How To Convert Your Sole Proprietorship Into A Private Limited Company

The sole proprietor cannot have full advantage of the business as it grows. Therefore, the company needs to be transformed into a  limited liability company. The conversion can be accompanied by all the benefits of the company, including higher capital and limited liability. Turning a partnership into a  limited company brings many benefits, but it also involves the spread of power and the loss of independence. Therefore, you should carefully consider all the factors involved and whether they really lead to the intended privileges before making a decision.

Benefits of a Private Limited Company

Capital expansion: Sole proprietors are limited to the owner’s capital, but limited liability companies can raise capital and raise higher capital for expansion. 

Limited Liability: The sole proprietor is fully responsible for the loss and in the event of a loss, his personal assets are also attached to repay the creditor. However, in the case of a  limited liability company, such liabilities are limited by shares or guarantees. 

Continuity: Since a sole proprietor depends on one person,  its existence is limited to the owner’s ability to act. Limited liability companies, on the other hand, are independent legal entities and do not rely on the existence of a single owner.

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Conditions for converting a sole proprietor to a limited liability company: 

The assets or liabilities of the old sole proprietor are immediately transferred to the assets of the new limited liability company. 

Old owner participation in the new private limited company should be at least 50%. If not, you can say at least 50% of your voting rights. After the establishment of the new company, the former shareholders must hold the shares for at least  5 years. 

The old sole proprietor does not receive any profit or consideration other than the allotment of shares directly or indirectly from the new company. This is because it is not treated as a sale of the old owner company.

An acquisition or sale agreement must be concluded between the sole proprietor and the company. 

The Memorandum of Association (MOA) of the association requires the item “Acquisition of sole proprietorship”.

Procedure for converting Proprietorship to Company

once the above requirements are met, The following procedure is involved in the conversion of a proprietorship to a company 

The proprietor must complete the Slump Sales Procedure 

For all directors, you need to get a director identification number (DIN) and a digital signature certificate (DSC). 

The proprietor must be applied to the availability of the name in form 1.

Prepare  MOA and Articles of Association (AOA)  (AOA) that specify the company’s objects and rules.

Apply for the establishment of the company to the Ministry of Corporate Affairs (MCA)

obtain a Certificate of Incorporation.

Apply for a new PAN and TAN. 

Change the bank details according to the conversion

Mention all the relevant documents.

Documents Required for Conversion

The following documents are required for conversion:

PAN Card copies of all directors (Identity Proof).

Copy of Aadhar card/ Voters ID (Address Proof).

Passport size photographs of Directors.

Proof of ownership of business place (if owned).

Rental agreement if rented.

No Objection Certificate (NOC) of Landlord.

Electricity or water bill.

Requirements for Forming a Private Limited Company

To establish a sole proprietorship in a limited liability company, first, establish a limited liability company, then incorporate the sole proprietorship through the  Memorandum of Association(MoA) and transfer all profits and liabilities to the limited liability company. Therefore, the following requirements must be met before applying for a legal entity establishment certificate. 

Directors: A minimum of two directors are required to establish a limited liability company. One of them can be the proprietor himself and the other can be a relative or friend.  

Director identification number: Directors must have an identification number as a requirement for establishment. Shareholders: A company needs at least two shareholders who can be the same as directors. The owner of a sole proprietor must be one of the directors of a limited liability company. 

Capital: The company must have an authorized capital of at least 1,00,000 rupees.