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Priyanka Bajpayee
| Updated: 17 Mar, 2020 | Category: Business Conversion, Compliances

Conversion of Sole Proprietorship Firm into Private Company

Conversion of Sole Proprietorship Firm into Private Company

An individual can start a business in several ways like Sole Proprietorship, Partnership, Limited Liability Partnership or Company Incorporation. Sole Proprietorship is also termed as Sole ownership which is a form of business where an individual introduces his own capital and solely handles the business by using his skills and intelligence.

Where Sole Proprietorship business has various merits like Easy formation, Secrecy and Full control of the individual and an individual with less capital can start the Sole Proprietorship business without involving any other person. It has some loopholes also which cannot be ignored like limited resources, Not suitable for Large scale business operations and Unlimited liability. These demerits result in Conversion of Sole Proprietorship into other forms of Business.

In this topic, we will discuss the conversion process of Sole Proprietorship into Private Limited Company. Before that, it is important to cover a few provisions of Private Limited Company.

What is a Private Limited Company?

In India, running a Private Limited Company is a well-known form of doing business.  The Private limited company is defined under Section 2(68) of the Companies Act,2013[1]. A private company is held for small businesses. The shares of the private limited company cannot be freely traded. Mainly, Startups choose Private limited company as a suitable business structure.

A Private Limited Company means a company which has a minimum paid-up capital as may be prescribed. Further, it must also hold in its Article the below-mentioned restrictions-

  • On the right to transfer its shares- It restricts the right of the member to transfer its shares freely.
  • Membership Limitation– In the case of Private Limited Company, the criteria for members is a minimum number of 2 and a maximum number of 200 members.

What are the Basic criteria of Private Limited Company Incorporation?

The basic criteria of Private Limited Company Incorporation are-

  • Minimum 2 members are required, and a maximum number of members can be 200.
  • It has a separate legal entity.
  • The liability of the members is limited.
  • Only 2 directors are required.
  • No criteria of minimum share capital.
  • DIN and DSC are required for the directors.

What are the advantages and disadvantages of the conversion of Sole Proprietorship into Private Limited Company?

Before conversion, the business owners shall keep in mind the advantages and disadvantages of conversion-

Advantages of Conversion-

  • Company is a Separate Legal Entity.
  • The members have limited Liability.
  • A Private limited company avails Tax benefits.
  • Private Limited Company has perpetual succession. (Death or insanity of the members) does not affect the continuity of the business.

Disadvantages of Conversion-

  • Much compliances and documentation are required.
  • Non-Compliances can result in penal provisions (Penalty and Imprisonment) and also the closure of the company.

The procedure of Conversion of Sole Proprietorship into Private Limited Company

There are various reasons for the conversion of Sole Proprietorship into Private Limited Company i.e. Expansion of business, Better access to financing, Protecting the assets, Attracting more and more investors.

Various steps and process is required for conversion of Sole Proprietorship into Private Limited Company-

  • For Private Limited Company incorporation, it is required for the applicant to get a DSC (Digital Signature Certificate) issued by the Certifying Authority, the authenticity of all the documents (For incorporation and further compliances) is ensured by the DSC.
  • Documents required for Conversion-
  1. Id and Address Proof of the Director.
  2. Passport size photograph.
  3. Copy of Rent Agreement (In case of rented property), Copy of Property papers (In case of Owned Property).
  • Criteria for Conversion-

The assets and liabilities of the Sole Proprietorship relating to the business become the assets and liabilities of the Company.

After conversion, the sole proprietor shall not receive any benefits in any form or manner, other than by way of shares allotted to him.

  • Incorporation of Private Limited Company through SPICE+ FORM

To ease the process of doing business, the Ministry of Corporate Affairs has introduced a new Web Form SPICE+ AND AGILE PRO by replacing the existing SPICE form. SPICE+ form is applicable with effect from 15th February 2020.

SPICE+ form includes all the compliances right from the name reservation of the company to post-incorporation compliances i.e. Opening of Bank Account.

Spice+ form is divided into 2 parts-

  • Name reservation of the company
  • Other Incorporation services. i.e. it covers the incorporation applications after the name gets approved.

Other Incorporation services include-

What details are required for Private limited company incorporation through SPICE+ Form?

The details required for Private Limited Company incorporation through SPICE+ form is-

  • Type and class of company
  • Capital Structure of the company i.e. details of Authorised and Paid-up capital
  • Details of the subscriber and directors.
  • Information required in PAN and TAN.

Attachments required for SPICE+ Form

  • AOA
  • MOA
  • Id and Address proof of the Subscriber and Director
  • Address proof of the office and copy of the Utility Bill
  • Declaration by the first director and subscriber.

The above-mentioned procedure and documents are required for the incorporation of a Private Limited company and conversion of Sole Proprietorship into a Private Limited Company.

Takeaway

To overcome the obstacles of Sole Proprietorship and for availing the Corporate benefits, it is important to convert the Sole Proprietorship into a Private Limited Company. The conversion process of Sole Proprietorship and Private Limited Company is a bit lengthy and expensive process that involves proper documentation, Criteria for conversion and also incorporation process of Private limited company.

Read our article:Conversion Process of One-person company to Public or Private Company

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Priyanka Bajpayee

Priyanka Bajpayee has done Masters in International Business Law and well versed in content writing covering the area of legal and finance. Also, she has practical experience of almost 1.5 years in Legal compliance and secretarial work.

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