- What is the process of conversion of a Sole Proprietorship to a Private Limited Company?
- Introduction
- A Sole Proprietorship is a type of business where a single individual owns and runs the business. The proprietor is personally liable for all debts and obligations of the business and has complete control over its operations. This type of business has low compliance requirements and is relatively easy and inexpensive to set up.
- What is a Private Limited Company?
- A Private Limited Company (PLC) is a type of business organization that is privately held and usually has a small number of shareholders. The liability of each shareholder in a PLC is limited to the amount of money they have invested in the company, and their shares cannot be publicly traded on a stock exchange. This means that ownership of the company is restricted to the existing shareholders, and new investors must be invited to join by the existing shareholders. PLCs are often used by entrepreneurs and small businesses as a way to raise capital and limit their personal liability.
- What is a Sole Proprietorship?
- A Sole Proprietorship is a type of business where a single individual owns and operates the company. The sole proprietor is responsible for all aspects of the business, including finances, management, and decision-making. In this type of business, there is no legal separation between the owner and the business entity. The proprietor receives all profits and is personally responsible for any debts or liabilities incurred by the business. This type of business is often used by entrepreneurs and small business owners who want to maintain complete control over their business operations.
- Benefits of conversion of Sole Proprietorship to Private Limited Company
- · Capital growth: The
equity of a sole proprietorship is restricted to the money of owners, whereas a
Private Limited Company has financing possibilities and can raise more capital
for expansion.
- · Limited Liability: A sole proprietor is entirely responsible for losses and in
the event of a loss the creditors are paid from the personal assets of the
owner. In a Private Limited Company, these responsibilities are limited by
shares or a warranty.
- · Consistency: Since
a Sole Proprietorship has only one member, it can only last as long as the
owner can run it. On the other hand, a Private Limited Company is an
independent legal entity that is not limited by the presence of a single owner.
- Requirements for conversion of Sole Proprietorship to Private Limited Company
- The following are the requirement for the conversion of a Sole Proprietorship to a Private Limited Company:
- ·
A slump sale agreement must be entered between the
Sole Proprietorship and Private Limited Company to transfer all the assets and
liability.
- ·
A sentence stating “An acquisition of a sole
proprietorship” should be included in the memorandum of association (MOA) of a
Private Limited Company.
- ·
Moreover, all of the perks and obligations of the Sole
Proprietorship must be transferred to the Private Limited Company.
- ·
The sole owner will have voting rights as he would be
part of the board of directors and constitute at least 50%of that company. It’s
important to keep in mind that a Private Limited Company must have at least two
directors.
- ·
The sole proprietor does not receive any benefit or
consideration, directly or indirectly, in any form or manner, other than by way
of allotment of shares in the company.
- Prerequisites of forming a Private Limited Company
- A Memorandum of Association (MOA) is used to take over a Sole Proprietorship and transfer all of its assets and liabilities to the Private Limited Company after incorporating the company. As a result, the following prerequisites of forming a Private Limited Company must be fulfilled before applying for a certificate of incorporation.
- ·
There should be
at least two directors, and DIN for each director.
- ·
There should be
at least two shareholders or more.
- ·
The required share
capital is one lakh rupees.
- ·
Moreover, the
Sole Proprietorship will have to dissolve legally. The use of any licenses or
tax registrations by the Sole Proprietorship can then be terminated or reported
to the authorities. Therefore, the shutdown should be reported to the
government.
- Process of conversion of Sole Proprietorship to a Private Limited Company
- There is no such process of conversion of Sole Proprietorship to a Private Limited Company. The members of the company have fulfilled the formalities of the slump sale agreement only. Then the members have to comply with the same process as registering a fresh or new Private Limited Company in India. The process is as follows:
- 1.
First, collect all the necessary
documents.
- 2.
Second, the member should sit down and
decide the name of the Private Limited Company.
- 3.
Third, draft the Article of
Association and Memorandum of Association for the proposed Private Limited
Company.
- 4.
Fourth, apply for
the company registration in the prescribed form i.e. SPICe+ Form:
- Spice+ is divided into two parts:
- Part
A: Apply for the name reservation of the
company in Part A of the form Spice+. It can be used for taking the name
approval of the proposed Company and also for filing Company registration in
one go.
- Part
B: In Part B of the Form Spice+, apply
for the following services:
- 1.
Incorporation
- 2.
DIN allotment
- 3.
Mandatory issue
of PAN
- 4.
Mandatory issue
of TAN
- 5.
Mandatory issue
of EPFO registration
- 6.
Mandatory issue
of ESIC registration
- 7.
Mandatory issue
of Profession Tax registration(Maharashtra)
- 8.
Mandatory Opening
of Bank Account for the Company and
- 9.
Allotment of
GSTIN (if so applied for)
- 5. Open a Bank Account in India under the name of the Private Limited Company.
- Required Documents for Conversion
- ·
Copy of each
director’s PAN card (identity proof)
- ·
Aadhaar card or
voter ID copy (address proof)
- ·
Passport-sized
photos for all Directors
- ·
Proof of a
business’s ownership (if owned) and if rented, then a rental agreement
- ·
Electricity or
water bill; owner’s No Objection Certificate (NOC).
- BOTOM LINE
- To convert a Sole Proprietorship to a Private Limited Company, the owner must follow the same process as incorporating a new Private Limited Company. There is no direct conversion process. The owner must file the necessary documents, such as the SPICe+ form, and fulfill all legal and compliance requirements. Once the Private Limited Company is registered, it will have various benefits that a Sole Proprietorship does not have, such as limited liability, a separate legal entity, better access to funding and investments, and fewer compliance requirements. These benefits are not available to a Sole Proprietorship.
