Conversion of Sole Proprietor to Private Limited Company

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What is Conversion of Sole Proprietor to Private Limited Company?

           Many people start their businesses as single proprietorships because of the low compliance requirements. As the business and earnings grow, it becomes important to separate the bank accounts and tax filings of the sole proprietor from those of the company. The transformation of a sole proprietorship into a private limited company is a viable option for achieving this separation.

     To convert a Sole Proprietorship into a Private Limited Company, an agreement for the sale of the firm must be signed by the Proprietorship and the Private Limited Company (once it has been incorporated). Furthermore, the Memorandum of Association of such a Private Limited Company must include “the takeover of a Sole Proprietorship Concern” as one of its purposes.

         Minimum Requirements For Converting A Proprietorship Firm Into A Private Limited Company

• Minimum 2 directors
• Minimum 2 shareholders for registration of a private limited company
• Minimum Rs.1 Lakh share capital.
• DIN (Director Identification number) for all directors.
• Business owner should mention “Takeover of sole proprietorship concern” as one of the objectives in Memorandum of association 

Documents Required In Converting Sole Proprietorship Into A Private Limited Company

• Latest photograph of all directors & shareholders
• PAN card copy of directors & shareholders (Passport in case of foreign nationals)
• Address proof of all directors & shareholders (Aadhar card and Voter id/passport/driving license)
• Address proof of registered office (electricity bill/telephone bill of the registered office)
• Non-objection certificate (NOC) from the owner of the registered office
• Rent agreement of the registered office (If office is situated at a rented place)
• Income tax return acknowledgement by the sole proprietor

Benefits Of Converting Proprietorship Firm Into A Private Limited Company

• Protection Of Personal Assets of the Directors
• A Private Limited Company is Separate Legal Entity in the Eyes Of The Law
• You Can Raise Capital Easily
• It Comes With The Benefit Of Continuous Existence
• Attract more customers
• Procure bank credits and good investment from reliable investors with ease
• Increases the potential to grow big and expand
• It is very easy to sell a Private Limited Company, as there is very little documentation required and the cost involved.
• Only corporation tax is charged (which is usually lower than other forms of taxes)

Procedure Of Converting Proprietorship Into A Private Limited Company

• In the first step, all the directors have to apply for DSC (digital signature certificate)
  & DIN (director identification number) and it is a mandatory requirement.
• In the second step, name selection is done for the new private limited company. After selecting the name, you need to check the name availability with registrar of companies (ROC). The name of the private limited company should be unique and does not match the name of any existing company.
• After getting the name approval from the registrar, you need to complete all these procedures as early as possible –                                                                  1. Drafting of MOA, AOA & other documents and mention “Takeover of sole proprietorship concern” as one of the objectives in MOA.
  2 Stamp duty payment
  3 Notarization of required documents
• After completing all these procedures, you need to file an application with MCA (Ministry of Corporate affairs) for registration of private limited company along with the application for DIN Allotment
• In the fifth step, MCA will verify all documents and if found satisfactory, MCA issue a certificate of incorporation of a new private limited company.
• Apply the fresh PAN and TAN number of the company in the sixth step.
• Finally, change your old current bank account on new private limited company name.

Conditions for Conversion

1. All the assets and the liability of the Sole Proprietary concern relating to the business immediately before the succession become the assets and the liability of the company.
2. The shareholding of the sole proprietor in the private limited company is not less than 50% of the total voting power in the company and his shareholding continues to remain so for a time period of 5 years from the date of the succession.
3. 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.

Frequently Asked Questions (FAQ’s)

What is Company Registration Certificate?

Once the filing of the documents is through, the ROC calls the attorney on a specific date for scrutiny and makes the necessary changes in the MoA and AoA, which have been filed. After this is done, the Certificate of Incorporation is granted to the company. Upon successful completion of the registration process, you will receive Private limited company registration certificate”

Do I need to have a proper office address for the registration of a “Private limited company”?

No, there is no such requirement. Any person can start a business at their “Place of residence or any other place”. Though you will incur “Private limited company registration cost”.

What are the different types of Private Limited Companies?

• A company limited by shares
• Unlimited company
• A company limited by guarantee.

What is the minimum capital needed to form a Private Limited Company?

You need to have a minimum capital of Rs.1,00,000 to start a private limited company. You need not have this amount in hand or your bank account. You can show this amount as the pre-incorporation expense of the start-up. Also, you can show the capital as infused in the assets.

Can a Private Limited Company own and carry out multiple businesses?

In case it has been mentioned in the “MoA” and approved by the registrar of the company, then only it is possible to carry out multiple businesses. The businesses could be in the same field or different.

Can anyone be a director?

There are only 2 conditions for anyone to be a director of the Private Limited Company.
These are:
• He/she should be 18 years or older
• He/she require a DIN (Director Identification Number)

How many directors are necessary for a Private Limited Company Registration?

Yes, a minimum of two directors are needed for a private limited company. The maximum members can be 200. You can register as a one person company, if you are the sole owner of the company.

What are articles of association and memorandum of association?

These documents contain the rules, vision and mission of your organisation, and define, among other things, the exact business and the roles and responsibilities of shareholders and directors

Can a Salaried person become the director of a company?

Yes, for sure. You can become the director of any type of company. But you need to go through the employment rules and make sure they allow you to do so.

What is meant by Limited Liability protection?

You are only responsible for the extent of your investment in the company. Personal assets are not procured in the case of bankruptcy.

Is Private Limited Company eligible to make FDI (Foreign Direct Investment) in India?

Of course. A private Limited Company is eligible to make FDIs in India.

Are there any annual compliances which must be fulfilled by a Private Limited Company?

Multiple compliances need to be fulfilled by a private company and these are:
• The company must appoint an auditor.
• The company should conduct at least one AGM (Annual General Meeting) and at least 4 board meetings (one in each quarter).
• An auditor must audit the books of the company
• Furthermore, a company shall fill the form AOC-4 and MGT-7 as a part of annual compliance within the specified time frame.
• There should be the annual filing of the ITR and registrar of the companies

Is it necessary to have a company’s books audited?

Yes, a Private Limited Company must hire an auditor, no matter what its revenues. In fact, an auditor must be appointed within 30 days of incorporation. Compliance is important with a private limited company, given that penalties for non-compliance can run into lakhs of rupees and even lead to the blacklisting of directors.

Can NRIs/foreign nationals become directors in a Private Limited Company?

Yes, a NRI or a foreign national can become a director of a private limited company. He or she must obtain a DIN from the Indian RoC. They can also hold a controlling stake in the company. As long as at least one director on the board of directors is an Indian resident.

What is the time taken in conversion of Proprietorship into Private Limited Company?

We can convert proprietorship into private limited company typically in 14-20 days. The time taken also depends on relevant documents provided by the applicant and speed of approvals from government. To ensure speedy registration, please pick a unique name for the proposed Company and make sure you have all the required documents ready, prior to starting the registration process.

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