How to convert Sole proprietorship into Private Limited Company?

Last Updated at: Feb 08, 2021
How to convert Sole proprietorship into Private Limited Company?
How to convert Sole proprietorship into Private Limited Company
In a set of reform measures announced on 17th May, the FM Nirmala Sitharaman has said that minor procedural and technical defaults under the Companies Act will be decriminalised. She said the Govt. was thinking to amend the Company’s Act in this regard.


As a business develops, the requests of business and the downsides of an ownership firm could constrain a business person to begin the procedure for converting ownership into private limited company. A private limited company offers considerable benefits over the ownership type of business, including that of constrained obligation, capacity to draw in fair capital, constant presence and so on. In this article, we take a look at the prerequisite and methodology for change of ownership into a private limited company.

Pros and Cons of Either Entity

These issues are significant contemplations at the front line of worries for entrepreneurs who need to change over from sole ownership to a Private Limited Company:

  • Separate legal entity

With regards to Sole Proprietorships, the proprietor and the business are one and the equivalent under the law and in your dealings with general society. Although you have the benefit of more self-governance over the business and its activities, you are monetarily and legitimately in charge of all risk against the business, for example for obligations and in claims.

  • Liability

As registered Private limited company under The Companies Act 1956, a business has a different legal identity from the proprietor; the organisation members have restricted liability. For sole ownership, loan providers may take legal action against you for debts brought about and venture into your assets and property. Consequently, a sole owner faces a more danger of complete individual budgetary ruin contrasted with a CEO of a Private Limited organisation.

Private Limited companies make good on corporate tax on their benefits and profits that the investors get. The law does not impose a tax on these profits. Duties are resolved at your income tax rate.

  • Limited capital

Sole ownership regularly has restricted subsidising raising choices, regardless of whether as far as getting advances from monetary establishments or as far as equity fundraising from financial specialists – which means your sources of working capital are constrained to your cash and then moving over of any benefits you make from the business.

  • Perpetual progression

A sole ownership’s legal presence is dependent upon your reality, hence your retirement or end will consequently mean the end of your business, in this way, your relatives and companions who are keen on proceeding with the business would certainly do not be able to do so without the managerial problem of joining the business – which is not the situation for a Private Limited Company.

  • Public perception

Sole ownership face troubles in working together on a bigger scale in light of the fact that the recognition is not exactly good than if they somehow happened to do it with a bigger business substance like a Private Limited Company business manages you. Further, it is also increasingly hard for sole ownership to pull in high-value workers who are eager and who view the business as offering little entry door for development just as being shakier than a Private Limited Company.

  • Administrative burden

On the other hand, the consistency prerequisites of a Private Limited Company are a lot higher than those of sole ownership be it in the continuous consistency or the issues to be managed after twisting up are more intricate than for sole ownership. Likewise, the laws, principles, and guidelines under the Indian Companies Act govern Private Limited Companies.

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Necessities for Conversion

The owner ought to guarantee consistency with the accompanying necessities before starting the conversion of ownership into a private limited company:

  • An understanding must be gone into between the sole owner and the private limited company for the conversion.
  • The Memorandum of Association (MOA) of the Private Limited Company ought to incorporate an entity that declares – “The takeover of a sole ownership concern”.
  • Also, one must convert all the benefits and liabilities of the sole ownership firm to the private limited company.
  • The sole owner ought to be a member of the organisation’s directorial board with a voting rule. The directional board comprises, in any event, half of that of the organisation. One must note that a private limited company must have at least two directors.
  • Moreover, the integration principles make it mandatory that the minimum share capital of a private limited company be Rs 1,00,000.
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Documents Required

Conversion of sole proprietorship into private limited company need of the following documents:

  • Basic ID and Address proof of the firm’s directors.
  • Along with a letter of authority/power of attorney.
  • One can present the testimony of the registered office address in the form. It can be of a copy of the electricity bill, rent agreement, sale deed and so forth.

The concerned person needs to provide Form 1, Form 18 and Form 32. Also, the person must upload the documents and forms referenced here on the Ministry of Corporate Affairs website (MCA).

Declaration of Incorporation

After furnishing all the necessary processes indicated above, the MCA approves the stipulated fulfilment necessities. In case the directing body thinks that it’s attractive, the asset will be furnished with a Certificate of Incorporation. Hence, this will adequately bring forth a new private limited company.


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