As a business grows, the demands of business and the drawbacks of a proprietorship firm could force an entrepreneur to start the process for conversion of proprietorship into private limited company. A private limited company offers significant advantages over the proprietorship form of business, including that of limited liability, ability to attract equity capital, continued existence and more. In this article, we look at the requirement and procedure for conversion of proprietorship into a private limited company.
Proprietorship vs Private Limited Company
A private limited company offers a lot of advantages over the sole proprietorship form of business. We have listed a few of them below:
- A sole proprietor would be incurred with unlimited liabilities for any losses incurred, which means that he/she will be required to pay personally for any losses incurred by the firm. The regulation of a private limited company makes a distinction between the owner and the entity, thereby making his/her liabilities limited.
- Sole proprietors will be taxed on their personal income tax rate, which isn’t the case with a private limited entity.
- Sole proprietorship firms are not vested with adequate fund-raising options, in contrast to a private limited entity.
- The demise of a sole proprietor would lead to the closure of the firm, whereas a private limited Company facilitates the legal heirs to rightfully take over the affairs of the business.
Requirements for Conversion
The proprietor should ensure compliance with the following requirements before beginning the conversion of proprietorship into company:
- An agreement must be entered into between the sole proprietor and the private limited company for conversion. Know more about slump sale agreement.
- The Memorandum of Association (MOA) of the Private Limited Company must include an object that states – “The takeover of a sole proprietorship concern”.
- All the assets and liabilities of the sole proprietorship firm must be transferred to the private limited company.
- The sole proprietor should be a part of the company’s directorial board with a voting power which constitutes to at-least 50% of that of the company. It may be noted that a private limited company must have a minimum of two directors.
- The incorporation rules of a private limited company mandate the minimum share capital requirement to be Rs 1,00,000.
Initiating the Process of Conversion
A sole proprietorship can be converted if the above-mentioned conditions are met. Talking about the conversion process, the following measures must be initiated by an entrepreneur to get the proprietorship firm converted into a private company:
- Obtaining the Digital Signature Certificate (DSC) and Director Identification Number (DIN) for the sole proprietor and new director.
- Acquiring permission for naming the company, the application for which must be made in Form-1.
- Apply to MCA for incorporation of company.
- Completing the slump sale formalities.
- Modifying details of the bank account in accordance with the conversion.
- Submitting the relevant documents and forms (covered separately).
Documents Required
Conversion of an entity prompts the need of the following documents:
- Basic ID and Address proof of the directors.
- Letter of Authority/POA.
- Proof of registered office address, which could be a copy of the utility bill, rent agreement, sale deed and the likes of it.
With respect to forms, the concerned person needs to furnish form 1, Form 18 and form 32. The documents and forms mentioned here should be uploaded on the website of the Ministry of Corporate Affairs (MCA).
Certificate of Incorporation
After the completion of all the procedures specified above, the MCA validates the prescribed compliance requirements. If the administering body finds it satisfactory, the entity will be provided with a Certificate of Incorporation, which effectively gives birth to a new private limited company.
