In this article, you will learn how to switch sole proprietorship to a private limited company.
A sole proprietorship is a legal entity that a single person can form to run a business. However, any lawsuit involving the business will make the owner and their assets liable. Know how to Switch Sole Proprietorship to a Private Limited Company? The owners of a private limited company, on the other hand, are protected from liability by the company’s legal status. This article will discuss the benefits of takeover of sole proprietorship by private limited company in India.
What Is a Sole Proprietorship?
A sole proprietorship is when one person acts as both the owner and the employee. This means that there is no distinction between taxes, liability, and ownership. The business is just one person.
Why You Should Convert Your Sole Proprietorship to a Private Limited Company
When you start a small business, it’s typically done by a sole proprietorship. This is great when you first get started, but a proprietorship may not be the best option as your business grows. You end up with all of the liability yourself, making it difficult to find investors and loans. A private limited company will help you avoid this issue because the liability is spread out among the shareholders.
Process of Conversion:
- Apply for DSC
- Check company name availability
- Send an application for Reserve Unique Name (RUN)
- Share copies of MoA, AoA
- Prepare and Pay stamp duty
- Notarise the necessary company documents
- File for company registration
- Submit an application for DIN
- Apply for PAN and TAN of your organization
Benefits of Conversion
One of the benefits of converting a sole proprietorship to a private limited company is that it will be easier to attract and keep investors. Investors are more likely to invest in a private limited company because they will have shares in the company and protection if anything goes wrong with the company. There are also tax benefits associated with owning shares in a private limited company.
Private limited companies are corporate entities that allow various venture capitalists and angel investors to invest more funds. This can be done through unsecured bonds or stockholders.
Private Limited Companies support FDIs whereas other companies need various licenses. The value of a private limited company is higher when it is registered than when it is not. The registration process for a private limited company can be completed from the official website of the Ministry of Corporate Affairs. The increased reputation among suppliers, vendors, and investors brings increased revenue to the private limited company.
It is easy to transfer shares to members of the company and issue new shares. As a separate entity, a private limited company is able to buy properties and assets on its own behalf. This includes the ability to litigate or be litigated.
Difference Between the Proprietor and Private Limited Company
A sole proprietorship is a business structure where a single individual owns and manages the entire business. On the other hand, a Private Limited Company is a separate legal entity, distinct from its owners, with the advantage of limited liability.
Unlike a sole proprietorship, a PLC can have multiple shareholders, directors, and a formal organizational structure.
Law Governing the Conversion of Proprietorship into Private Limited
The conversion process adheres to the Companies Act of 2013 and the Income Tax Act of 1961 in India.
The Companies Act of 2013 provides the legal framework for incorporating, governing, and operating companies in India. It lays down the procedures, requisites, and compliances for transforming a sole proprietorship into a PLC.
The Income Tax Act of 1961 focuses on the taxation aspects of businesses in India, including converting a sole proprietorship to a PLC. It outlines the tax implications, benefits, and duties tied to the conversion.
Requirements for Conversion
Before embarking on the conversion journey, certain prerequisites must be met:
Agreement: An agreement between the sole proprietor and the PLC must outline conversion terms, including asset and liability transfers, business valuation, and related matters.
Memorandum of Association (MOA): The MOA of the PLC should explicitly state the intent to acquire the sole proprietorship. This inclusion ensures legal clarity.
Transfer of Assets and Liabilities: All assets and liabilities of the sole proprietorship should be meticulously transferred to the company, ensuring a seamless transition.
Directorial Board and Shareholding: The sole proprietor becomes part of the directorial board and should hold a minimum of 50% of the voting power. A PLC must have at least two directors.
Minimum Share Capital: A PLC must have a minimum share capital of Rs 1,00,000 as per incorporation rules. This requirement must be met during conversion.
Prerequisites for Forming a Private Limited Company
The conversion process involves forming a PLC before taking over the sole proprietorship:
Directors: At least two directors are required for a PLC. One can be the sole proprietor, and the other can be a relative or friend, ensuring compliance.
Director Identification Number (DIN): All directors must obtain a unique DIN before incorporation, essential for directorship positions.
Shareholders: A minimum of two shareholders, including the sole proprietor, are necessary.
Conditions for Converting to a Sole Proprietorship
During the conversion, the following conditions should be met:
Transfer of Assets and Liabilities: All assets and liabilities of the sole proprietorship should be entirely transferred to the new PLC.
Shareholding and Voting Rights: The old sole proprietorship must hold a minimum of 50% shares in the new PLC, retaining significant control.
Minimum Shareholding Period: The old sole proprietor should hold PLC shares for at least five years from incorporation, stabilizing ownership.
Non-Monetary Consideration: The conversion is not a sale; no monetary consideration should be involved between the entities.
Documents Required for Conversion
The necessary documents include –
- Identification and address proofs of directors
- Passport-sized photos
- Property documents (if owned)
- Lease agreements (if rented) and
- NOCs (if applicable)
Conclusion
In conclusion, the sole proprietorship structure works great for a small business. However, as the business grows and becomes more complex, it may be time to convert to a private limited company.
How much turnover is required for Pvt Ltd?
There's no specific turnover requirement for a Pvt Ltd company; it can vary based on the nature of the business and other factors.
What is the minimum capital of Pvt Ltd?
The minimum share capital required for a Pvt Ltd company is Rs 1,00,000 or its equivalent currency.
How much tax does a Pvt Ltd pay?
The tax rate for a Pvt Ltd company depends on its annual income and the applicable tax slabs.
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