Setting Up of Business, Industrial and Labour Laws · Conversion of Business Entities

Conversion of Partnership Firm and Sole Proprietorship into Company

Updated 11 October 2026 · Fact-checked

A partnership firm or sole proprietorship has no separate legal identity. A fresh company is incorporated under Chapter II (Sections 3 to 7) of the Companies Act, 2013. A firm that consists of two or more members can instead apply to register under Part I of Chapter XXI (Section 366), subject to its provisos, consents and Section 374 filings.

Understand Conversion of Partnership Firm and Sole Proprietorship into Company

A partnership firm and a sole proprietorship are not separate from their owners. The owners hold the assets and are personally liable for the debts. A company is a separate legal person. Conversion means moving a business from the first kind of entity to the second.

For an existing firm, the Act gives a route in Part I of Chapter XXI (Sections 366 to 378). This is different from fresh incorporation of a new company, which is under Chapter II (Sections 3 to 7). Section 366 says a "company" for this Part includes any partnership firm, LLP, cooperative society, society or any other business entity formed under any other law that applies for registration under this Part. Under Section 366(2), an entity of this kind that consists of two or more members may register as an unlimited company, a company limited by shares, or a company limited by guarantee, in the manner prescribed and subject to the provisos to that sub-section.

A sole proprietor has only one member, so Section 366(2) does not fit a proprietorship on its face. A proprietor usually forms a new company (for example a One Person Company or a private company) under Chapter II (incorporation of company), and then transfers the business to it by agreement. Check the question wording: it will tell you which route to use.

The provisos set conditions. A company with less than seven members shall register as a private company (Section 366(2)(vii)). Under proviso (iv), the assent of a majority of the members present in person (or by proxy, where proxies are allowed) at a general meeting summoned for the purpose is needed. If the company is about to register as a limited company (limited by shares or by guarantee) and its members' liability is not limited by any law, as with a firm, proviso (v) raises that majority to not less than three-fourths of the members present in person or by proxy. A company is registered as a company limited by shares only if it has a fixed share capital divided into shares of fixed amount (or stock), held by those shareholders and no other persons.

Section 374 adds obligations. The applicant must ensure secured creditors have consented or given no objection, publish a notice in a newspaper (one English and one vernacular), file a notarised affidavit from all members or partners that documents will be submitted to the earlier registering authority for dissolution of the firm, and comply with other prescribed conditions.

The effect of registration is in Section 371. The provisions of the earlier instrument (such as the deed of partnership) are treated as the memorandum and articles as far as the Act would require them there. The Act then applies as if the company had been formed under it. Table F of Schedule I applies only if adopted by special resolution. In a winding up, those liable for debts contracted before registration remain contributories for them.

Key rules to remember

Who can register under Section 366: Partnership firm, LLP, cooperative society, society or other business entity with two or more members may register as unlimited, limited by shares or limited by guarantee company; Section 366(2). Cannot be used by a company already registered under the Companies Acts of 1882, 1913 or 1956.
Minimum members rule: Company with less than seven members shall register as a private company; Section 366(2)(vii).
Majority for assent: Majority of members present in person or by proxy at a general meeting summoned for the purpose; Section 366(2)(iv). Proxy counts only where proxies are allowed.
Majority for limited company: At least three-fourths of members present, if members' liability was not limited by any law and it registers as a limited company; Section 366(2)(v). Poll votes count by each member's entitlement under the regulations (Section 366(3)).
Guarantee company condition: Assent plus a resolution that each member undertakes to contribute a specified amount on winding up; Section 366(2)(vi). Contribution applies while a member or within one year after ceasing.
Obligations before registration: Secured creditor consent or no objection; newspaper notice (English and vernacular); notarised affidavit from all members or partners; other prescribed conditions; Section 374(a) to (d).
Effect of registration: Earlier instrument treated as memorandum and articles; Act applies as if formed under it; Section 371(2) and (3). Table F applies only if adopted by special resolution.

How to solve Conversion of Partnership Firm and Sole Proprietorship into Company questions

Use this order for any question on converting a firm or proprietorship into a company. It keeps your answer in the ICSI style: provision, facts, conclusion.

1Identify the entity: a partnership firm with two or more members, or a sole proprietorship with one owner. This decides the route.
2State the provision. For a firm, cite Section 366 (registration under Part I of Chapter XXI). For a proprietor, say a new company is formed and the business is transferred to it.
3Check eligibility: it must not be a company already registered under the earlier Companies Acts; check the member count and the type of company chosen.
4Apply the member rules: fewer than seven members means a private company; check the share capital condition for a company limited by shares.
5Apply the voting rule: majority of members present at a general meeting; three-fourths if registering as a limited company where liability was not limited by law.
6List the Section 374 steps: creditor consent, newspaper notice, affidavit, other prescribed conditions.
7State the effect under Section 371: instrument becomes memorandum and articles, the Act applies, and contributories remain liable for earlier debts.
8Close with a clear conclusion that answers the exact question asked.

Quickest way: Five-point check for conversion questions

When to use it: Use when you have little time and the question asks whether and how a firm can convert.

Count the members: one means new company route; two or more means Section 366.
Check exclusions: already registered under the Companies Act, 1956 or earlier means not eligible.
Pick the vote: simple majority of those present, or three-fourths for a limited company in the stated case.
Write the four Section 374 items in one line each.
End with the effect under Section 371 and the fate of the old firm.

