Formation Agreement is an agreement by which an existing partnership firm may sell its entire business to an existing limited company, or may convert itself to a limited company. On the sale or conversion the limited company takes over the business of a parternship firm for an agreed price known as "price consideration". The price may be settled by the company partly by paying cash and partly by alloting its shares and debentures to the partners.
Formation Agreement is the basis of the conversion of a partnership firm to a limited company. It is required to prove the sale of business or in case of conversion, a proof of the terms and conditions agreed upon between the parties in order to convert the existing partnership firm into a limited company. It acts as one of the foundations for the commencement of the new business as a limited company.
This is an official document, capturing all the information and details required to prove the partnership. This official document consists of:
Name and address of all the partners involved
Date of the agreement
Complete name and address of the business entity entering into the partnership
Details of purpose of business
Official agreement by all the partners to the formation of the partnership
Approval of all the partners for the name and purpose of the business
Details of the shares and dividend prices (if the company is going public)
Details of the partners’ share, job responsibilities, and designation in the company
Details of assets and liabilities in the company
Individual partners’ contribution (monetary and work-related contributions are recorded in actuality)
Accurate details of the initial investment raised by the partners and expenses incurred
Details of all the Board of Directors (Note: that there only can be 5 members of the Board of Directors)
Details regarding termination and dissolution of the company (if in future)
Details and signature of witnesses to this official agreement
Approval and signature of all the partners involved
Documents required to make/execute Formation Agreement
DRAFT OF FORMATION AGREEMENT TO CONVERT A PARTNERSHIP INTO A LIMITED COMPANY
AGREEMENT is made at________on this_____ day of____________ between Mr. L s/o_______residing at ......... of the FIRST PART and Mr.M s/o_________residing at .......... of the SECOND PART and Mr. N s/o___________ residing at .......... Of the THIRD PART as follows:
The Parties are carrying on business of dealing in electronic goods in partnership in terms of the deed of partnership ____________ entered by and between them in the name of M/s. LMN & Co. and the parties now propose to convert the said partnership into a public company limited by shares under the Companies Act 1956 or Companies Act, 2013 , on the following terms agreed upon between them.
NOW IT IS AGREED BY AND BETWEEN THE PARTIES HERETO AS FOLLOWS:
1. The Parties agree that they will form and register a public company limited by shares with a view to carry on the business carried on by them in partnership as aforesaid.
2. The name of the company will be ABC & Co. Ltd., subject to approval by the Registrar of Companies or such other name as will be approved by the parties hereto and by the said Registrar of Companies.
3. The Memorandum of Association and Articles of Association will be got prepared by the lawyer to be appointed by the parties hereto and to be approved by the parties hereto. The main object of the proposed company will be to deal in electronic goods by way of manufacture, sale and purchase thereof or acting as the agents for sale of such goods for any other Company or concern.
4. The nominal or authorized capital of the company will be Rs.__________ to be divided into equity shares of Rs.100/- each and________preference shares of Rs.100/- each.
5. The valuation of the business of the said partnership together with its assets, stock-in-trade and goodwill including book debts but subject to liabilities will be obtained from the Chartered Accountants of the said partnership firm and the amount of such valuation will be taken as paid to the parties hereto by allotting equity shares and preference shares of the face value of such valuation as fully paid up to each of the parties hereto. The valuation of the assets and the goodwill of the said partnership business will be made and shown separately. The equity and preference shares in the capital of the company will be allotted to the parties hereto in the ratio or in proportion in which shares of the parties in the capital and property of the said partnership firm are held.
6. The parties shall subscribe to the Memorandum and Articles of Association, one share each to be paid in cash and they will also secure additional at least four persons to subscribe to the Memorandum and Articles by agreeing to take one share each.
7. Besides, the minimum subscription to shares required to commence business will also be contributed by the parties hereto in cash in the same proportion as aforesaid.
8. The initial expenses required for registration of the company will be contributed by the parties in equal shares and the same will be reimbursed to them by the company after registration of the company.
9. The parties hereto will be the first Directors of the Company and the Board of Director will be constituted after the registration of the company in terms of the Articles of Association. The total number of Directors shall not be more than five.
