Convert Proprietorship to Private Limited Company - Know Everything in Detail

A solitary proprietorship is unable to reap the full rewards of expansion. The proprietorship will therefore need to be changed into a private limited company. All of a company's advantages, such as greater capital, limited liability, and others, may follow the conversion. Although converting a proprietorship into a private limited company has numerous advantages, it also results in a loss of independence and distribution of authority. Therefore, the choice must be made after carefully weighing all the relevant elements to determine if it actually results in the privileges anticipated.

Weighing The Pros and Cons of Conversion 
 

Before deciding to convert your sole proprietorship into a private limited company, you must take the following important factors into account:

• Separate legal entity
   

When a firm is run only by one person, the owner and the company are considered to be one and the same entity for legal purposes. Even if they have complete control over their business operations, sole owners are nevertheless personally liable for any dangers that their enterprise may face. A private limited business, however, is a distinct legal entity that exists on its own. It has its own resources and liabilities, and it has the right to sue or be sued as well as buy or sell a property. 

• Liability
   

In contrast to a sole proprietorship, a private limited company limits shareholders' responsibility to the value of their stock. The personal assets of shareholders are never taken in order to pay off the company's debts unless there has been fraud.

In the case of a proprietorship, loan providers may file a lawsuit and confiscate the owner's assets to satisfy their debts. Sole proprietors are more likely than shareholders in private limited companies to experience complete financial ruin.

• Tax benefits
   

Due to the fact that taxes are based on profits rather than income, private limited enterprises benefit from corporate tax benefits. On the other hand, since a sole proprietorship is not a corporation, it cannot benefit from the exemptions and advantages of the corporate taxes structure. 

• Capital and fundraising
   

Private limited corporations enjoy a variety of fund-raising opportunities, but sole proprietorships lack acceptable possibilities. In contrast to a sole proprietorship, private limited companies would have little trouble acquiring money from a variety of sources. A private limited business is more likely to get approved for a loan than a sole proprietorship.

• Perpetual progression
   

A sole proprietorship's legal permanency depends on how long the owner stays in business, as opposed to a private limited company, which has perpetual succession. Therefore, the proprietorship will be dissolved at retirement or death. This means that any heirs who would like to inherit the company and operate it would be unable to do so.

• Public perception
   

Due to the fact that they run a smaller business structure, such as a sole proprietorship, their acquaintance isn't as credible as it would be if they ran a larger business structure, such as a private limited company.

Additionally, it gets harder and harder for single proprietorships to recruit high-value, talented, and qualified workers. This is because of the fact that potential employees are aware of the company's restricted room for growth. 

• Administrative burden
   

In comparison to sole ownership, a private limited corporation has much more stringent compliance requirements. This is so that private limited companies are operated in accordance with the laws, rules, and policies established under the 2013 Companies Act. The administrative burden is worthwhile, though, given the credibility that corporate entities gain as a result of adhering to compliance rules.

Requirements for converting a proprietorship into a private limited company
 

To convert proprietorship into a private limited company, the following requirements must be met:

• It is necessary for the sole proprietor and the business to sign a takeover or sale agreement.
• The business must receive the single proprietorship's assets and liabilities in full.
• The Memorandum of Association (MOA) of a private limited company should include a statement stating that its purpose is "The takeover of a sole ownership firm."
• The owner's shareholding must account for at least 50% of the voting power, and it must remain that way for five years.
• Except for the number of shares held, the proprietor should not obtain any further benefits, either directly or indirectly.
• The private limited company shall have a minimum authorised share capital of Rs. 1,00,000.

Procedure to convert 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 2013 and the Income Tax Act 1961. The procedures listed below can be used to convert proprietorship into a private limited company:

• The owner must finish the slump sale procedures.
• All directors must get a Director Identification Number (DIN) and a Digital Signature Certificate (DSC).
• The owner must submit Form 1 to request the availability of the name.
• Create the company's Memorandum of Association (MOA) and Articles of Association (AOA), which should contain the company's goals and regulations.
• Contact the Ministry of Corporate Affairs to request the incorporation of your business (MCA).
• Send in all the necessary paperwork.
• The Certificate of Incorporation should be obtained.
• Get a new PAN and TAN by applying.
• Change the bank information to reflect the conversion.

Documents required to convert proprietorship
 

The following paperwork is necessary for conversion:

• A copy of each director's PAN card (Identity Proof).
• Aadhar card or voter ID copy for address proof.
• Passport-sized photos of the directors.
• Proof of business location ownership (if owned).
• If rented, a rental agreement.
• Landlord's No Objection Certificate (NOC).
• Water or electricity bill.

One must submit the following forms to the MCA:

• Along with the MOA, AOA, and other papers, Form 1 must be filed.
• The specifics of the registered office are detailed in Form 18.
• Details of the directors' information are contained in Form 32.

Prerequisites for forming a private limited company
 

To convert proprietorship into a private limited company, follow these steps: first, create the private limited company; next, use a Memorandum of Association (MoA) to take over the sole proprietorship and transfer all rights and obligations to the limited company. So, before requesting a certificate of incorporation, the following conditions must be satisfied.

• Directors

A pvt ltd company should have a minimum of two directors in order to be incorporated. The owner himself is one of them, and any other family member or acquaintance is the other.

• Director Identification Number
   

In order to incorporate, the directors must have an Identification Number.

• Shareholders
   

The minimum number of shareholders for the business is two, and they might be the same people who serve as directors. One of the directors of the limited company must be the proprietor of the single proprietorship.

• Capital
   

The minimum authorised capital for the company is one lakh rupees.

Benefits of a private limited company
 

• Capital expansion
   

Unlike a private limited company, which has fundraising possibilities and can obtain more money for expansion, a sole proprietorship is only as wealthy as its owner.

• Limited liability
   

A sole proprietor is entirely liable for losses, and in the event of losses, creditors may also attach the sole proprietor's personal assets to satisfy debts. Such responsibilities are, however, constrained in the case of a private limited corporation by shares or a warranty.

• Continuity
   

Because a sole proprietorship depends on only one person, it can only last as long as the owner is able to run it. On the other hand, a private limited company is a distinct legal entity that is not constrained by the existence of a single owner.

Conclusion
 

The entire process is thought to be horrifying. In the conversion process, a firm is registered as a whole, additional paperwork is then provided to complete the takeover, and finally, the proprietorship is terminated. Sole proprietorship to private limited company conversion is thought to be a time-consuming process. On the other hand, Online Legal India can help you complete this task far more quickly and easily. Contact our specialists right away!