Conversion of Sole Proprietorship to Private Limited Company

A Sole Proprietorship company or a Proprietorship company is a registered business entity under the Companies Act of 2013 that an individual and not an enterprise owns. Here, the owner and the business are the same in a sole proprietorship company. Also, the sole proprietorship company’s owner directly controls all the business’s aspects. And they are accountable for the firm’s functioning and solely own the business profits or losses. The owner has unlimited liability to the company. And there is not much scope for business expansion in a Sole Proprietorship system as the liabilities increase on an individual, which becomes difficult to manage. You should go for conversion of sole proprietorship to private limited company in that case.

A PLC or a Private Limited Company or an LTD, or simply a company, is a privately held company where the liabilities of its member directors or shareholders are limited. So in a private company setup, the owner’s liability is limited to their shares and limits the maximum number of shareholders to 50. Therefore, shares cannot be traded publicly in a private company setup.

A Private Limited Company offers significant advantages over a sole proprietorship firm, namely limited liability, ability to attract equity capital from investors, perpetual existence, and more.

Why should you convert a Proprietorship into a Private Limited Company?

  • Limited Liability: Given that financial risks are inevitable in a business cycle. But to sustain the progress of business, one must minimize such risk. Therefore, in a PLC, the company limits the liability of its shareholders to their shares. So if, for some reason, a company were to be closed, the shareholders would not risk losing their assets.
  • Low repercussions on business losses: Private limited companies are liable to pay corporate tax only on their profits. The shareholders of a PLC are not taxed on their dividends. Taxes are determined as per their income tax rate.
  • Business Growth: Once the business starts expanding, sole proprietorship struggles in reaching large-scale business standards, whereas PLCs can attract high-caliber employees that aid in the growth of the business.
  • Lesser responsibilities: The burden of the running of the business and its related operations falls solely on the owner in a sole proprietorship, whereas, in a PLC, the company distributes business responsibilities among its member directors, which makes the business activities much easier to manage.
  • Perpetual Succession: The owner’s death in a proprietorship will dissolve the company. Whereas in the case of a Private Limited Company, the company will continue even after the demise or exit of an individual from the company.
  • Ability to Raise Funds: A PLC can attract much more investments than a proprietorship because of its vast enterprise and flexibility in conducting business operations. 

Conditions for conversion

Before embarking on the process of conversion of your sole proprietorship into a Private Limited company, the proprietor must fulfill the following conditions:

  • All the directors of the proposed PLC must have their Director Identification Number (DIN).
  • The proposed company must have a minimum of two directors to manage the affairs of a PLC.
  • The proprietor must maintain a minimum of two shareholders to look into the company’s affairs.
  • No minimum capital requirement for conversion.
  • The proprietor must transfer all the assets and liabilities of the proprietorship to the to-be PLC.
  • The individual sole proprietor shareholding should not be less than 50%.
  • The shareholding must be valid for 5 years.
  • The sole proprietor must provide no benefits related to the allotment of shares.
  • The applicant must carry out a sale or takeover agreement between the proprietorship firm and the company.
  • In the Memorandum of Association, one of the objectives of the business must be the takeover of the sole proprietorship business.

Required Documentation

  • Th applicant must draft and send a written agreement between the sole proprietorship and private limited company to the Registrar of Companies
  • Ownership of Sole Proprietorship and proof of address of the office
  • Digital Signature Certificate (DSC) of all directors of the proposed company
  • Director Identification Number (DIN) of all directors of the proposed company
  • Altered Memorandum and Articles of Association for the proposed company
  • Duly filled Form 32 indicating a change or update in the board of directors
  • Duly filled Form 18 containing the notice of situation of the registered office of the proposed company
  • Duly filled Form 1 to validate the name availability of the newly formed private company
  • Power of Attorney or letter of authority, whichever is applicable

Process of conversion

The process to convert a Sole proprietorship to a Private limited company is as follows:

  1. Complete your slump sale agreement formalities as a sole proprietor.
  2. Appoint another director(s) to head your new Private Limited Company (PLC).
  3. Obtain the DIN and DSC for the said director(s) and yourself (owner)
  4. File the application to reserve the name of your PLC using the RUN application.
  5. Draft Memorandum of Association to specify the objective of your new company and Articles of Association to specify the code of conduct the company promises to live by.
  6. File the application for the company’s incorporation.
  7. Obtain the Certificate of Incorporation from the Registrar of Companies.
  8. Get the PAN and TAN of your newly formed PLC.
  9. Make modifications to your bank details as per your new company.

Also Read: Here is what you need to know about TEC certification

Convert your Proprietorship into a Private Company with Registrationwala

We, at Registrationwala, provide end-to-end solutions for converting a sole proprietorship into a private limited company, and so our services include the following:

  • Registering for DINs as well as DSCs for the company’s directors
  • Also, getting the name approval for your company
  • Afterwards, submit the form for conversion with the required documents.
  • And reviewing the application and making any changes if needed
  • Finally, obtaining the Certificate of Incorporation of the new PLC
  • Further assisting you in obtaining PAN and TAN for the new PLC
  • And Further helping you with maintaining your books.

So, no headaches for you, just for us. Take your first steps towards this conversion and reach out to us for knowing about other registrations and licenses.

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