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Sole Proprietorship to Pvt. Ltd. Company

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Convert a Sole Proprietorship to Private Limited Company

It is only a matter of time when a simple sole proprietor is willing to turn his business into a Private liability company in order to take advantages of being a large sized company with more options of growth and of availing finance opportunities. The process of transferring your Sole Proprietorship to Private Limited Company is quite easy, as Sole Proprietorship does not have much standing as a business entity. It is the only one that is given by the licenses such as the GST registration or the MSME registration. As a business grows, it is expected to move on from a simple Sole Proprietorship to Private Limited Company. This is usually done in order to expand the business, to take advantages of being a limited company and to be a separate entity from the owners. A private Limited company has many advantages over a Sole Proprietorship and it is simply a passage of growth and there is a lot to be gained when a Sole Proprietorship to Private Limited Company. The process of conversion is also quite simple and easy, where all you need to do as a business owner is to start a private limited company and an agreement as to be submitted that is between the Private Limited Company and the Sole Proprietor, which declares that all of the assets will be transferred to the Private limited company from the sole proprietorship.

Advantages of Converting a Sole Proprietorship to Private Limited Company

It has Limited Liability

Perhaps the biggest advantage that a Private Limited Company has over a Sole Proprietor is that there is limited liability with the Private Limited Company which a Sole Proprietor does not enjoy. When it comes to running a business, all businesses need money in order to run and most of them end up borrowing from different sources when their own funds or their own savings run out. When it comes to Sole Proprietorship, in case the business gets wind up or if it fails, the Sole Proprietor is liable to pay for the business debt himself. If however, he is unable to pay from the business funds, the amount he has borrowed, then he would have to pay back the debts by selling his personal assets. This means he is personally liable for the business debt. In a private limited company however, this is not the case and the personal assets of the owners are safe from liquidation.

It is a Separate Legal Entity

One of the other big advantages that a Private Limited Company has over a Sole Proprietorship is that the Limited Liability Company is a separate entity as compared to a sole proprietorship, in the eyes of law. This means, everything is done under the name of the company while the owner remains distant. This also means that the owner is not personally liable for the debt and if there is any legal action taken against the business, it would be against the company and not the owner and the owner is safe from being sued against. Even in the case of the company being wind up, the owner remains safe.

Ready for Investment

Equity funding can be accommodated easily by Private Limited companies as there is a proper distinction between the owners of the companies and the directors of the company and of course, there is limited liability. In fact many of the venture capitalists as well as the private equity funds managers prefer to invest in Private limited companies. This is because there would be a requirement by the Limited Liability Partnerships for them to become partners in the running of the business and an OPC may only require one shareholder.

More chances of availing finance

Most of the financial institutions like banks and other lenders are more likely to lend to a private limited company as compared to an unknown sole proprietor. Since a limited liability company is a registered company with limited liability as well as being a separate legal entity, it is a better prospect for giving loans by the banks and other institutions. The company also has various other options of raising finance by issuing shares as well.

Better capacity of debt taking

A private limited company has a better capacity and more options of taking on the debt burden than Limited Liability Partnerships and Sole Proprietorships. Not only are the bank loans and lending more readily available to private limited companies but they have other options of raising finance as well, such as issuing convertible debentures as well as regular debentures through which they can get funds. Overall, a private limited company has a better access and availability to get funds.

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Priyanka Bajpayee
| Date: 17 Mar, 2020

Conversion of Sole Proprietorship Firm into Private Com...

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