Convert a Sole Proprietorship to Private Limited Company

For converting a sole partnership to a Private Limited Company (PLC), you need to submit an agreement between the sole proprietor and the PLC declaring the transfer of all assets

• File required forms with the Registrar of Companies (ROC).

• Select and approve a unique company name.

• Legally transfer assets, liabilities, and contracts to the new company.

• Adhere to corporate tax and compliance requirements.

How to Convert Proprietorship to Private Limited Company - Overview

In India, many entrepreneurs initially start their business as a sole proprietorship because of its low compliance requirements. After certain years, the business will boom and the revenues involved will become more.

Now, in order to limit the liability and to detach the bank accounts and tax filing of an individual, a sole proprietorship to private limited company conversion will be done.

By conversion of proprietorship into private limited company under companies act 2013, it becomes a separate legal entity thereby reducing the risk of liability and the personal assets will remain untouched except in case of fraud.

The private limited company will be governed under the companies act, 2013, and the shares are held privately and not offered to the public. Similarly, the structure of taxation will be unique under income tax act, 1961, and different from the sole proprietorship, which considers the income as individual income.

Benefits of Conversion from Proprietorship to Private Limited Company

There are many benefits to converting a proprietorship to a private limited company. Some of the key benefits include:

• Limited liability: In a proprietorship, the owner is personally liable for all the debts and obligations of the business. This means that if the business fails, the owner's personal assets, such as their home or car, can be used to pay off the debts. In a private limited company, the liability of the shareholders is limited to the amount of money they have invested in the company. This means that if the business fails, the shareholders' personal assets are not at risk.
• Access to capital:Private limited companies are more likely to be able to raise capital from investors, as they are seen as being a more stable investment. This is because investors are less likely to lose their money if the company is a private limited company with limited liability.
• Credibility: A private limited company is seen as being more credible than a proprietorship. This is because it is a separate legal entity with its own set of assets and liabilities. This can make it easier to do business with other companies and organizations.
• Transferability of ownership: The ownership of a private limited company can be easily transferred to another person or entity. This can be useful if you want to sell your business or bring in new investors.
• Tax benefits: Private limited companies can avail of certain tax benefits, such as lower corporate tax rates and depreciation allowances.
• Compliance requirements: Private limited companies have more compliance requirements than proprietorships. This can be a burden, but it also helps to protect the interests of the shareholders and creditors.

However, there are also some disadvantages to converting a proprietorship to a private limited company. Some of the key disadvantages include:

• Cost: The cost of converting a proprietorship to a private limited company can be significant. This includes the cost of legal fees, registration fees, and stamp duty.
• Administration: Private limited companies have more administrative requirements than proprietorships. This includes the need to keep more records and file more reports.
• Regulation: Private limited companies are more regulated than proprietorships. This means that they are subject to more government rules and regulations.

Difference between the Proprietor and Private Limited Company

Conditions to Be Followed Prior Converting a Sole Proprietorship to Private Limited Company

• After incorporating a new private limited company, all the assets and liabilities of the old sole proprietorship will be completely transferred to the company.
• Even after the conversion takes place, the old sole proprietorship will hold 50% of shares in a new private limited company. i.e 50% of the voting rights will be held by a sole proprietorship.
• The old sole proprietor will hold shares for a minimum period of 5 years from the date of incorporation of a new private limited company.
• Similarly, there will not be any monetary consideration between a sole proprietorship and private limited company as it is a mere conversion, not sale.

Requirements for Conversion

1. Agreement: The owner and the company need an agreement. This agreement will list the rules for the switch. This could include moving assets and debts, the value of the business, and other important points.

2. Memorandum of Association (MOA): The MOA of the company needs a clear goal to take over a sole proprietorship. This makes the switch legal and clear.

3. Move of Assets and Debts: All assets and debts of the business need to go to the company. This move should be written down and kept track of to make the switch easy.

4. Board of Directors and Shares: The owner should join the company's board of directors. They need to have at least half of the voting power in the company. Remember, a company needs at least two directors.

5. Minimum Share Capital: A private limited company needs a certain amount of share capital. This is ₹1,00,000 (or the same value in other money). The owner must meet this rule when they switch.

Procedure for Conversion of Sole Proprietorship to Private Limited Company

Before the Conversion from Sole Proprietorship to Private Limited Company

1. Transfer of Assets and Debts: After starting a new private limited company, all the assets and debts of the old business will be moved to the new company.

2. Ownership of Shares: Even after the change, the old business will keep 50% of the shares in the new company. This means the old owner will have 50% of the voting power.

