A sole proprietorship firm can not enjoy all the benefits in order to operate smoothly and efficiently as it keeps growing. And then it will feel the need to convert to a private limited company. This is an important step for many entrepreneurs as it helps in enjoying the benefits of a corporate structure and in expansion of their businesses. A sole proprietorship may avail you a simple and easy setup but converting into a private limited company avails you a lot of advantages like better access to funds, limited liabilities and a better market credibility. Through this blog, we will learn about the various pros and cons of converting into a private limited company when you are a sole proprietorship firm. We will try to learn the essential steps that need to be taken for the necessary conversion and the requirements and benefits of this conversion. But first, let us understand what is a sole proprietorship and what is a limited liability company.
In sole proprietorship, a business is owned and run by a single person. Under a proprietorship, no legal distinction is there between the business and the owner. The proprietor or the owner is solely responsible for all the operations, decisions and profits related to the business. He is personally liable for all the debts and liabilities of the business and hence, the assets of the owner will be at risk if the business faces any loss. Also, the funding options for a proprietorship are limited as compared to other businesses.
Private Limited Company
Those business organisations that are privately owned by shareholders are referred to as private limited companies. A private limited company is a legal structure and is mostly chosen by small or medium sized businesses. Also, the liability of the shareholders is limited when it comes to a private limited company. The shareholders are liable only for their share of the capital contribution. This means that their assets are safe in case the company faces losses or debts. Therefore, a private limited company provides financial security to its shareholders.
Requirements to convert proprietorship to private limited company
Before proceeding further with the process of conversion of proprietorship to private limited company, it is necessary to meet the following conditions:
- The presence of an agreement is necessary. This agreement is drafted between the proprietor and the private limited company. It contains all the terms and conditions for the conversion of proprietorship to private limited company. It consists of the details regarding the transference of assets and liabilities, valuation of business and more.
- The memorandum of association(MOA) belongs to the private limited company and consists of an object clause. This clause clearly states the intention with which the sole proprietorship will be taken over.
- The assets and liabilities of the proprietorship need to be transferred to the private limited company. This transfer news to be documented and recorded properly in order to ensure a smooth conversion from proprietorship to a private limited company.
- It is necessary for the proprietor to be a part of the board of directors and must hold at least 50% of the power to vote in the company. Also, the company must have a minimum of two directors.
- The minimum share capital of the private limited company needs to be Rs. 1 Lakh. At the time of conversion, the proprietor must possess this minimum capital.
Documents required for conversion
The documents that are necessary in order to convert a proprietorship to private limited company are listed below. A person must possess the following documents which are necessary for the conversion:
- Identity Proof of all the Directors(PAN Card)
- Address Proof of all the Directors(Copy of Aadhar Card or Voter ID)
- Passport size photographs of all the directors
- Proof of ownership of the place of business
- In case the property used for business is rented, then a rental agreement
- A no objection certificate(NOC) of the landlord
- Bill of water or electricity
Also, the listed forms are to be submitted to the MCA:
- Form 1 needs to be filed with the MOA , AOA and some other documents.
- Form 18 needs to be filed which helps in specifying the details of the registered office.
- Form 32 needs to be filed as it contains the details of the information of the directors.
Process for conversion of proprietorship to private limited company
Once you possess all the required documents and have satisfied all the conditions that are required to convert proprietorship to private limited company, then you need to follow that steps listed below:
- All the slump sale formalities must be taken care of by the proprietor.
- The Director Identification Number(DIN) and the DSC(Digital Signature Certificate) needs to be acquired for all the directors.
- The proprietor will have to apply for the availability of the name of the company in Form 1.
- The proprietor needs to prepare a Memorandum of Association and an Article of Association of the company in order to specify the goals and rules of the company.
- A Proprietor needs to apply to the Ministry of Corporate Affairs(MCA) for incorporation of the company.
- He needs to submit all the related documents.
- He will receive the certificate of Incorporation.
- The proprietor will have to apply for a new PAN and TAN.
- According to the conversion, the proprietor will have to modify his bank details.
Benefits of conversion of proprietorship to private limited company
There are a lot of benefits for a business if a proprietor converts his business from proprietorship to private limited company. Some of them are listed below:
- Limited Liability: In a private limited company, the assets of the shareholder are safe and protected. Also, the liability of a partner is limited to the amount that they have invested. This is helpful in providing financial security.
- Separate Legal Entity: A private limited company if a unique lawful entity and ensures credibility, stability and continuity in the ownership.
- Better access to funds and capital: A private limited company has better access to funds and capital. As it can perform functions like share issuance and it also attracts investors to invest in the expansion of the business.
- Transference of Ownership: In case of a private limited company, the ownership can be easily transferred through transference of shares, or by business succession planning and also allows selling and purchases of the business.
- Tax Benefits: A private limited company is also eligible for deductions, exemptions and reduced rates which helps in saving tax.