How to Convert a Proprietorship into a Private Limited Company?
When an entrepreneur wants to enlarge his business, lure investment, and minimize personal liability, converting a sole proprietorship into a private limited company in India is a progressive and timely business activity. It involves a formalized method of converting the state of sole proprietorship to a private limited company under the provisions of the Companies Act, 2013. The following is an exhaustive guide on the conversion of proprietorship into a private limited company prerequisites, procedural steps, and benefits related to such conversion.
Understanding the Conversion
A sole proprietorship means that an unincorporated business is owned by a single owner. It is, nevertheless, easy to set up and limited for growth, and the owner has unlimited personal liability. The next stage from a sole proprietorship would be a private limited company, which gives the business a separate legal entity, limited liability, and enhanced credibility.
Prerequisites for Conversion
- Formation of a New Private Limited Company: The process shall start with the formation of a new private limited company under the New Companies Act of 2013. Thereafter, such a company will take the assets and liabilities of the sole proprietorship
- Minimum Requirements:
- Directors: at least two directors are compulsory, one of whom can be the proprietor. Each director should secure a Director Identification Number and a Digital Signature Certificate from any given certificate-issuing authority.
- Shareholders: Under the law, at least two shareholders are required, one of whom must be the proprietor.
- Capital: No minimum paid-up capital has been prescribed; however, the company should have authorized capital as per its requirements.
- Inclusion in Memorandum of Association (MoA): The objective of acquiring this sole proprietorship business should be mentioned clearly in the new Memorandum of Association.
- Asset and Liability Transfer: All assets and liabilities of a sole proprietorship are to be transferred to the new company. This transfer is formalized by entering into a formal agreement.
- Shareholding Structure: He should hold a minimum of 50% of shares in the company by becoming its proprietor for five long years.
- No Monetary Consideration: The conversion is without monetary consideration; it is otherwise being done by allotting shares to respective persons.
Step-by-Step Conversion Process
- Obtain DIN and DSC: DIN and DSC are required by every proposed director.
- Name Approval: To obtain approval for a name, apply using the RUN (Reserve Unique Name) service at the Ministry of Corporate Affairs.
- Drafting MoA and Articles of Association (AoA): Prepare the MoA and AoA, one of whose objectives is to acquire the ownership business.
- Incorporation Application: The incorporation application is to be submitted before the MCA along with other requirements via SPICe+ form.
- Certificate of Incorporation: The application will be signed by the Registrar of Companies (RoC) if it’s fit for consideration for issuing a Certificate of Incorporation, which will indicate that a private limited company is being formed.
- Execution of Transfer Agreement: The transfer agreement is a formal agreement drafted and executed such that the individual assets and liabilities from the sole proprietorship are now under the new company.
- Allotment of Shares: Issuance to the proprietor as consideration for the transfer of the business.
- Update Registrations and Licenses: Old entries (like GST, PAN, and TAN) are to be amended to reflect the new company structure.
- Bank Account Transition: Close the account of the sole proprietorship and open a new account in the name of the private limited company.
Benefits of Conversion
- Limited Liability Protection: The shareholders bearing personal liability are restricted to the extent of their shares, thereby safeguarding personal assets.​
- Separate Legal Entity: The company has an independent legal identity. On that, it can own property and enter into debts and contracts independently as if those were legacies.​
- Enhanced Credibility: The structure of a private limited company creates greater credibility with investors, suppliers, and customers.​
- Access to Funding: The company can raise capital by means of equity, to attract venture capitalists and angel investors.
- Perpetual Succession: The change of ownership or management does not affect the existence of the company.
Key Considerations
- Compliance Requirements: Private limited companies are involved in slightly stricter compliance, including filing every year for an audit.
- Tax Implications: Consider some of the possible tax liabilities arising due to the change of assets and ensure compliance with that.
- Employee Transition: Employee transition means that employees need to be informed and transitioned from working under the sole proprietorship to the new company with one undisturbed employment timeline.
Get Started with TaxDunia
Conversion of a sole proprietorship to that of a company limited by shares is beneficial move toward business development and long-term sustainability. This will go through sound planning and strict legalities, but in the long run, it offers tremendous benefits regarding liability protection, credibility, and access to capital.