3. Holding Period of Shares: The old owner will keep shares for at least 5 years from when the new company starts.

4. No Monetary Consideration: There will be no money paid between the old business and the new company. This is a change, not a sale.

Steps to Convert a Sole Proprietorship into a Private Limited Company

1. Complete Slump Sale Formalities: The owner should finish all steps related to the slump sale.

2. Obtain DIN and DSC: The owner should get the DIN and DSC for all future directors of the new company.

3. Check Name Availability: The owner should apply to check if the new company name is available.

4. Draft MOA and AOA: The owner should write the MOA and AOA of the new Private Limited Company. In MOA, he must say that the old business has been taken over by the company.

5. Apply for Company Registration: The owner should apply online to register the company on the Ministry of Corporate Affairs portal.

6. Submit Documents: All the documents should be sent with the application form.

7. Secure Certificate of Incorporation: The owner should then get the Certificate of Incorporation from the Registrar of Companies.

8. Apply for PAN and TAN Numbers: The owner should apply for PAN and TAN numbers from the right authority.

9. Update Bank Accounts: Finally, the bank accounts of the new company should be updated for business.

After the Conversion Process

After all these steps, the MCA checks the application and the documents. If they are happy, they will issue a certificate of Incorporation. This certificate will start the new private limited company.

Procedure to Convert Proprietorship to Private Limited Company

The procedure to perform takeover of sole proprietorship by private limited company in India is as follows,

• Step 1: Application for DSC (Digital Signature Certificate).
• Step 2: Apply for the DIN (Director Identification Number)
• Step 3: Application for the name availability.
• Step 4: Filing of the EMOA and EAOA to register a private limited company
• Step 5: Apply for the PAN and TAN of the company
• Step 6: Issued certificate of incorporation by RoC with PAN and TAN
• Step 7: Opening a current bank account on the company name

How Can We Help in Registering Your Company in India?

The Private Limited Company Registration process is completely online, so you don't even have to leave your home to get your entity registered. At Vakilsearch, we complete the Company Registration online within 14 days.

TheLegalLabs Company Registration package includes:

• DIN and DSC for two Directors
• Drafting of MoA & AoA
• Registration fees and stamp duty
• Company Incorporation Certificate
• Company PAN and TAN
• Zero Balance Current Account - Powered by DBS Bank *

Documents Required for Conversion of Sole Proprietorship to Private Limited Company

PAN Card: All directors need to give a copy of their PAN Card. This is for identity proof

Aadhar Card or Voters ID: This is needed for address proof.

Photos: Directors should provide passport size photos

Proof of Business Place: If the directors own the place of business, they need to show proof

Rental Agreement: If the business place is rented, a rental agreement is needed

NOC from Landlord: The landlord should give a No Objection Certificate (NOC)

Bill: A copy of an electricity or water bill is needed.

Forms for MCA:
Form 1: This form should be sent with the MOA, AOA, and other documents
Form 18: This form gives the details of the registered office
Form 32: This form has details about the directors.

Why TheLegalLabs for Sole Proprietorship to Private Limited Company Conversion?

1K Companies Per Month

We execute legal work for over 1000 companies and LLPs every month, by leveraging our tech capabilities, and the expertise of our team of legal professionals. Come on board and experience the ease and convenience!

Realistic Expectations

By handling all the paperwork, we ensure a seamless interactive process with the government. We provide clarity on the incorporation process to set realistic expectations.

300-Strong Team

With a team of over 300 experienced business advisors and legal professionals, you are just a phone call away from the best in legal services.

Recent Updates on Converting Sole Proprietorship to Private Limited Company in India

Registering a PLC in the MCA portal has now become easier.

10-Jun-20: As a sole proprietorship business flourishes, it looks to convert itself into a private limited company to extract the inherent benefits. The Government has now facilitated the registration of new PLCs on the MCA portal. Now, registration under GST, EPFO, ESIC and Professional Tax can be done on the MCA portal, while incorporating the company itself. However, the entities will need to comply with the provisions of GST Act, ESI Act and MP Act.

NIIT Among top 20 Training Outsourcing

29th May: For the thirteenth consecutive year, NIIT, a skill development company is on the list of top 20 outsourcing companies for training. The Training Industry Inc. made this list based on industry visibility, impact, innovation, company size, growth potential, geographical reach, and strength of clients

MCA Offers Relaxations for Conducting Annual General Meeting

07th May: In light of the current global crisis, MCA has granted relaxation for conducting Annual general meetings. Earlier, the presence of the member at the venue was not required. Now, this can be done online with e-voting and postal ballot. There is no requirement to travel inter-state or cross the border for AGM.