Conversion of Proprietorship to Private Limited Company

Starting a business as a Sole Proprietorship is a common practice by most people due to low compliance requirements. But with the increase in business and growth in income, there is a need to separate the bank accounts and the tax filings of the Sole Proprietor and that of the business. To accomplish this separation a possible solution is to convert the Sole Proprietorship into a Private Limited Company as it offers various benefits over proprietorship like limited liability, ability to attract equity capital, continued existence, etc.

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Overview of Conversion of Proprietorship to Private Limited Company

Starting a business as a Sole Proprietorship is a common practice by most of the people due to low compliance requirements. But with the increase in business and growth in income, there is a need to separate the bank accounts and the tax filings of the Sole Proprietor and that of the business. To accomplish this separation a possible solution is to convert the Sole Proprietorship into a Private Limited Company as it offers various benefits over proprietorship like limited liability, ability to attract equity capital, continued existence, etc.

Following are some requirements to be kept in mind while converting proprietorship into a private limited company:

• To convert a Sole Proprietorship into a Private Limited Company, an agreement has to be executed between the Proprietorship and the Private Limited Company (once it is incorporated) for the sale of the business. To convert a Sole Proprietorship into a Private Limited Company, an agreement has to be executed between the Proprietorship and the Private Limited Company (once it is incorporated) for the sale of the business.
• Further, such Private Limited Company so incorporated must have “the takeover of a Sole Proprietorship Concern” as one of the objectives in its Memorandum of Association.
• Transfer of all assets & liabilities to the private limited company.
• The sole proprietor as a member of the board of directors with at least 50% voting power.
• No benefit direct or indirect to sole proprietor other than by way of allotment of shares.
• Minimum 2 shareholders & 2 directors for private limited company.
• DIN for all directors.

Advantages of Conversion of Proprietorship to Private Limited Company

NO MINIMUM CAPITAL No requirement of minimum paid-up capital is required for starting a Private Limited Company.
EASE OF FORMATION A Private Limited Company can be easily registered and is easy to manage and run with less legal compliance.
BUILD A GREAT TEAM Today, in the business world it is important to have the option of providing stock ownership or ESOPs to employees which can be offered only by Limited companies.
SEPARATE LEGAL ENTITY The biggest advantage of a Private Limited Company is that its identity is distinct from that of its members which ultimately limits the liability of members. A company is a separate person having its rights & Obligations enabling it to enter into contracts in its name, right to sue & be sued.
PERPETUAL SUCCESSION In case of the death of the owner or transfer of shares, your business won’t get affected as the company is considered separate from its members.
LIMITED LIABILITY The greatest benefit of a Private Limited Company is limited liability. If any liability arises then its member’s assets remain unaffected; members are only liable for unpaid shares held by them and not more than that. Stakeholders are not liable for corporate debts and liabilities.
GREATER FLEXIBILITY A Private Limited Company is required to perform lesser legal formalities as compared to a Public Limited Company. It enjoys special exemptions and privileges under the company law. Therefore, in a Private Limited Company, less compliance is required.
SECRECY A Private Limited Company is not required to publish its accounts or file several documents. Therefore, it is in a better position than a public company to maintain business secrets.
ATTRACT INVESTMENT Private limited companies easily accommodate equity funding as there is a clear distinction between shareholders and directors as well as limited liability. Venture capitalists and private equity funds prefer to invest in this structure.
TRANSPARENCY & CREDIBILITY Private Limited Company enjoys enhanced transparency as the information relating to a company is available in a publicly searchable database. Thus, able to win the trust of the general public & improve business credibility.
EXIT PLAN It offers the best type of exit plan for all promoters. Only the shares of a company can be sold or transferred to another entity without any hassles, while the business remains a going concern.
GOING INTERNATIONAL A private limited company allows FDI up to 100% through an automatic route without any prior government approval.

Registration Process

Step 1: OBTAINING DSC AND DIN Digital Signature Certificate(DSC) and Director Identification Number(DIN) is required for the proposed Directors of the Private Limited Company which is necessary to file the company registration documents. For this, you will only need to provide a few scanned documents and details; our representatives will fill out the form and submit it online. DIN and DSC can be obtained for the proposed Directors within 1 to 2 days.

Step 2: NAME APPROVAL A minimum of one and a maximum of six proposed names must be submitted to the MCA. Subject to availability, naming guidelines and MCA processing time, Name Approval can be obtained in 2 to 3 working days.

Step 3: DRAFTING MOA AND AOA ELECTRONICALLY It takes 2 to 3 days to draft MOA and AOA Electronically in Spice MOA (INC-33) and Spice AOA (INC-34).

Step 4: COMPANY REGISTRATION After drafting the e-MOA and e-AOA, the incorporation Spice Form INC-32 is submitted along with a link form Spice MOA (INC-33) and Spice AOA (INC-34) to the MCA. MCA will usually approve the application for incorporation in 5 to 7 days, subject to their processing time. Please note that forms 49A and 49B have to be mandatorily applied with SPICe. If the same is not filed within 2 days of submitting SPICe (INC-32), the application for incorporation will be marked as ‘Invalid’.

Required Documents

For Directors & Shareholders

1. Self Attested PAN Card copy

2. Self Attested copy of any one of the Identity Proof(Voter’s ID/Passport/Driver’s License)

3. Self Attested copy of Address Proof in the name of the director (Any utility bill i.e., mobile bill/water bill/ electricity bill, or bank statement which should not be older than two months)

4. Passport-sized photograph

For Registered Office

1. Rent Agreement (Notarised: For rented property)

2. Sale Deed/Property Deed in English (in case of owned property)

3. No-objection Certificate from the property owner

4. Latest Electricity Bill / Mobile or Telephone Bill / Latest Bank Statement/Gas Bill

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FAQ's Conversion of Proprietorship to Private Limited Company :-

The proprietorship must be closed within three months of incorporating of the Private Limited Company.
The assets of proprietorship can be converted into capital for the Private Limited Company, via the making of resolutions and further contracts/agreements. Any debt owing to any creditors (including fines/penalties) will have to be settled before the transfer of such assets.
All bank accounts used for the sole-proprietorship need to be closed, and a new bank account under the Private Limited Company need to be opened. Naturally, all cheques and bank transfers need to be made in favor of the Private Limited Company henceforth.
No. All licenses and permits must be re-applied under the Private Limited Company following necessary procedures to concerned authorities.
Yes, you need a minimum of two Directors for a private limited company. If you are the sole owner, you can register as a One Person Company.
Any individual/organization can become a member of the private limited company including foreigners/NRI.

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