Overview of Conversion of Sole Proprietorship into Private Limited Company

Though due to lack of compliance, people start their business as sole proprietors, as the business of a company grows, it does not fit the limitations of the sole proprietorship. With growth, it is aiming to meet with the business world, and the drawbacks of a sole proprietorship do not meet its growth; thus, it goes for conversion into a private limited company. A private limited company has so many advantages over a proprietorship. 

For converting a sole proprietor into a private company, an agreement has to be signed between the sole proprietorship and the newly incorporated private limited company for the sale of its business. Such an incorporated Private company should mention in its Memorandum of Association that it has taken over a sole proprietorship. The sole owner of the proprietorship should be made a part of the board of directors with the voting right.

Conditions required for conversion into Private Limited Company

• The takeover agreement or sale agreement between the sole proprietor and new private limited company
• The takeover should be mentioned in the MOA of the new Private Company as one of the objectives.
• All the assets as well as liabilities of the sole proprietorship should be transferred to the newly incorporated Private Company
• The shareholding of the sole proprietor should be at least 50%, and the same should continue for the next five years.
• The proprietor should not have received any additional benefits.

Basic requirements of Converting Sole Proprietorship into a Private Company 

According to the rules and regulations of the Company Act, 2013, in order to incorporate any certified company in India, the followings should be required:

• Number Of Directors: A private limited company must have a minimum of two directors and a maximum of 15.
• Unique Name

The name of the private limited company should be unique, and it should not resemble any existing companies or trademarks in India.

• Minimum Share Capital

 No minimum share capital required for the Incorporation of a company.

• Designated Office

The registered office of a company does not have to be a commercial space. Even a rented home can be the registered office.

• Memorandum Of Association

One of the objectives of the Memorandum of Association (MOA) should read an expression “the takeover or acquisition of a sole proprietorship concern”.

• Annual Returns

The private limited company should file an annual financial accounts statement and annual returns with the registrar of the company every year.

• Number of Shareholders

There should be at least two shareholders in the private limited company. 

• DIN and DSC

All the directors of a newly incorporated private company must have DSC and DIN. 

Benefits of Conversion of Sole Proprietorship into Private Company

A private limited company has many benefits, such as:

• There is no formal registration for the sole proprietorship, but the Private Companies are registered under the Companies Act 2013. 
• The sole proprietorship does not hold any separate legal entity, and the private limited company is a separate legal entity.
• In a sole proprietorship, shares cannot be transferred, whereas, in a private limited company, the shares are transferred easily.
• Unlike a sole proprietor, a Private Company can raise the fund or capital for expansion. 
• In case of losses, liabilities are limited by shares or warranty in a Private Limited Company, whereas in a sole proprietorship, the sole proprietor is wholly responsible for such losses. 
• A Private Company enjoys tax benefits, where tax is levied on profits only and not on income, whereas the sole proprietor, not a corporate entity, cannot enjoy such benefits. 
• A private limited company enjoys perpetual succession, but the sole proprietorship depends on the life of the sole proprietor. 
• A sole proprietorship cannot afford highly qualified and capable employees, whereas it is much easier for a private limited company. 
• Liability in a sole proprietorship is unlimited, but it is limited to the shares in the private limited company.
• A private limited company is more genuine because, unlike a sole proprietorship, it is registered and enhances the authenticity of the business.

Documents Required for conversion to Private Limited Company

The documents required for the conversion of a sole proprietorship into a Private Limited Company are:

• Proof of identification of all directors
• Address Proof of all the directors
• Passport size photographs of all the directors
• Proof of the ownership of the place of business
• Lease/rent agreement, if the property is rented
• No Objection Certificate from the owner of the land 
• Utility bills 

Other documents required with the appropriate Forms:

• Memorandum of Association
• Articles of Association
• Details of registered office
• Particulars and information of directors

Procedure for Conversion of Sole Proprietorship to Private Limited Company

Conditions to be followed before converting a sole proprietorship to a private limited company

• After incorporating a new private limited company, all the assets and liabilities of the old sole proprietorship will be completely transferred to the incorporating company.
• Even after the conversion takes place, the old sole proprietorship will hold 50% of the shares in a new private limited company. i.e., 50% of the voting rights will be held by a sole proprietor.
• The old sole proprietor will hold shares for a minimum period of 5 years from the date of Incorporation of a new private limited company.
• Similarly, there will not be any monetary consideration between a sole proprietorship and a private limited company as it is a mere conversion, not a sale.

The steps to be followed for converting a sole proprietorship into a Private Limited Company:

• The sole proprietor should complete all the steps related to the slump sale formalities.
• The sole proprietor should obtain the DIN and DSC for all the persons going o be directors of the company to be incorporated.
• Application to be made for checking the availability of name for the new private company.
• The sole proprietor should then draft the MOA and AOA of the new Private Limited Company. In MOA, he must add one objective stating that the sole proprietorship has been taken over by the company.
• The sole proprietor should then apply online for Company Registration from the Ministry of Corporate Affairs online portal. 
• All the documents should be submitted along with the application form.
• Then the applicant should secure the Certificate of Incorporation from the Registrar of Companies. 
• The applicant should then apply for PAN and TAN numbers from the authorized authority. 
• At last, the bank accounts of the private limited company should be updated for carrying out transactions. 

After completion of all the above-mentioned procedures, the MCA verifies the application and the documents filed with it, and after satisfaction, it will issue a certificate of Incorporation. This certificate of Incorporation will give new birth to the private limited company. 

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