Common mistakes in Conversion of Partnership Firm and Sole Proprietorship into Company

Saying a sole proprietor can register under Section 366 like a firm.
Students treat all unincorporated businesses as the same.
Fix: Section 366(2) needs two or more members. A proprietor forms a new company under Chapter II and transfers the business to it.
Writing that a three-fourths majority is always needed, or that a simple majority is enough for every type of company.
Students memorise one figure and drop the condition that links the vote to the type of company.
Fix: The base rule under proviso (iv) is a majority of members present. If the firm registers as a limited company (by shares or by guarantee), proviso (v) raises it to at least three-fourths of members present, because the partners' liability is not limited by any law. For an unlimited company, the proviso (iv) majority applies.
Forgetting that fewer than seven members must form a private company.
The old seven-member rule is remembered, not the current text.
Fix: Quote Section 366(2)(vii): less than seven members shall register as a private company.
Omitting one or more Section 374 obligations.
Students remember the notice but forget the affidavit or creditor consent.
Fix: Learn four items: secured creditor consent, English and vernacular notice, notarised affidavit from all members, other prescribed conditions.
Thinking old debts disappear on registration.
Separate legal personality is confused with automatic release.
Fix: Under Section 371(3)(c) and (d), persons liable for pre-registration debts remain contributories in a winding up.
Applying Table F automatically to the converted company.
Students assume model articles always apply.
Fix: Section 371(3)(a): Table F applies only to the extent adopted by special resolution; the earlier instrument is treated as the constitution.

Worked examples

Example 1

Rao & Sons, a partnership firm in Pune with five partners, wants to register as a company under Part I of Chapter XXI of the Companies Act, 2013. Advise on the type of company, the vote required and the steps before registration.

Show the solution

Provision: Section 366 includes a partnership firm that applies for registration under this Part. Under Section 366(2), and subject to its provisos, a firm of two or more members may register as an unlimited company, a company limited by shares or a company limited by guarantee. This is the route for an existing firm; fresh incorporation under Sections 3 to 7 is a different route.
Facts: the firm has five members, which is less than seven. Under Section 366(2)(vii) it shall register as a private company.
Type: within that, the partners choose between unlimited, limited by shares and limited by guarantee. If they want limited liability, a company limited by shares is the usual choice, but proviso (iii) must be met: a fixed share capital divided into shares of fixed amount, held by those shareholders and no other persons. The type chosen decides the vote.
Vote: under proviso (iv), assent of a majority of the members present at a general meeting summoned for the purpose, in person or by proxy where allowed. If the firm registers as an unlimited company, this majority is enough. If it registers as a limited company (by shares or by guarantee), proviso (v) applies because the partners' liability was not limited by any law, so at least three-fourths of the members present must assent. For a company limited by guarantee, the assent must also be accompanied by the resolution required by proviso (vi).
Section 374: obtain consent or no objection of secured creditors; publish a notice in one English and one vernacular newspaper; file a notarised affidavit from all partners on submitting documents for dissolution of the firm; comply with other prescribed conditions.
Effect: under Section 371, the partnership deed is treated as memorandum and articles to the extent the Act would require them, and the Act applies as if formed under it.

Answer: Rao & Sons must register as a private company. Assent needs a majority of members present under proviso (iv). If it registers as a limited company (by shares or by guarantee), proviso (v) raises this to at least three-fourths of the members present; if it registers as unlimited, the majority is enough. For limited liability it should choose a company limited by shares, subject to the share capital condition. It must also meet the Section 374 obligations.

Example 2

Meera runs a sole proprietorship in Jaipur. She wants to carry on the business as a company. Can she use Section 366? What is the proper course and what happens to her earlier liabilities?

Show the solution

Provision: Section 366(2) permits registration by an entity consisting of two or more members.
Facts: a sole proprietorship has one owner, so the section does not fit it on its face.
Course: Meera forms a new company under Chapter II (incorporation of company) of the Act (for example a One Person Company or a private company with another shareholder) and transfers the business to it by agreement.
Liabilities: the company is a separate legal person. Liabilities she incurred as proprietor stay with her unless the creditor agrees to the company taking them over; the transfer terms should be recorded in writing.
Registration under Part I of Chapter XXI would also bring the Section 374 and Section 371 effects, but those are for a qualifying entity.

Answer: Meera cannot use Section 366 as a single-member proprietor. She should incorporate a new company and transfer the business to it, settling earlier liabilities by agreement with creditors.

Exam tips

Quote Section 366, 371 and 374 by number; ICSI answers reward the provision first.
Always state the member count test and the private company rule for fewer than seven members.
Learn the four Section 374 items as a list; questions often ask for them directly.
Distinguish a firm (two or more members) from a proprietor (one member) in the first line.
Finish with a one-line conclusion that answers the question asked.

Practice questions from Conversion of Business Entities

Conversion of Partnership Firm and Sole Proprietorship into Company in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Conversion of Partnership Firm and Sole Proprietorship into Company: frequently asked questions

Can a partnership firm convert into a company under the Companies Act, 2013?

Yes. Section 366 allows a partnership firm with two or more members to register under Part I of Chapter XXI as an unlimited company, a company limited by shares or a company limited by guarantee. It must meet the conditions on assent, share capital and Section 374 obligations.

How does a sole proprietorship become a company?

A proprietor has one member, so Section 366(2) does not apply on its face. The usual way is to incorporate a new company and transfer the business to it by agreement.

What happens to the partnership deed after conversion?

Under Section 371(2), the provisions of the instrument, which includes a deed of partnership, are treated as conditions and regulations of the company. Parts that would be in a memorandum are treated as being in it, and the rest as articles.

Who must consent before a firm registers as a company?

Secured creditors must have consented or given no objection under Section 374(a). The members must also assent at a general meeting by the required majority under Section 366(2)(iv) and (v).