Sole Proprietorship to Private Limited Company2023-08-09T22:08:51+05:30

Sole Proprietorship to Private Limited Company

A sole proprietorship firm can be easily converted into a Private Limited Company to avail various benefits like limited liability, continuous existence, a separate entity, infusion of additional investors, etc. A Pvt Ltd Company is one of the popular business organizations amongst startups and emerging businesses.

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    Introduction

    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 Pvt Ltd 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 up to 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).

    Conditions for Conversion of Proprietorship Firm into Pvt Ltd Company

    • All the assets and liabilities of the sole proprietorship must be transferred to the company.
    • The shareholding of the sole proprietor should be at least 50% of the total share.
    • The shareholding of the sole proprietor must be continued for a period of 5 years.
    • Any additional benefits or consideration shall not be provided to the sole proprietor except the allotment of shares.
    • The Memorandum of Association (MOA) of the company shall have one of its objects as “The takeover of a sole proprietorship”.
    • A sale or takeover agreement has to be executed between the sole proprietorship firm and the company.

    Advantages of Converting Proprietorship to Pvt Ltd Company

    • Separate legal entity and Limited Liability

      A company is a separate artificial person in the eyes of the law, and the liability of each member/shareholder is limited up to the unpaid amount of shares. It means that if a company faces loss under any circumstances, then its shareholders are not liable to sell their own assets for re-payment.

    • Perpetual succession (Continuous Existence)

      A company has a continuous existence in the eyes of the law even in the case of death, insolvency, and bankruptcy of its members. This leads to the perpetual succession of the company. The life of the company does not depend upon one person as in the case of a sole proprietor.

    • Easy allocation of ownership and management

      Businesses that require funding from fund houses, venture capitalists (VCs), angel investors, etc. need to register or convert to Private Limited Company so that it can make them shareholders and offer them a seat on the board of directors, whereas Sole Proprietorship Firm is not eligible to share or fully give up ownership and management.

    • Preferred by banks, VCs & investors

      As the private limited company’s books are audited by an independent auditor every year, most of the Banks, VCs, and investors prefer them over other forms of business.

    • Separation between Ownership and Management

      In a Pvt Ltd company, there is a clear separation between ownership and management which ensures that management of the company is headed by a team of professionals with the diverse skills necessary to effectively run the company.

    Minimum Requirements for Conversion

    • Minimum 2 member/shareholders

    • Minimum 2 Directors (At least 1 of the director shall be an Indian Resident)

    • DIN for Directors

    • Minimum capital of 2 Rupees

    • DSC for Director/Shareholders

    What Is Included in Our Conversion Package?

    • Company name search and approval

    • Digital Signature Certificate (DSC) for 2 Director/Shareholder

    • Director Identification Number (DIN) for 2 Directors

    • Certificate of Incorporation/Registration

    • Company PAN and TAN

    • Memorandum of Association (MOA) and Articles of Association (AOA)

    • Supporting Document for opening Bank Account

    • Employees State Insurance Corporation Registration (ESIC) and Employees Provident Fund Registration (EPFO)

    • Professional Tax Registration (For Companies registered in the state of Maharashtra and Karnataka only)

    • Drafting of slump sale agreement

    • Company Master File Kit

    Procedure to Convert Sole Proprietorship into Pvt Ltd Company

    • Application for Name Approval

      An applicant has to provide 2 different names and main objects for the proposed company which shall be submitted to MCA for approval, out of which one name will be approved. The applicant may keep the name of the sole proprietorship concerned with the word “Private Limited” if such name is not resembling any existing company/LLP/trademark.

    • Application for Digital Signature Certificate (DSC)

      Once the name is applied, we shall apply the Digital Signature Certificate (DSC) of directors/shareholders for digitally signing the forms. If the directors/shareholders already have DSC, then this step can be skipped.

    • Submission of Forms for Incorporation

      After the name is approved and DSC is generated, we need to prepare and submit an incorporation application in SPICE+ forms along with a Memorandum of Association (MOA), Articles of Association (AOA), and AGILE form for final approval.

