How to Convert a Firm into a Company in Nepal

Many businesses in Nepal start as sole proprietorships or partnership firms because they are easy and inexpensive to register. But as the business grows, firms often face limitations in capital raising, liability protection, credibility, and scalability. This is where converting a firm into a company becomes essential.

This guide explains how to convert a firm into a company in Nepal, the company conversion process, legal requirements, documents and tax implications.

What Does Firm to Company Conversion Mean in Nepal?

Converting a firm into a company means:

• Closing or deregistering the existing sole proprietorship or partnership firm

• Registering a Private Limited Company (or Public Company) under the Company Act

• Transferring business operations, assets, liabilities, and goodwill to the new company

Note: Nepal does not allow automatic conversion. A firm and a company are legally different entities.

Why Convert a Firm into a Company? (Business Reasons)

Businesses usually convert due to:

Key Advantages of Company Structure

1. Limited liability protection

2. Better business credibility

3. Easier investment and funding

4. Shareholding structure

5. Ownership transfer flexibility

6. Stronger legal identity

7. Long-term scalability

8. Better compliance for large contracts

Firms are suitable for small operations; companies are better for growth and expansion.

Legal Framework for Company Conversion in Nepal

Firm-to-company conversion is governed by:

• Company Act, 2063 (2006)

• Partnership Act, 2020

• Income Tax Act, 2058

• VAT Act

• Office of the Company Registrar (OCR) procedures

• Inland Revenue Department (IRD) guidelines

The conversion is done through closure + re-registration, not migration.

Types of Firms That Can Be Converted

You can convert:

1. Sole Proprietorship Firm: Private Limited Company
2. Partnership Firm:  Private Limited Company
3. Family-owned firm :  Company

Cooperatives and NGOs follow different laws.

Company Conversion Process in Nepal (Step-by-Step)

STEP 1: Decision & Business Planning

Before conversion:

1. Decide shareholding structure

2. Decide directors

3. Decide authorized capital

4. Evaluate tax and asset position

STEP 2: Close or Suspend the Existing Firm

You must formally close the firm at:

• Inland Revenue Office

• Ward/Municipality (if registered locally)

Required:

1. Application for closure

2. Tax clearance (PAN/VAT)

3. Latest tax returns

4. Audit (if required)

Without firm closure, company registration may face tax complications.

STEP 3: Settle Taxes & Liabilities

Before conversion:

• Clear outstanding taxes

• Settle liabilities

• Prepare balance sheet

• Identify assets to be transferred

STEP 4: Reserve Company Name

Apply for name approval at the Office of the Company Registrar (OCR).

Rules:

• Name must be unique

• Not misleading

• Not identical to firm name (can be similar with Pvt. Ltd.)

STEP 5: Register the Company at OCR

Submit:

• Memorandum of Association (MOA)

• Articles of Association (AOA)

• Shareholder details

• Director details

• Capital structure

• Office address

OCR issues:

• Company Registration Certificate

STEP 6: Obtain PAN/VAT for the Company

Register the company at:

• Inland Revenue Department

New company gets a new PAN (firm PAN does not transfer).

STEP 7: Transfer Business Assets & Operations

Transfer:

• Bank accounts

• Assets

• Inventory

• Brand name

• Contracts (with consent)

This is done via:

• Asset transfer agreement

• Board resolution

• Bank updates

STEP 8: Update Licenses & Authorities

Update:

• Municipality license

• Industry registration (if applicable)

• Banks

• Clients & suppliers

Documents Required for Firm to Company Conversion

For Firm Closure

• Firm registration certificate

• PAN/VAT certificate

• Tax clearance

• Application letter

• Audit report (if applicable)

For Company Registration

• Citizenship copies of shareholders/directors

• Passport (if foreign shareholder)

• MOA & AOA

• Office address proof

• Photos

• Name approval letter

Tax Implications of Company Conversion

Key Tax Points

• Firm and company are separate taxpayers

• Asset transfer may attract capital gains tax

• VAT registration must be fresh

• Losses of firm do not automatically carry forward

Proper tax planning is essential before conversion.

Common Mistakes During Conversion

1. Assuming automatic conversion
2. Not closing firm properly
3. Ignoring capital gains tax
4. Poor shareholding planning
5. Not transferring contracts legally
6. Forgetting to update banks & licenses

Timeline for Company Conversion in Nepal

Can Foreign Investors Be Added During Conversion?

Yes. During company formation:

• Foreign shareholders can be included

• FDI approval may be required

• FITTA compliance applies

Firm vs Company (Quick Comparison)

Conclusion

Converting a firm into a company in Nepal is a strategic move for businesses aiming for growth, investment, and long-term sustainability. While the process is not automatic, careful planning, legal compliance, and tax management can make the transition smooth and efficient.

By following the proper company conversion process and avoiding common mistakes, entrepreneurs can unlock the full benefits of operating as a registered company in Nepal.

FAQs

1. How to convert a firm into a company in Nepal?

Close the firm legally, clear taxes, register a company at OCR, obtain PAN/VAT, and transfer business assets and operations.

2. Is automatic conversion allowed in Nepal?

No. Nepal requires firm closure + new company registration.

3. Can I keep the same business name?

Yes, with modification (e.g., adding “Pvt. Ltd.”), subject to OCR approval.

4. Do I need to close the firm first?

Yes. Proper closure avoids tax and legal conflicts.

5. Is tax payable during conversion?

Possibly. Asset transfer may attract capital gains tax.

6. How long does conversion take?

Usually 10–25 working days, depending on tax clearance.