As an organisation expands, customer appetite for its products and services will increase. On the opposing side, it is going to be more challenging to run a company with just a single businessperson, consequently, at this time, the vast majority of sole proprietorships commence to convert proprietorship to a private limited company. When compared to a sole proprietorship form of business, a private limited company comes with numerous benefits, including limited liability, having the chance to access equity capital, an uninterrupted existence, and others.
A contract for the sale of the sole proprietorship’s firm needs to be carried out along with the newly established private limited company if you want to convert a sole proprietorship into a private company. The acquisition of a sole proprietorship serves as an event that would indicate a private firm having incorporation must be recorded in its Memorandum of Association(MOA). A position as a member of the board of directors with voting privileges must be granted to the proprietorship’s sole proprietor right.
The conversion of proprietorship to a private limited company carries several advantages, however, it also results in a splitting of power and an erosion of independence. Consequently, it is an essential decision that needs to be taken cautiously considering all of those pertinent factors. One should also consider whether this decision will be beneficial to the development of the business.
Difference Between Sole Proprietorship and Private Limited Company
There are a few differences between a sole proprietorship and a private limited company, Knowing these differences will help in choosing the suitable business type
Documents Required for the Conversion of Sole Proprietorship to Private Limited Company
- ID proofs of all the directors, such as their passports, Aadhaar cards, or PAN cards.
- Address proof of all the directors which may include an Aadhaar card, a passport, or utility bills that show each director’s place of residence (such as a water or energy bill).
- Each director involved with the conversion must have recent passport-size photos.
- If the business address has been owned by the sole proprietor, property documents, which might include ownership papers or sale deeds, must be provided.
- A copy of the lease or rent agreement between the property owner and the sole proprietor is required to be provided if the place of business is rented.
- One must obtain a No Objection Certificate, or NOC, from the landowner authorising the conversion if the place of business is owned by someone other than the sole proprietor.
- Documents such as recent utility bills identifying the address of the business (such as an electricity or water bill).
Forms to be submitted to the MCA are
- The MOA, AOA, SPICE+ form and other necessary documents need to be filed with Form 1.
- The information about the registered office is provided in Form 18.
- Particular information regarding the directors will be provided in Form 32.
Director Identification Number (DIN) and Digital Signature Certificate (DSC)
All the directors who are involved in the conversion process, get their DIN and DSC. Directors are provided with a unique ID number called a DIN, and safe digital transactions are carried out using a DSC.
Procedure to Convert Proprietorship to Private Limited Company
The proprietor is held accountable for completing the slump sale procedures.
- For each director, a Director Identification Number (DIN) and a Digital Signature Certificate (DSC) need to be obtained.
- The proprietor has to submit Form – 1 to inquire about the availability of the name.
- Generate the MOA and Articles of Association (AOA) for the company, which should define the objectives and rules of the company.
- Apply for the company’s incorporation into the Ministry of Corporate Affairs (MCA).
- Submit all of the necessary documents.
- Collect the document known as the Certificate of Incorporation.
- Apply for a new PAN and TAN.
- Revise the bank information according to the conversion.
What Is Required to Form a Private Limited Company?
The procedure to convert a proprietorship firm into a private limited company is to initially establish the private limited company, which is subsequently utilised for acquiring the sole proprietorship through the use of a Memorandum of Association (MoA) and transfer all rights and obligations to the private limited company. Therefore, before seeking a certificate of incorporation, the requirements that follow must be accomplished:
- Directors: A private limited company is required to have at least two directors for the company to be formed. The proprietor itself represents one of them at the time, whereas any other relative or friend is the other one.
- Director Identification Number: It is mandatory for incorporation that the directors have an Identification Number (DIN).
- Shareholders: At least two shareholders are needed and these can include the same people who act as directors. One among the directors for the private limited company has to be the proprietor of the sole proprietorship.
- Capital: The least permitted capital to obtain for the private limited company is one lakh rupees.
Advantages of Converting from a Sole Proprietorship to a Private Limited Company
- The sole proprietorship is not formally registered, however, private limited companies are, under the Companies Act of 2013.
- Shares are unable to be transferred under a sole proprietorship, whereas they’re able to be in a private limited company.
- In a Private Limited Company, liabilities have limitations by shares or warranties in the event of losses, whereas with a sole proprietorship, the proprietor is completely liable for such losses.
- The sole proprietor, whose business is not a corporate organisation, is not eligible to obtain the tax advantages that a private limited company receives, because tax is assessed only on profits rather than income.
- The sole proprietorship relies on the existence of its sole proprietor whereas a private limited company enjoys perpetual succession.
This is essential to completely assess legal, financial, and strategic considerations while converting from a sole proprietorship to a private limited company. Although the procedure appears complex as well, entrepreneurs who are interested in growing might want to think about it because of the benefits it offers regarding implicit expansion, reduced liability, and flexibility in operation. To make the procedure for conversion flow smoothly and guarantee an effective conversion, it’s essential to make contact with expert legal and financial professionals. At Taxxinn, we’ve got the expertise to furnish guidance and assist throughout the conversion procedure, documentation and setting up the private limited company.