Proprietorship to Private Company

A private limited company offers various advantages over the sole proprietorship form of business. Some of them are listed as below:

• A sole proprietor would be suffer with unlimited liabilities for any losses incurred, which means that he/she will be accountable to pay from his personal assets for any losses incurred by the firm. The regulation of a private limited company creates a difference between the owner and the entity, thereby making members liabilities limited.

• Sole proprietors will have to pay tax on their personal income tax rate, which isn’t the case with a private limited entity.

• Sole proprietorship firms are not entrusting with adequate fund-raising options, in distinction to a private limited entity.

• The decease of a sole proprietor would lead to the closure of the firm, whereas a private limited Company facilitates the legal heirs to rightfully take over the affairs of the business.

The proprietor should ensure compliance with the following requirements before starting the conversion of proprietorship into company:

• An agreement for takeover should be enforced into between the sole proprietor and the private limited company.

• The Memorandum of Association (MOA) of the Private Limited Company must include an object that states – “The takeover of a sole proprietorship concern”.

• All the assets and liabilities of the sole proprietorship firm should be transferred to the private limited company.

• The sole proprietor should be a part of the company’s directorial board with a voting power of at-least 50% of that of the company and must continue to be held for a period of 5 year. It should be noted that a private limited company must have a minimum of two directors.

• The incorporation rules of a private limited company make it mandatory to have the minimum share capital to be Rs 1,00,000.

• The proprietor should not receive any additional benefits either directly or indirectly, except to the extent of shares held.

A sole proprietorship can be converted into private limited company if the above-mentioned conditions are fulfilled. The following measures should be initiated by the member to get the proprietorship firm converted into a private company:

• Applying for the Digital Signature Certificate (DSC) and Director Identification Number (DIN) for the sole proprietor and new directors

• Acquiring permission for the naming of the company, the application for which must be made in Form-1

• Apply to Ministry of Corporate Affairs for the incorporation of company.

• Completing the slump sale formalities

• Submitting the relevant documents and forms

• Receive the Certificate of Incorporation.

• Apply for a new PAN and TAN.

• Modify the details of bank account after conversion as per the need.

For converting an entity one need to submit the following documents:

• ID and Address proof of the directors

• Letter of Authority/POA

• Proof of registered office address, (copy of the utility bill, rent agreement, sale deed)

With respect to forms, the concerned person needs to file the form 1, Form 18 and form 32 along with the all necessary documents attached in them. The documents and forms mentioned here should be submitted to the registrar of companies through Ministry of Corporate Affairs (MCA).

After the completion of all the necessary procedures specified above, the MCA will verify all the relevant documents. If the administering body finds it satisfactory and no objection were raised, the entity will be provided with a Certificate of Incorporation, which effectively intimate to a new private limited company.