  • The details (along with date) of the Board meeting at which the proposal for the alteration of Memorandum and Articles was approved;
  • The date of the general meeting at which the proposed conversion was approved;
  • Details of conversion (along with the reasons) into a private company and the effect of conversion on shareholders, creditors, debenture holders, deposit holders ,and other related parties;
  • Details of any conversion made within the last five years and outcome thereof along with a copy of the order.
  • Form RD-1 is required to be filed with Regional Director within 60 days of passing of Resolution along with the fee as provided in the Companies (Registration Offices and Fees) Rules, 2014 with following attachments:
    • a. Copy of Application signed by the directors.
    • A Draft copy of Altered Memorandum of Association and Articles of Association.
    • Copy of the MINUTES of the general meeting with details of votes cast in favor and or against with names of dissenters.
    • Copy of Board resolution not earlier than 30 days authorizing to apply for such conversion
    • Scanned, Signed and Stamped Copy of ADVERTISEMENTS
    • Declaration by Key Managerial Personal (If in case where there is no KMP in the Company by any of the Directors) that:
      • The limit of the number of members to 200. 
      • NO DEPOSIT has been accepted by the Company in violation of the Act and rules made thereunder and NO NON-COMPLIANCE of sections 73 to 76A, 177, 178, 185, 186 and 188 of the Act and rules made thereunder.
      • Details of the creditors and debenture holders i.e.
        • Name and Address of every creditor and debenture holder.
        • Nature and amounts due to them in respect of debts, claims or liabilities.
• The Company shall file an AFFIDAVIT^[1], signed by the Company Secretary of the Company, or by the 2 directors,1 of whom shall be the Managing Director to affect that –
  • They have made a full inquiry into affairs of the company,
  • They are full of opinion that the list of creditors and debenture holders is correct,
  •  Proof of Serving the Notice to all Creditors, Debenture holders, Registrar and other Regulatory Bodies.
• In case of any objection is raised from any creditor or debenture holder in response to the advertisement or notices issued, the Company shall submit the copy of Objection with the Regional Director.
• Where an objection is raised, to hear the Regional director will call the concerned person (Creditor and Debenture holder) who has objected and to the Company and after giving the proper opportunity of being heard, the regional director will take the decision.

Note – (Any Representative can come for hearing on behalf of the both a person who has raised the objection and Company).

• On examining the application, where the Regional Director finds it necessary to call for further information he shall within 30 days from the date of receipt of the application, Regional Director gives intimation of such information by directing the person or the company to furnish such information, within 15 days in e-Form No. RD-GNL-5.
• After rectification, the Regional Director will issue certified copies.

V.Conversion of OPC to convert itself into a Public or Private Company

In case, of Compulsory Conversion

The conversion of One Person Company to Private or Public Company is compulsory if –

• The Paid-Up share capital of an OPC exceeds Rs. 50 lakhs,
• Average Annual Turnover of an OPC during the immediately preceding 3 consecutive financial years exceeds Rs. 2 crores.

The OPC shall within 6 months from the date the exceeding the above-mentioned limits shall be required to convert itself into –

• A Private Company-With a minimum of 2 Members and 2 Directors.
• A public Company-With a minimum of 7 Members and 3 Directors.

One Person Company shall give notice to the ROC in Form No-INC-5 within 60 days explaining that the company has ceased to be an OPC and is required to convert itself into a Private Company or Public Company.

Voluntary Conversion

Voluntary conversion of OPC to Private Company /Public Company is only possible after the expiry of 2 years from the date of incorporation.

The procedure of both Compulsory conversion and Voluntary conversion is the same but the requirement for filing Form INC-5 shall not be applicable in the case of Voluntary Conversion.

After the due compliances, ROC shall close the OPC and register the documents submitted as for the issue of fresh Certificate of Incorporation. However, the conversion shall not affect the existing debts, liabilities, and obligations of the company.

VI.Conversion of Private Company to OPC

A Private Company other than a company registered under Section 8 companies Act 2013, can convert itself into OPC who has-

o   A share capital of 50 lakhs rupees or,

o   An average annual turnover is 2 crore rupees, during the relevant period.

·  The Conversion shall be in accordance with Rule 7 of Companies (Incorporation) Rules, 2014.

·  NO objection in writings is obtained by the company from existing members and creditors when passing a special resolution in the general meeting.

·  The Special Resolution is required to be filed by the company, passed by shareholders for Conversion of Private Company into One Person Company (OPC) with concerned Registrar of Companies. Form MGT.14 shall be filed within 30 days of the passing of Special Resolution with the concerned Registrar of Companies with the documents and the documents that shall be enclosed along with fees are mentioned below:

o   Detailed list of members and list of creditors;

o   The Audited Balance Sheet and the Profit and Loss Account; and

o   No Objection letter of secured creditors and a declaration by way of the affidavit shall be provided by the directors of the company confirming that all members and creditors of the company have given their consent for conversion.

·   On being satisfied that the Company has complied with prescribed requirements the Registrar of Companies (ROC) shall issue the Certificate to the effect of Conversion of Private Company into One Person Company (OPC).

Read our article:Converting an OPC into a Private Limited Company