    • Get a Certificate of Incorporation

      It typically takes 3-5 days after final submission to get the incorporation certificate. Incorporation certification is proof that the company has been registered. PAN, TAN, ESIC, EPFO, and Professional Tax registration certificates will also be received simultaneously.

    • Change of Details in other registrations

      After the incorporation, all the existing registrations/licenses which were obtained by Sole Proprietorship shall be canceled and new registration in the name of a private limited company shall be obtained.

    Documents Required for Converting Proprietorship to Pvt Ltd

    • List of documents to be submitted by the Director and Shareholders –

      Following are the documents that are required to be submitted by all the proposed directors and shareholders of the company. All documents submitted should be valid and readable.

      • Scanned copy of PAN Card
      • Scanned copy of Aadhaar Card/Voters ID/Passport/Driving License
      • Scanned copy of the Latest Bank Statement/Telephone Bill/Post-paid Mobile Bill/Electricity Bill (The address proof shall be recent and not older than 2 months)
      • Scanned passport-sized photograph
      • Any other documents as may be prescribed

      In the case of foreign nationals or NRI Director and Shareholders, the documents list can be checked here:

      Document Checklist for Foreign Nationals or NRI Director and Shareholders

    • Registered Office Proof

      A Private Limited Company should have a registered office place in India. The office address can be residential or commercial premises. The address proof shall be recent and not older than 2 months. Following is the list of documents to be submitted as Registered Office Address Proof –

      • Scanned copies of utility bills such as Electricity bills/Mobile Post-paid bills/Landline Post-paid bills/Gas bills/Water bill
      • Scanned copy of a No-objection Certificate from the property owner or whose name appears on such utility bill

    FAQ

    How much time is needed for setting up a Private Limited Company by conversion of Sole Proprietorship in India?2022-01-24T12:08:36+05:30

    On average, it takes 15-20 days for conversion, 2 different approvals (Name Approval & Final Approval) are required from government bodies. However, this is dependent on the workload of the Central Registration Centre (CRC), MCA.

    Do I need to be physically present during this process?2022-01-24T12:07:51+05:30

    There is no such requirement, all the required documents are filed electronically, so you would not need to be physically present. You would just need to send us scanned copies of all the required documents and forms.

    Who can be a member of a Private Limited Company in case of conversion?2022-01-24T12:07:04+05:30

    Any individual or organization can become a member/shareholder of the private limited company, including foreigners/NRI. However, such a person must be 18+ above in terms of age and should have a valid PAN card. Therefore, the sole proprietor along with any other person can become member of the Company.

    Can the sole proprietor become a director of company on conversion?2022-01-24T12:01:27+05:30

    Yes, the sole proprietor may become a director in the company on conversion.

    Is the consent of sole proprietor required for conversion into company?2022-01-24T11:57:51+05:30

    Yes, the consent of sole proprietor is mandatory for conversion into company.

    Is it required to have a company’s books audited?2022-01-24T11:55:26+05:30

    Yes, a private limited company should get its book audited and file the same with the Registrar of Companies (ROC) every year.

    Whether Capital gain is applicable on conversion of sole proprietorship to company?2022-01-24T11:54:31+05:30

    Capital gain on conversion of sole proprietorship firm is not applicable only if the conditions as per Income Tax Act 1961 is satisfied, otherwise a sole proprietor has to pay capital gain tax.

    What is a slump sale agreement ?2022-01-24T11:53:40+05:30

    Sump Sale is a sale of 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 sale/transfer of business.

    Can I register a Private Limited Company on my home or residential address?2022-01-31T12:48:17+05:30

    Yes, you can register the company at your residential address. You need to submit the utility bill of your home address along with the No Objection Certificate from the owner of the premises.

    How will I get documents like Certificate of Conversion, MoA, AoA, PAN, TAN, etc.?2022-01-24T11:46:15+05:30

    You will receive these documents in soft copy via email as well as we shall send you a printout of these documents at your address.

    What are the mandatory compliances for Company?2022-02-01T20:55:38+05:30

    Know about mandatory compliances here

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