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Sole Proprietorship to Private Limited Company
As a business grows, the demand of business will rise and in the other side, it would be difficult to manage and control the firm with a single business person, hence in this stage most of the Sole Proprietorship begins the act to convert itself into private limited company. A private limited company enjoys significant advantages when compared sole proprietorship type of business, some of them include limited liability, the possibility to draw equity capital, a constant existence, and so on.
Along with many benefits, the conversion of a sole proprietorship into a private limited company brings the diffusion of power and there will be a loss of independence. Hence, it is a crucial decision and it must be taken very carefully considering all the factors involved in it and figure out if it genuinely brings privileges to your growing business.
Conditions for Conversion
- A sale agreement or takeover agreement needs to be enrolled in between the sole proprietor and private limited company.
- The Memorandum of Association (MOA) of the Sole proprietorship needs to contain the object ‘The takeover of a sole proprietorship”.
- All the properties, assets and liabilities of the sole proprietorship firm must be transferred to the private limited company.
- The shareholding of the proprietor must not be less than 50% of the voting power, and it continues the same for a period of 5 years.
- The proprietor or the owner does not get any additional advantage either directly or indirectly, except to the level of shares held.
Sole Proprietorship vs. Private Limited Company
A sole proprietor would maintain with unlimited liabilities for any losses or debts incurred. Simply means, the proprietor is responsible for all happenings of his business whether it is good or bad, he is responsible to pay for any loss or debts bear by the firm. But in the case of a private limited company, the rules and regulations consider the owner and the company as a separate legal entity, thereby earning liabilities of the owner is limited. Usually, sole proprietors do not have enough fund-raising alternatives whereas private limited company enjoys the advantages of fundraising options. The demise of the owner or proprietor may end the incumbency of the firm, whereas in a private limited company rightfully nominates the legal heir to take over the position ann affairs of the business.
Benefits of Private Limited Company in India
- Credit Availability A private limited company can receive funds from the unsecured bond as well as from the stockholders. This type of company is regarded as a corporate entity which draws in various venture capitalists and angel investors that supports and helps the company to raise more funds and to expand their business.
- Limited Liability as the private limited company is a separate legal entity, the responsibility of the directors or members of a private limited company is limited to their share only.
- Perform Globally The private limited companies support Foreign Direct Investment whereas other types of firms need appropriate licensing/Liaising and commendation from the administration for investments from foreign.
- Increased Value in Marketplace A registered private limited company is more trustworthy when compared with non-registered ones. All the information about the registration of private limited companies is completely obtained from the official website of the Ministry of Corporate Affairs. Suppliers, Vendors, and investors trust registered private limited companies over the other business organisations which in turn increases the brand value of the company among the customers and suppliers and other investors
- Ease In Transfer of Ownership It is very easy to transfer shares to new members and to issue fresh shares in a private limited company.
- Separate Legal Entity A private limited company is considered as a separate legal entity that possesses all the rights to litigate or to be litigated. It acts as an artificial person and can buy any property or assets on its own name.
- Perpetual Existence A private limited company is considered as a lifelong existence which means they cannot be ended or dissolved due to many reasons like death, retirement or insanity of any of their directors/ members/ shareholders.
Documents Required for the Conversion of Sole Proprietorship to Private Limited Company
- Identity Proof – Copy of PAN of all directors.
- Address Proof – Copy of Aadhar card/ Voters ID of all directors
- Passport size photographs of Directors.
- Proof of ownership of registered business place (if owned).
- Rental agreement if the registered business place is a rented place.
- NOC or No Objection Certificate from the Landlord.
- Utility bill – Electricity or water bill.
Following are the forms which need to be submitted to the MCA:
- Form 1 should be filed with the firm’s MOA, AOA and other documents.
- Form 18 details the information about the registered office.
- Form 32 details the information of the directors.
Procedure for Conversion of Proprietorship to Company
To start a private limited company from a sole proprietorship, first, form the private limited company and then take on the sole proprietorship through an MOA or Memorandum Of Association (MoA) and reassign all liabilities and benefits to the private limited company.
Therefore, the following prerequisites must be seen before applying for a certificate of incorporation of the company.
Directors: To form a private limited company, a minimum of two directors are required. One of the directors can be the proprietor or owner, and the other can be any friend or relative.
Director Identification Number or DIN: The directors of the company must have an Identification Number as a requirement for incorporation.
Shareholders: The Company must have a minimum of two shareholders, and can be the same as the directors of the company. The owner or proprietor of the sole proprietorship can be one of the directors of the private limited company.
Capital: The private limited company should have a minimum capital of 1 Lakh rupees to start the business.
Frequently Asked Questions
Under ‘RUN”, the applicant can make an application by proposing 2 different names with its implication
Once a Company is incorporated, it will be in existence and active as long as the annual compliances are submitted regularly.
The proprietorship firm must be closed within 90 days or three months of incorporating of the Limited Company.
The assets of proprietorship firm can be commuted into capital for the Private Limited Company, by the making of resolutions and later including in contracts/agreements. Any debt or loan owing to any creditors such as fines/penalties must be settled before the transferring process of such assets.
All bank accounts which are used by the sole-proprietorship firm need to be closed and a new bank account in the name of Private Limited Company need to be opened. In that way, all cheques and bank transfers are transferred to the Private Limited Company.
A Pvt. Ltd. company would require two or more members who shall be the directors of the company.
Any individual/ or organization including foreigner can become a member of a Private Limited Company
No, you cannot transfer the permits and license from Sole Proprietorship to Private Limited Company
