Small businesses formed as sole proprietorships generally struggle to upscale their venture due to minimal investment capacity, unlimited liability, no separation between ownership and management, no perpetual succession after the death of a sole person, etc. It also cannot induct new investors on the Board and is less preferred for investment. Start-ups and growing businesses started as sole proprietorships choose to convert into Private Limited Company because it allows outside funding to be raised easily, limits the liabilities of its shareholders, and enables them to offer employee stock options to attract top talent.
A Private Limited Company is a type of privately held small business entity, which is considered a separate legal entity in the eyes of law, provides separation between ownership and management, restricts shareholding upto 200 or fewer members, and shares are prohibited from being publicly traded. A sole proprietorship can be converted into a private limited by executing a sale/takeover agreement and mentioning the takeover of the business of a sole proprietor as the main object in its Memorandum of Association (MOA).