10. On the registration of the company the parties agree to transfer the business of their said partnership together with all assets and liabilities and together with its goodwill and the benefit of subsisting contracts entered into by the partnership, by executing a Deed of Assignment of the business as a going concern in terms of the draft that will be prepared by the legal adviser of the parties.
11. No invitation to the public to apply for allotment of shares of the issued capital to be fixed by the Director will be made until the shares to be allotted to the parties in cash as well as fully paid are allotted to the parties hereto and other subscribers to the Memorandum of Association.
12. This agreement is provisional only and shall not be binding on the company until the date on which company is entitled to commence business under S. 149 of the Companies Act and on that date it shall become binding on the company formally adopting the same. In case that event shall not happen this agreement will be treated as canceled.
13. On the registration of the company and the company becoming entitled to commence business, the Board of Director to be constituted as aforesaid will adopt this agreement so as to be binding on the company. A formal agreement will be entered into between the company and the parties for adopting and confirming this agreement.
14. After the business of the said partnership is assigned to the company as aforesaid, the said partnership will be treated as dissolved and no party will be liable to pay any amount to the other in respect of such partnership. It is, however agreed that if any of the creditors does not accept the company as debtor for the amount, due to him on any account, the amount due to such creditor or creditors will be payable and paid by the parties hereto in proportion of their respective shares in the partnership and the valuation of the said business will be increased to that extent. The consent of the creditors to the transfer of the liability of the partnership to the company will be obtained before the transfer of the business to the company. A formal Deed of Dissolution will be executed by the parties and intimation of dissolution will be filed with the Registrar of Firms and advertised as required by law.
15. The parties agree that so long as they will be directors and share holders of the company, none of them will start a similar business or be directly or indirectly interested in a similar business as that of the company.
16. The parties agree that none of them will exercise any vote for removal of any of them as director.
17. The costs of and incidental to the execution of the Deed of Assignment of the business by the parties hereto will be borne by the company.
18. The liability to pay capital gains tax on transfer of the said business will be that of the parties in proportion to their shares in the partnership and the parties will indemnify the company against such liability.
IN WITNESS WHEREOF the parties have put their hands the day and year first hereinabove written.
Signed and delivered by
Within named partners
Mr. L,
Mr.M
Mr. N
IN the presence of_________
Witnesses
1._____________
2._____________
No specific set of documents is required to execute a formation agreement. However, one should scrutinize the id proofs of the parties entering into the agreement. One must also scrutinize the necessary documents required for the conversion of the company and the formation documents of the existing company subject to conversion.
In order to execute a formation agreement the partners have to hold a meeting and take assent for the conversion of the partnership firm into a limited company. Thereafter, an agreement is drafted with the help of a lawyer and same is entered into between the parties. The agreement is required to be registered and printed on a stamp paper of the correct value as provided by the prevalent laws. Once the agreement is stamped and registered it becomes binding upon all the parties.
In order to enter into a Formation agreement to convert a partnership firm into a limited company, following legal considerations are to be kept in mind:
Registered Partnership firm with minimum 2 or more Partners
Minimum Share Capital shall be Rs. 100,000 (INR One Lac) for conversion into a Private Limited Company
There must be provision in the Partnership deed for converting the firm into Company
There must be an agreement between the partners to convert the firm into Company.
If the above requirement is not fulfilled by the firm, then the Partnership deed should be altered
Minimum 2 Shareholders and Directors. However, Directors and shareholders can be same person.
Director Identification Number (DIN) for all the Directors.
Digital Signature Certificate (DSC) for two of the Directors.
While drafting agreements, it is important to know as to what terminology should be used while drafting the same as a small ambiguity in the terms can also jeopardize the claim of the parties. This is why it is crucial to have a documentation lawyer to assist you with the drafting an agreement. Being an expert in the area of documentation law, a documentation lawyer knows the nitty-gritty of the legal procedures and the requirements involved in drafting an agreement. With the experience attained in the field, he/she can guide you with the right advice while entering into an agreement and can make sure that such mistakes are eliminated that cannot be resolved even through further legal procedures.
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