Sole proprietorship holds many benefits as compared to other entities for those people who are starting a new business with comparatively less risks. It is best for small and medium businesses or for professionals who do not want to be associated with others.
However, it isn't easy to raise capital to scale the business in Sole proprietorship . Sole proprietors have limited avenues for raising capital such as Investment of own savings, taking out loans to support the business, advances from commercial banks or borrowing from finance companies, no way of raising Equity Capital, Unlimited Liability, Difficulty in Obtaining Funds, Higher Tax Incidence and a few more.
Hence, it’s difficult to build a big business as a single person as Sole Proprietorship is seen to hamper growth with time. So, if one is looking to expand his/her business then it is advisable that this structure should be converted to another form once achieving growth to a sustainable level. It is very common for sole proprietors to convert their business into partnerships and private limited companies and others after business starts growing. The conversion process is possible and you can always choose to do so. But due to a ton of information scattered online, many people get confused. In this article we’ll discuss how you can convert your sole proprietorship business to a legal entity.
The proprietor should ensure compliance with the following requirements before beginning the conversion:
The procedure to form a private limited company from a business with sole proprietorship registration is to first form the private limited company and then take over the sole proprietorship through a Memorandum Of Association (MoA) and transfer all benefits and liabilities to the limited company.
One person company is an improved and better form of a sole proprietorship firm and thus conversion of sole proprietorship into One Person Company is a good business decision.
Step 1 - Obtaining Director Identification and Digital Signature Certificate
Step 2 - Applying for name approval by submitting Form SPICe+ 32 application. The name should comply with the guidelines of the Ministry of Corporate Affairs & shall be ending with the words ‘(OPC) Private Limited’.
Step 3 - Once the name is approved, the director has to submit several documents such as MoA and Article of Association. The documents are examined by the Registrar of Companies, and on successful verification, the owner is handed over the receipt of certificate for his incorporation.
The legal forms of both entities are different, so, PAN number, GST Number, Bank Accounts of both entities will always be different from each other. So, to convert the proprietorship firm into a Partnership firm, firstly, it is required to incorporate a partnership firm and then arrange for PAN, GST number, Bank accounts of the Partnership firm.
Then, you have to file all GST Returns and pay pending taxes. After doing so, apply for cancellation of the GST number giving reasons as ‘Change in legal Structure of firm’. It will also ask to enter the GST number of the new Partnership firm. Transfer all assets and liabilities into partnership firm as sale of business by proprietor to partnership firm.
However, it is also provided that, in case of conversion, the proprietorship firm should cease to be a taxable person at all and there should not be any activity after transfer of all assets including stock into a new entity.
Conversion process is possible provided that you fulfill the eligibility criteria of the business structure to which you are switching. In short, the choice of business structure varies from person to person and business to business depending upon their intention. The better way is to hire a professional who is well-versed with these processes.