As the business grows, the drawbacks of the sole proprietorship may drive the owner to choose a more adaptable business structure, like a private limited company. Over proprietorship firms, the private business offers a number of benefits, such as ease of investment, on-going presence, and others. In this article, we’ll examine how to convert a sole proprietorship to a private limited company.
Nowadays, it’s common to change a proprietorship into a private limited company. In addition to being one of the most popular business entity types, the proprietorship is also the easiest to set up. Compared to other business organizations, a proprietorship’s scope and independence make it simpler for employees to adapt. Because there is less control over financial matters, it also helps employees gain more practical experience in managing issues. Having said that, a sole proprietorship is less advantageous than a private limited company as the business expands. One may feel like changing the sole proprietorship into a private limited company with an eye toward future growth.
The following requirements must be met in order to be eligible for the change:
- The company and the sole owner wish to enter into a takeover settlement or sale settlement.
- The takeover of a sole proprietorship is the purpose that the Memorandum of Association (MOA) wishes to hold.
- The sole proprietorship’s assets and liabilities must be transferred to the company.
- A minimum of 50% of the voting power must now be held by the owner, and that ownership must continue for a period of five years.
- Other than the number of stocks held, the owner no longer receives any further benefits, either directly or indirectly.
A legal process must be followed when a proprietorship business considers becoming a corporation.
Advantages of Changing from a Proprietorship to a Company
By changing their single proprietorship into a corporation, a sole owner can gain the following advantages:
- Liability is Limited – The concept of limited liability is the basic justification for turning a proprietorship into a corporation. Limited liability denotes that the firm’s liability is constrained to a particular sum of unpaid capital.
- Perpetual Succession- This would imply that the entity will cease to exist with the death of the ownership concern. This is not for a firm or a private limited company. Even if a particular employee left, the business would continue to run.
- Ability to Raise Capital—Private limited corporations would have little trouble raising capital from a variety of sources.
- More Reputation: When compared to a sole proprietorship business, a private limited company will unquestionably have a better reputation. Registration of the business with the Ministry of Corporate Affairs is required. This registration would make the company more reputed in the eyes of the public. With this registration the company would be more reputed in the public’s eyes.
Eligibility Conditions for Converting a Proprietorship to a Company
The following requirements must be met in order to convert a proprietorship into a corporation:
- All private limited company directors must obtain a director identification number, or DIN.
- Minimum Directors: To oversee the operations of a private limited company, a minimum of two directors must be chosen.
- Shareholders—At least two shareholders must be chosen to oversee the company’s business.
- No Minimum Capital Requirements—According to the Companies (Amendment Act) 2015, a proprietorship must be converted into a company.
Procedure for Converting a Proprietorship to a Private Limited Company
The transformation of a sole proprietorship business into a private limited company is governed by both the Companies Act of 2013 and the Income Tax Act of 1961. The procedures listed below can be used to convert a company to a proprietorship:
- All directors must get a director identification number (DIN) and a digital signature certificate (DSC).
- Obtaining the corporation’s name permission, which must be obtained on Form-1
- The MoA and AoA, which describe the company’s goals and policies, should be prepared.
- Submit a business establishment application to the MCA.
- The owner must execute the slump sale requirements.
- Provide all required paperwork
- An incorporation certificate will be given to you.
Required Documents for Conversion
- A copy of each director’s PAN card (identity proof)
- Aadhaar card or voter ID copy (address proof)
- passport-sized images of the directors
- Evidence of a business’s ownership (if owned)
- If rented, a rental agreement
- Landlord’s No Objection Certificate (NOC)
- Water or electricity charge.
The MCA must receive the forms listed below:
The MoA, AoA, and other documents must be filed with Form 1, and Form 18 contains information on the registered office. Details of the directors’ information are contained in Form 32.