A Sole Proprietorship company or a Proprietorship company is a registered business entity which is defined under the Companies Act of 2013. In this business model, an individual owns a sole proprietorship, not an enterprise. Therefore, in a sole proprietorship company, the owner and the business are the same things. The owner of the sole proprietorship company directly controls all the aspects related to the business. Only he is accountable for the firm’s functioning and solely owns the business profits or losses. Also, The owner has unlimited liability to the company. So, there is not much scope for business expansion in a Sole Proprietorship system. Sadly, The liabilities increase on an individual which becomes difficult to manage.
A PLC or a Private Limited Company or an LTD or simply a company is a private company. Accordingly, its member directors or shareholders have limited liability. This means that a PLC limits the liability of its shares among its shareholders. Also, a registered PLC limits the maximum number of shareholders to 50. Lastly, a Limited company doesn’t allow public share-trading.
Also Read: Conversion of Partnership Firm into LLP
Why you should convert a Proprietorship into a Private Limited Company?
- Limited Liability: The financial risks are inevitable in a business cycle. So to sustain the progress of a business, one must minimize such risk. This is what a Private Limited Company structure provide. Firstly, it limits the liability of its shares among its shareholders. So, the shareholders would not risk losing their assets for a closure of a company.
- Low repercussions on business losses: Private limited companies are liable to pay corporate tax only on their profits. So, the authorities do not tax the shareholders of a PLC on their dividends. Rather, Income tax rate determines the taxes.
- Business Growth: A sole proprietorship struggles in reaching large-scale business standards. Here, A PLC model proves useful. In case of a PLC, it can attract high-calibre employees that aid in the growth of the business.
- Lesser responsibilities: The burden of the running of the business falls solely on the owner in sole proprietorship. But that is not the case with a PLC. A PLC distributes it business responsibilities among its member directors, rather than pressing all responsibilities on the founder.
- Perpetual Succession: The death of the owner in a proprietorship will dissolve the company. But in case of a Private Limited Company, the firm will continue to exist even after the demise or exit of the individual.
- Investment: PLC is a vast enterprise and is flexible in conducting business operations. Therefore, it can attract consderable investments in the market.
Conditions for conversion
Before embarking on the process of conversion of sole proprietorship into private limited company, the below-mentioned conditions must be fulfilled:
- All the directors of the proposed PLC must have their Director Identification Number (DIN).
- Also, a PLC needs a minimum of two directors to manage its affairs.
- The company requires a minimum of two shareholders so as to look into its affairs.
- No minimum capital requirement is required for conversion, which is one less requirement.
- The proprietorship on it conversion, will transfer all its assets and liabilities to the to-be PLC.
- The shareholding arrangement must be valid for 5 years, if not more.
- In any case, no benefits related to the allotment of shares must be provided to the sole proprietor.
- A sale agreement or the takeover agreement must take place between the proprietorship firm and the company.
- Memorandum of Association must mention the objectives to takeover the business of the sole proprietorship.
Required Documentation
- The applicant must write an agreement with private limited company which will define the conversion process.
- Ownership of Sole Proprietorship and proof of address of the office
- Digital Signature Certificate (DSC) of all directors of the proposed company
- Director Identification Number (DIN) of all directors of the proposed company
- Altered Memorandum and Articles of Association for the proposed company
- Duly filled Form 32 indicating a change or update in the board of directors
- Timely filled Form 18 containing the notice of situation of the registered office of the proposed company
- Kindly filled Form 1 to validate the name availability of the newly formed private company
- Power of Attorney or letter of authority, whichever is applicable
Process of conversion
The process for conversion of sole proprietorship into private limited company is as follows:
- Complete your slump sale agreement formalities as a sole proprietor.
- The applicant must appoint more director(s) in the firm.
- Obtain the DIN and DSC for the said director(s) and yourself (owner)
- File the application to reserve the name of your PLC using the RUN application.
- Draft Memorandum of Association to specify the objective of your new company.
- Draft Articles of Association to specify the code of conduct the company promises to live by.
- File the application for the company’s incorporation.
- Obtain the Certificate of Incorporation from the Registrar of Companies.
- Get the PAN and TAN of your newly formed PLC.
- Make modifications to your bank details as per your new company.
Also Read: Facts that One Must Know About AGR Dues in India
Convert your Sole Proprietorship into a Private Company with Registrationwala
We, at Registrationwala, provide end-to-end solutions so as to aid you in converting a sole proprietorship into a private limited company. Our services include:
- Registering for DINs and DSCs for the company’s directors to authorize the documents.
- Getting the name approval for your company
- Submitting the form for conversion with the required documents.
- Reviewing the application and making any changes if needed
- Obtaining the Certificate of Incorporation of the new PLC
- Assisting you in obtaining PAN and TAN for the new PLC
So, Take your first steps towards this conversion and reach out to us.
