Proprietorship to Private Limited Company

Due to low compliance requirements, many people start their businesses as sole proprietors in India. After many years, the business will expand, and revenue will increase. Its become difficult for a single person to handle the business.

Hence, most people prefer to convert their Proprietorship into a Private Limited Company(plc), which has various benefits over a sole proprietorship. To convert a sole proprietorship into a private limited company, you must sign an agreement between the sole proprietorship and the newly Private Limited Company(plc).

Benefits of converting Proprietorship to Private Limited Company

A Private Limited Company has many benefits, some of which are given below:

• Sole proprietorships don't have official registration, while Private Companies must register under the Companies Act 2013.

• Unlike a sole proprietorship, a private limited company has a separate legal law. You cant quickly transfer ownership of the sole proprietorship. Private companies can save more money for company growth than sole proprietorships.

• If a private limited company faces any financial loss in a business, it is limited by shares or warranty. However, in a sole proprietorship, the owner is entirely responsible for the loss.

• Private limited's can enjoy tax benefits according to their company profits. However, sole proprietors do not get these benefits.

• Private limited companies never end, even if somebody is leaving or passes away, but in sole proprietorships, if the owner retires or passes away, the company will stop.

• Private limited companies quickly get professional and skilled employees for their companies, as Sole proprietorships face challenges in hiring candidates.

• Registering as a private limited company makes your business more reliable than sole proprietorships. The owners liability is unlimited in a sole proprietorship, but its limited to the shares in a private limited company.

Conditions for Conversion

• The agreement must be signed between the sole Proprietor and private limited for the takeover or sale of a company.

• The Memorandum of Association (MOA) of a new Private Limited company needs to include the takeover of a sole proprietorship as its objective.

• All the liabilities and assets of sole proprietorship must be handed over to the new private limited company.

• The sole Proprietor does not get any extra benefits from this transformation.
• The Proprietor should hold at least 50% of the shares, which should continue for the same five years.

Basic Requirements for Conversion of Proprietorship to Private Limited Company

Under the Company Act 2013, to set up a certified company in India, you need to follow these criteria:

• Number of Directors: To form a private limited company, there must be at least two

directors.

• Unique name: The company name must be different and unique. It should not be the same as other companies or trademarks in India.
• Minimum Share Fund: No minimum share capital is necessary for the company's incorporation.
• Designated Office: The registered office cant be a commercial space as it can be a rented home.
• Memorandum of Association: In MOA, it is necessary to highlight the objective of the takeover or sale of sole proprietorship.
• Shareholders: A minimum of two shareholders should be required for a private limited company.
• DIN and DSC: All new private limited company directors need to make Director Identification Numbers (DIN) and Digital Signature Certificates (DSC).
• Annual Returns: Filing annual financial accounts and returns with the company registrar is mandatory yearly.
• Capital: The company needs to have at least 1 lakh rupees capital.

Procedure for Conversion of Proprietorship to Company

These are the following steps for converting a proprietorship to a Private Limited company:

• The sole Proprietor should complete the steps of slump sale formalities.

• Sole Proprietors must get the Director Identification Numbers (DIN) and Digital Signature Certificates (DSC) for all the company directors.

• The application should check the availability name for the new private limited company.

• The sole Proprietor should prepare the Memorandum of Association (MOA) and Articles of Association (AOA), including the companys objective and rules.

• The sole Proprietor must visit the Ministry of Corporate Affairs online portal to register.

• All the necessary documents need to be submitted with the application form.

• Then, the applicant gets the certificate of incorporation from the registrar of companies.

• You must apply for a new PAN and TAN number from the authorized authority.
• Finally, you must update your private limited company bank account for the transaction.

Documents for Conversion

Documents required for the conversion of Sole proprietorships into private limited:

• ID proof of all directors
• Address proof of all directors
• Passport-sized photos of Directors.
• Proof of business place ownership.
• Rental agreement (if rented).
• No Objection Certificate (NOC) from the Landlord.
• Electricity or water bill.

For submission to the MCA, these forms are required:

• Form 1, along with MOA, AOA, and other necessary documents.
• Form 32, containing director information.
• Form 18, providing registered office details.

FAQS

1. What are the advantages of converting to a Private Limited Company?

A Private Limited Company has many benefits, some of which are given below:

• Sole proprietorships don't have official registration, while Private Companies must register under the Companies Act 2013.

• Unlike a sole proprietorship, a private limited company has a separate legal law. You cant quickly transfer ownership of the sole proprietorship. Private companies can save more money for company growth than sole proprietorships.

• If a private limited company faces any financial loss in a business, it is limited by shares or warranty. However, in a sole proprietorship, the owner is entirely responsible for the loss.

• Private limited's can enjoy tax benefits according to their company profits. However, sole proprietors do not get these benefits.
• Private limited companies never end, even if somebody is leaving or passes away, but in sole proprietorships, if the owner retires or passes away, the company will stop.

2. Which documents are required to convert a sole proprietorship to a private limited company?

Documents required for the conversion of Sole proprietorships into private limited:

• ID proof of all directors
• Address proof of all directors
• Passport-sized photos of Directors.
• Proof of business place ownership.
• Rental agreement (if rented).
• No Objection Certificate (NOC) from the Landlord.
• Electricity or water bill.

3. How do you convert a sole proprietorship into a private limited company?

• The agreement must be signed between the sole Proprietor and private limited for the takeover or sale of a company.

• The Memorandum of Association (MOA) of a new Private Limited company needs to include the takeover of a sole proprietorship as its objective.

• All the liabilities and assets of sole proprietorship must be handed over to the new private limited company.

• The sole Proprietor does not get any extra benefits from this transformation.
• The Proprietor should hold at least 50% of the shares, which should continue for the same five years.

4. What is the complete form of DIN and DSC?

DIN stands for Director Identification Numbers, and DSC stands for Digital Signature Certificates.

5. How many directors are in a private limited company?

In a private limited company, a minimum of two directors are needed.

6. What is essential for converting a Sole Proprietorship to a Private Limited Company?

Under the Company Act 2013, to set up a certified company in India, you need to follow these criteria:

• Number of Directors
• Unique name
• Minimum Share Fund
• Designated Office
• Memorandum of Association
• Shareholders
• DIN and DSC
• Annual Returns
• Capital

7. How long does converting a sole proprietorship to a private limited company take?

The time required to convert a sole proprietorship to a private limited company may vary depending on the country and jurisdiction, as well as the complexity of the conversion process. It may take several weeks to months to complete the process, including obtaining approvals, drafting and filing legal documents, and fulfilling other regulatory requirements.

8. What is a slump sale agreement?

A sump Sale is a sale of a business venture/undertaking as a whole for a lump sum consideration without values being assigned to the individual assets or liabilities. A slump sale agreement is executed between the seller and purchaser to complete the sale/transfer of business.