Sole Proprietorship – legalixo.in

Sole Proprietorship to Private Limited Company

Transform your sole proprietorship into a private limited company with the expert assistance of legalixo. We manage all compliance and legal obligations to ensure a seamless transition.

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Summary of the Transition from Sole Proprietorship to Private Limited Company

Although many individuals initially establish their businesses as sole proprietors due to non-compliance issues, the limitations of this structure become apparent as the business expands. As the enterprise seeks to engage more fully with the broader business environment, the disadvantages associated with sole proprietorships hinder its growth. Consequently, a transition to a private limited company is often pursued. This form of business organization offers numerous advantages compared to sole proprietorships.

To transform a sole proprietorship into a private company, it is necessary to execute an agreement between the sole proprietorship and the newly formed private limited company regarding the sale of the business. The incorporated private company must indicate in its Memorandum of Association that it has acquired the sole proprietorship. Additionally, the sole proprietor should be included as a member of the board of directors, with the right to vote.

Benefits of Conversion of Sole Proprietorship into Private Company

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 sole proprietorship cannot afford highly qualified and capable employees, whereas it is much easier for a 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.

The fundamental prerequisites for transforming a sole proprietorship into a private company.

In accordance with the provisions set forth in the Company Act of 2013, the following requirements must be met to incorporate a certified company in India:

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.

Documents Required for conversion to Private Limited Company

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

Procedure for Conversion of Sole Proprietorship to 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 steps to be followed for converting a sole
proprietorship into a Private Limited Company:

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 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.
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.
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.

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