What is the process of conversion of a Sole Proprietorship to a Private Limited Company?

Introduction

People start their businesses as Sole Proprietorship due to the low compliance requirements. As a business grows, the demands and drawbacks of a sole proprietorship make it necessary for an entrepreneur to start the process of conversion from a sole proprietorship to a Private Limited Company. If compared to a Sole Proprietorship, a Private Limited Company has several advantages, including limited liability, the capacity to raise equity capital, durability, ease of registering via the SPICe+ form, and more. Before going through the process of conversion of Sole Proprietorship to Private Limited Company and its benefits, let’s have a quick look at what is a Sole Proprietorship and a Private Limited Company.

What is a Private Limited Company?

A Private Limited Company is a small commercial corporation that is privately owned. In a Private Limited Company, a member’s liability is limited to the number of shares he or she holds. Shares in a Private Limited Company cannot be exchanged publicly.

What is a Sole Proprietorship?

A Sole Proprietorship is a business entity that is owned, controlled, and managed by a single person. The owner of the business is called the sole proprietor. As the business is run by a natural person, there is no legal difference between the promoter and the business. The promoter himself receives all the profits.

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).

Wrapping up

The process of conversion of Sole Proprietorship to a Private Limited Company will be completed in one step, which is fulfilling the formalities of the slump sale agreement. Because there is no such process of conversion. The directors have to follow the same process as incorporating a Private Limited Company by filing the SPICe+ form. The Private Limited Company will enjoy the benefits of limited liability, separate legal entity, fewer compliance requirements, etc. which the sole proprietor never enjoyed.