How to Start a Sole Proprietorship to Private Limited Company

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Sole Proprietorship to Private Limited Company

In India, entrepreneurs tend to choose the sole proprietorship as a form of a business structure due to low compliance requirements associated with it. However, as the business grows, it becomes necessary to limit the liabilities of a sole proprietor. It is also essential to separate the personal and business-related financial transactions of the entrepreneurs. In this case, the best option is to Convert a Sole Proprietorship to a Private Limited Company.

For Conversion, promoters need to execute an agreement between the proprietorship firm and private company. This agreement is known as the “Slump Sale Agreement”. Further, the MOA of the company formed must include ‘The Takeover of a Sole Proprietorship Concern’ as one of the objectives.

Concept of Sole Proprietorship Firm

A Sole Proprietorship is a business format owned and managed by a single individual. The term “Single Individual” denotes “Sole Proprietor”. A proprietor is solely responsible for bearing all the profits and losses of the firm. Moreover, he/she has the power to make all the crucial decisions of the firm.

This business structure is based on the concept of One Man’s Capital. That means the capital required for starting a sole proprietorship firm is arranged by the proprietor alone.

A proprietorship firm is not a separate legal entity, i.e. there is no distinction between the proprietor and proprietorship firm. Also, the owner of the business suffers from unlimited liability.

Concept of Private Limited Company

A Private Limited Company is a company privately held by its shareholders. It is a separate legal entity, i.e. the shareholders of a company enjoy limited liability. The liability of the shareholder is limited to the extent of the number of shares held by them.

This business format also enjoys perpetual succession. This means that the death, bankruptcy or insolvency of any member will not affect the existence of the company.  Further, 

The mission, vision, objectives and limitations of a company are mentioned in the Memorandum of Association (MOA). In contrast, the Articles of Association (AOA) includes the rules, regulations and by-laws of the company.

Benefits of Conversion of Proprietorship to Private Limited Company

Benefits of Conversion of Proprietorship to Private Limited

The benefits of conversion of a sole proprietorship into Private Limited Company are as follows:

  • Ease in Raising Funds

    A Private Limited Company can easily raise funds from Financial Institutions and Banks.

  • Limited Liability

    A Sole Proprietor is solely responsible for bearing all the losses of a firm. It means that in case of loss, the personal assets of the proprietor may also get attached to repay creditors. In contrast, the liability of the shareholders of a private company is limited to the extent of shares held by them.

  • Perpetual Existence

    A Private Company is a Separate Legal Entity. It means that the death, insolvency and bankruptcy of a member will not affect its existence.

Minimum Requirements for Conversion of Sole Proprietorship to Private Limited Company

In India, the minimum requirements for the conversion of Sole Proprietorship to Private Limited Company are as follows:

  • Director Identification Number (DIN) for all Directors;
  • A minimum of two Directors;
  • A minimum of two Shareholders;
  • No Minimum Capital required after the Companies (Amendment) Act, 2015;

Conditions for Conversion Sole Proprietorship to Private Limited Company

The conditions for the Conversion can be summarised as:

  • All the assets and liabilities of a proprietorship firm become the assets and liabilities of the newly formed company.
  • The shareholding of the proprietor in the private company must not be less than 50% of the total Voting Power. This shareholding remains valid for a period of five years from the Date of Succession.
  • The sole proprietor will not receive any benefit through the allotment of shares in the company.
  • The income tax rate of 30% plus surcharge and cess applies to the company's profits.
  • A sale agreement or takeover agreement must be executed between the proprietorship firm and private company.
  • “takeover of a sole proprietorship” must be one of the objectives of the Sole Proprietorship Firm.

Documents Required for Conversion Sole Proprietorship to Private Limited Company

The documents required for the conversion can be summarised as:

  • PAN Card details of all directors;
  • A copy of Aadhar card, Driving License, Voters ID of all the directors;
  • Passport-sized photographs of Directors;
  • Proof of ownership in the form of sale deed for the Registered Office (if owned);
  • Rental Agreement (if rented);
  • NOC (No Objection Certificate) from Landlord;
  • Utility Bill in the form of electricity or water bill.

Forms Required for Conversion Sole Proprietorship to Private Limited Company

Forms Required for Conversion

The forms required for the conversion are:

  • Form 1

    The directors need to file this form with the MOA and AOA of the company.

  • Form 18

    This form specifies the details of the Registered Office.

  • Form 32

    This form provides details of the directors.

Procedure for Conversion Sole Proprietorship to Private Limited Company

Procedure for Conversion Sole Proprietorship to Private Limited Company

In India, the steps involved in the Conversion are as follows:

  • First, the Proprietor needs to complete the Slump Sale Formalities;
  • Now, obtain DIN (Director Identification Number) and DSC (Digital Signature Certificate) for all the directors;
  • The Proprietor needs to apply for the name availability in Form 1;
  • Next, draft the MOA and AOA of the company specifying the rules and objects of the company;
  • Visit the official website of the Ministry of Corporate Affairs to apply for Company Registration;
  • Submit all the Necessary Documents;
  • Receive COI (Certificate of Incorporation) from the Registrar;
  • Apply for new PAN (Permanent Account Number) and TAN (Tax Deduction and Collection Account Number);
  • Modify the Bank Details according to the Conversion.

Summarised Difference between Sole Proprietorship and Private Limited Company

S. no.

Point of difference

Private limited company

Proprietorship

1.

Registration

Companies Act, 2013

No Formal Registration.

2.

Name of the business

Name of the company must end with suffix “Private Limited Company”.

No suffix required

3.

Separate Legal Entity

Yes

No

4.

Liability

The Private Limited Company offers Limited Liability to the extent of shares held by the shareholders

Unlimited

5.

Minimum and maximum members

Minimum: 2 members

Maximum: 200 members

Minimum: 1 member

Maximum: 1 member

6.

Foreign ownership

Allowed through the Automatic Approval Route.

Not allowed

7.

Transfer of shares

Allowed

Not Allowed

8.

Perpetual Succession

Yes

No

9.

Taxation

30% plus surcharge and cess as applicable

Under the owner’s income tax

FAQs of Sole Proprietorship to Private Limited Company

Yes, it is mandatory to have at least to directors to obtain Private Limited Company Registration.

Any individual or organisation including Foreigners/ NRI can become a member of a Private Limited Company.

No, the whole procedure is 100% online, and you do not have to be present at our office for the closure of proprietorship and incorporation of a private limited company. We will send a scanned copy of the documents through mail.

No, there is no need to pay any extra charge, we will send the invoice through the mail with no hidden cost.

For the whole process, we will need around 15 to 20 business days period.

Yes, NRIs are eligible to become a director in a private limited company. However, at least one director must be an Indian Resident.

The assets and liabilities of a sole proprietorship firm become the assets and liabilities of the private limited company.

Any person, including the LLP, Trust, or Association of Persons (AOP), can hold shares in a private limited company.

The applicant can reserve two names by filing the RUN (Reserve Unique Name) form on the MCA portal.

Private Company registration has a lifetime validity or as long as the Annual Returns of the Company are filed on time.

 

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