Proprietorship to Private Limited
Converting a sole proprietorship into a Private Limited Company allows access to benefits such as limited liability, perpetual existence, separate legal entity, attracting more investors, etc. Pvt Ltd Company is a preferred business structure for startups and growing enterprises.
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Conversion of Proprietorship to Private Limited Company
Small sole proprietorship businesses often face challenges in expanding their operations due to limited funds, unlimited liability, lack of separation between ownership and management, absence of perpetual succession in case of the owner's death, and inability to bring new investors on board, making them less attractive for investment.
Start-ups and expanding businesses that began as sole proprietorships opt to become Private Limited Companies to easily raise external funding, restrict the shareholders' liabilities, and provide employee stock options to attract top talent.
A Pvt Ltd Company is a privately owned small business entity that is legally separate from its owners, limits ownership to 200 or fewer shareholders, and cannot publicly trade shares.
Converting a sole proprietorship to a Private Limited can be done by signing a sale/takeover agreement and including the takeover of the sole proprietor's business as the primary objective in its Memorandum of Association (MOA).
Benefits of Private Limited Company
Capital expansion: While a sole proprietorship is restricted to the owner's capital, a private limited company can pursue fundraising opportunities to secure additional capital for growth.
Limited liability: A sole proprietor bears full liability for losses, with their assets potentially used to repay creditors in the event of losses. Nevertheless, liabilities in a private limited company are restricted either by shares or warranty.
Continuity: A sole proprietorship relies on one individual, so its survival is tied to the proprietor's capacity to function. While the private limited company is its legal entity, it is not dependent on having a sole owner.
Requirements for Establishing a Private Limited Company
The process involves creating a private limited company and then transferring the assets and liabilities of the sole proprietorship to the new company through a Memorandum of Association (MoA). Therefore, the upcoming regulations should be addressed before requesting a certificate of incorporation.
- Directors: A minimum of two directors are necessary to form a private limited company. One of them might be the owner, while the other could be a family member or friend.
- DIN: A Director Identification Number is required for directors before they can be incorporated.
- Shareholders: Shareholders have to be at least two in number for the company, and they are allowed to also act as directors. The proprietor of the solo business must also be a director of the corporation.
- Capital: The business must maintain a minimum authorized capital of 100,000 rupees.
Conditions for Conversion
- The sole proprietor and the company must enter into a takeover agreement or sale agreement.
- The object "The acquisition of a sole proprietorship" must be included in the Memorandum of Association (MOA).
- All assets and debts of the individual business owner must be moved to the corporation.
- The owner must maintain ownership of at least 50% of the voting rights and keep it for a minimum of 5 years.
- The owner does not receive any extra advantages, whether it is through direct or indirect means, except for the shares they own.
Procedure for Conversion of Proprietorship to Private Company
These are the procedures followed when transforming a sole proprietorship into a company once the stated criteria are satisfied:
- Request for Approval of Name
A person needs to give 2 distinct names and main purposes for the suggested business to be sent to MCA for review, with one name being chosen for approval. If the name of the sole proprietorship is not similar to any existing company/LLP/trademark, the applicant can continue using the name with the addition of "Private Limited."
- Request for DSC (Digital Signature Certificate) Application
After the name is assigned, we will use the Digital Signature Certificate (DSC) of directors/shareholders to digitally sign the forms. If the directors/shareholders already possess a DSC, this step may be omitted.
- Filing of Forms for Company Formation
Once the name and DSC are validated, the next step is to submit an incorporation application in SPICE+ forms along with the MOA, AOA, and AGILE forms to complete the process.
- Obtain a document verifying the establishment of a company.
Typically, the incorporation certificate is received within 3-5 days of the final submission. Incorporation certification serves as evidence of the company's registration. PAN, TAN, ESIC, EPFO, and Professional Tax registrations will be obtained all at once.
- Modifications in information for additional enrollments.
Following the establishment of the private limited company, all registrations/licenses acquired by the Sole Proprietorship will be revoked and new ones will be obtained in the company's name.
Documents Required for Conversion
The conversion necessitates the following documents:
- Copy of PAN Card for every director (Proof of Identity).
- Duplicate of Aadhar card/ Voters ID (Proof of Address).
- Photographs of Directors in passport size.
- Verification of ownership of commercial property (if applicable).
- If the property is rented out, a rental agreement will be required.
- Landlord's No Objection Certificate (NOC).
- Electricity and water bill.
The documents that need to be handed into the MCA are:
- The MOA, AOA, and various other documents must be submitted with Form 1.
- Form 18 outlines the information regarding the registered office.
- Form 32 provides details about the directors' information.
Why Corpeed
You can complete the Private Limited Company Registration process online without any hassle. At Corpseed, we efficiently handle online Company Registrations within a specified timeframe.
Connect With Corpseed
Connect with the Corpseed team to discuss your requirements at IVR: 7558640644 or hello@corpseed.com. It takes 20–25 minutes to discuss the requirement.
Dedicated Manager
Once you discuss the requirement, we will align a dedicated Account Manager to understand your business needs and assist throughout the process.
Real Time Update
Track the progress of your application and always know what’s in progress and what’s done.
Job Completed
Once the job is completed, you will receive registrations & certifications directly to your email ID and at your doorstep.
Frequently Asked Questions
Quick answers to common questions about this service.
Can ownership of a sole proprietorship be transferred?
No, the sole proprietorship's ownership cannot be transferred.
In the event of conversion, who is eligible to become a member of a Private Limited Company?
Foreigners/NRIs, as well as individuals and organizations, are welcome to become members/shareholders of the private limited company. Nonetheless, the individual must be at least 18 years old and possess a valid PAN card. Hence, any individual, including the sole proprietor, has the opportunity to join the Company as a member.
Is it necessary for me to be physically there for this procedure?
There is no need for this, all necessary documents can be submitted electronically, so your physical presence is not necessary. Simply send us scanned copies of all necessary documents and forms.
Is it possible for the sole proprietor to transition into a director role upon conversion of the company?
Yes, the individual proprietor has the option to become a director after the company is converted.
Is it possible for me to establish a Private Limited Company using my home or residential address for registration?
Certainly, you can officially establish the company using your home address. You are required to provide both your utility bill for your home address and a No Objection Certificate from the premises owner.
What is the procedure to obtain documents such as a Certificate of Conversion, Memorandum of Association, Articles of Association, PAN, and TAN?
You will be getting these documents both electronically through email and physically through mail at your provided address.
Do companies need to have their books audited?
Indeed, a private limited company must have its books audited annually and submit them to the Registrar of Companies (ROC).
Does the conversion of a sole proprietorship to a company result in capital gains taxes being applied?
If the requirements stated in the Income Tax Act 1961 are met, there will be no capital gain tax on the conversion of a sole proprietorship firm; otherwise, the sole proprietor will be required to pay the tax.
What does a slump sale agreement entail?
A lump sum sale involves selling a business in its entirety for a total price without breaking down the value of separate assets or debts. A slump sale agreement is signed by the seller and purchaser to finalize the sale/transfer of the business.
What is the time frame required to establish a Private Limited Company through the conversion of a Sole Proprietorship in India?
The typical time for conversion is between 15 and 20 days, with both Name Approval and Final Approval needed from government entities. Nonetheless, this relies on the workload at the Central Registration Centre (CRC), MCA.
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