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 offers numerous advantages, including

• The establishment of a sole proprietorship does not require formal registration; however, private companies must be registered in accordance with the Companies Act 2013.
• A sole proprietorship lacks a distinct legal identity, while a private limited company is recognized as a separate legal entity.
• In a sole proprietorship, the transfer of shares is not permitted, in contrast to a private limited company, where shares can be transferred with relative ease.
• Unlike a sole proprietor, a private company has the capability to raise funds or capital for its growth and expansion.
• In the event of financial losses, a private limited company limits liabilities to the extent of shares or warranties, whereas a sole proprietor bears full responsibility for any losses incurred.
• A private limited company benefits from tax advantages, as taxation is applied solely to profits rather than income, while a sole proprietor, not being a corporate entity, does not have access to such benefits.
• Furthermore, a private limited company enjoys perpetual succession, whereas the existence of a sole proprietorship is contingent upon the life of the sole proprietor.
• A sole proprietorship may struggle to attract highly qualified and skilled employees, whereas a private limited company finds it significantly easier to do so.
• Liability in a sole proprietorship is unlimited, while in a private limited company, it is confined to the shares held.

• Lastly, a private limited company is perceived as more credible, as it is officially registered, thereby enhancing the legitimacy of the business.

Documents Required for conversion to Private Limited Company

Procedure for Conversion of Sole Proprietorship to Private Limited Company

Prerequisites to consider prior to the transformation of a sole proprietorship into 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.

Canjain Assistance in converting a sole proprietorship to a Private Limited Company