When a business entity is formed, the most preferred choice is a sole proprietorship structure due to its low compliance needs. Once your business grows, it is important to take steps to limit the liabilities plus minimize the burden of compliance on a single person. The best way out here is to convert your sole proprietorship firm into a private limited company.
The main difference between a sole proprietorship and a private limited company is the liability of the members plus directors. Besides, there is a requisite amount of share capital needed for the proprietorship company.
In this informative post, we will discuss the process of conversion of sole proprietorship into private limited company, conditions and its benefits.
What are the key advantages of conversion from sole proprietorship to private limited company?
A private limited company enjoys many benefits when compared to a sole proprietorship type of business. Some of the major benefits are mentioned below.
Separate legal existence
We know that the private limited company is a separate legal entity as well as its existence is separate from its members. It makes the business possible to own assists plus enter into contracts in the name of the private limited company or even sue a 3rd party in case of a dispute. The members of a company have no personal liability to the creditors of a firm for the company's debts beyond their holding in the business.
Easy transferability
You as an owner can be transferred to an individual or even to a Company by transferring the shares with the consent of shareholders. It is very simple whereas in proprietorship, you can not do such transfer as they are not permitted.
Limited Liability of Directors
In a private limited company, your personal assets (director's personal assets) remain untouched if there are any outstanding debts on your firm. Keep in mind that only the amount invested for incorporation or the personal assets of your company are to be sold off for paying off the outstanding debts.
Taxation
Companies have to pay tax on their taxable profits. There is a broader range of allowances as well as tax deductible costs that can be offset against the profit of company.
Continues in existence
A private limited company has a perpetual succession as it is a separate legal entity. It is not affected by the death of any member. That means it continues to be in existence regardless of the changes in the membership.
Conditions for conversion of sole proprietorship firm in a private limited company
A sale agreement or takeover agreement needs to be entered into between you ( sole proprietor) and company
All the assets and liabilities of the sole proprietorship should be transferred to the company
The MOA (memorandum of association) needs to carry the object "The take over of a sole proprietorship".
Your shareholding must not be less than 50 percent of the voting power, and the same 50 percent must continues to be held for a period of five years. You do not receive any additional advantages (directly or indirectly) except to the extent of shares held.
Procedure of Converting a Sole Proprietorship into a Private Limited Company
Slumps sale formalities: you have to complete the steps related to slump sale first.
Secure the DIN and DSC for the directors: In the 2nd step, you have to get the unique director identification number (DIN) and digital proof of authorization (DSC) for all the directors.
Apply for name availability: In this step, you have to check and apply for name availability in the form 1.
Prepare MOA and AOA: In this step, you have to draft the articles of association as well as memorandum of association. In the memorandum of association, the prime aims of the Business must be stated.
Apply for company registration online: In this step, you must go online for the process of your company registration.
Submit all the documents: all the required documents must be submitted online.
COI (secure Certificate of incorporation) from the registrar: After this, you must secure the Certificate of incorporation from the registrar.
Apply for PAN/ TAN number: you must apply for PAN/TAN number with the authority.
Update your bank details: Now, you have to update your bank details to carry out the transactions.
What documents are required for the conversion?
Conversion of a sole proprietorship into a private limited company need the following documents:
1. ID and address proof of the directors for example- PAN Card of directors and shareholders and foreign individuals can provide passports.
2. Letter of authority or POA
3. Latest Passport size photograph of all directors and shareholders
4. Proof of your registered office address that could be a utility bill copy, sale deed, rent agreement.
5. You have to submit an income tax return acknowledgment.
6. With respect to forms, you need to furnish form 1, form 18 and 32.
7. Rental agreement if rented.
8. No Objection Certificate or NOC of Landlord.
The Documents and forms must be uploaded on the website of the ministry of corporate affairs. After the completion of all the procedures and documents submission, the MCA validates the prescribed compliance needs. In case they find it satisfactory, the business entity will be provided with a Certificate of incorporation and it gives birth to your new private limited company.
To convert a sole proprietorship into a private limited company or public limited company, you can get in touch with ExpertBells. To convert a sole proprietorship into a private limited company can take about 15 to 20 days. Remember, the time taken depends on relevant documents provided by sole proprietor and speed of approvals from government.
Also, to make sure speedy Private Limited Company Registration, pick a unique name for the proposed Company and ensure you have all the needed documents ready before starting the registration process.