Conversion of 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
How to reserve the name for a Company?
Under
'RUN”, the applicant can make an application by proposing 2 different names
with its implication
For how long is the Company incorporation
process valid?
Once
a Company is incorporated, it will be in existence and active as long as the
annual compliances are submitted regularly.
For how long can the Sole Proprietorship be
in existence with the newly formed Private Limited Company?
The
proprietorship firm must be closed within 90 days or three months of
incorporating of the Limited Company.
Are the assets and properties of Sole
proprietorship firm transferred to the Private 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.
How the funds are converted from
Proprietorship to Private Limited Company?
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.
What are the key factors for incorporating a
private limited company?
A
Pvt. Ltd. company would require two or more members who shall be the directors
of the company.
Who can become a member of a Private Limited
Company?
Any
individual/ or organization including foreigner can become a member of a
Private Limited Company
Can I transfer the permits and license from
Sole Proprietorship to Private Limited Company?
No,
you cannot transfer the permits and license from Sole Proprietorship to Private
Limited Company
