Sole Proprietorship

Conversion of Proprietorship to Private Limited Company

Been wondering about expanding and scaling your small business? Consider converting your sole proprietorship into a private limited company. In this article, we will take a look at the prerequisites for this conversion.

As a business develops, the demands of the business world and the downsides of sole ownership could constrain its growth and development. This is why many entrepreneurs opt for converting sole proprietorship into a private limited company. 

It has significant advantages over other types of ownership structures, such as limited liability, the ability to attract additional funding, perpetual succession and so on.

Weighing The Pros and Cons of Conversion 

You must consider the following key areas before deciding to convert your sole ownership to a private limited company:

Separate legal entity

In the case of sole proprietorships, the proprietor and the business are one and the same under the eyes of the law. Although sole proprietors enjoy the benefit of self-governance over their business activities, they are personally responsible for all risks involved in their business. On the other hand, a private limited company is a separate and individual legal entity. It has its own assets and liability, it can be sued or can sue, purchase or dispose of the property. 

Liability

Unlike a sole proprietorship, shareholders’ liability in a private limited company is restricted to the amount of their shareholding. Except in cases of fraud, the personal assets of shareholders are never acquired to settle the company’s debts.

In the case of a sole proprietorship, loan providers may sue the proprietor and seize his assets and property for the obligations of their business. As a result, a sole proprietor is more likely to face total financial devastation than a shareholder in a private limited companies.

Tax benefits

Private limited companies enjoy corporate tax benefits, where taxes are levied on profits instead of income. On the other hand,  a sole proprietorship not being a corporate entity cannot take advantage of the corporate taxation structure’s exemptions and benefits. 

Capital and Fundraising

Sole proprietorships lack suitable fund-raising options, but private limited companies benefit from numerous fund-raising avenues. Private limited entities would have little trouble raising cash from a wide range of sources compared to a sole proprietorship. Banks are more willing to give loans to a private limited company than a sole proprietorship. 

Perpetual progression

Unlike a private limited company that enjoys perpetual succession, the legal permanence of a sole proprietorship is determined by the proprietor’s life span. As a result, retirement or death will result in the dissolution of the proprietorship. This means that heirs interested in inheriting and running the business will be unable to do so.

Public perception

Sole proprietorships have difficulties networking and collaborating on a larger scale due to the fact that their reputation isn’t as credible as it would be if they operated a larger company structure, such as a private limited company.

Furthermore, sole proprietorships find it increasingly difficult to attract high-value employees who are qualified and capable. This is because prospective employees recognize the limited scope for expansion inherent in the business structure. 

Administrative Burden

Compliance formalities and requirements of a private limited company are a lot higher than those of sole ownership. This is because the laws, regulations, and guidelines under the Companies Act, 2013 govern the operation of private limited companies. However, the credibility that corporate entities enjoy on account of meeting the compliance requirements, make the administrative burden worth the trouble.

Requirements for Conversion

The following conditions have to be satisfied for the conversion of proprietorship into a private limited company:

  • A takeover agreement or sale agreement needs to be entered into between the sole proprietor and the company
  • All the assets and liabilities of the sole proprietorship must transfer to the company
  • The Memorandum of Association (MOA) of the Private Limited Company ought to incorporate a declaration that its object is – ‘The takeover of a sole ownership concern’
  • The shareholding of the proprietor should not be less than 50% of the voting power, and the same should prevail for a period of 5 years
  • The proprietor should not receive any additional benefits either directly or indirectly, except to the extent of shares held
  • The minimum authorized share capital of the private limited company should be ₹1,00,000.

Prerequisites for Conversion

  • Minimum of 2 shareholders 
  • Minimum 1 lakh share capital
  • DIN for all directors
  • Minimum of 2 directors
  • DSC for all directors

Documents Required for Conversion

For the conversion of sole proprietorship into a private limited company you need the following documents:

  • PAN card copy of all directors (identity proof)
  • Copy of Aadhar card/ voters ID (address proof)
  • Passport size photographs of directors
  • Proof of ownership of business place (if owned)
  • Rental agreement (if rented)
  • No Objection Certificate (NOC) from Landlord (if rented)
  • Electricity or water bill

What are the Forms?  

  • Form 1 filed with MOA, AOA and other documents 
  • Further, Form 18 specifying details of the registered office
  • Form 32 including information about the directors

Declaration of Incorporation

After completing the registration process through the SPICE+ form and Agile Pro with the required documents, the MCA upon verification approves the conversion with the Certificate of Incorporation. 

If you want help with the conversion or want to do it the easy way, check out Vakilsearch’s conversion package. From filling forms to drafting all the required documents, our experts will take care of everything for you.

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