Conversion of Proprietorship into Private Limited Company
As a business grows, the demands of business and the drawbacks
of a proprietorship firm could force an entrepreneur to start the process for
conversion of proprietorship into private limited
company. A private limited company offers significant advantages over
the proprietorship form of business, including that of limited liability,
ability to attract equity capital, continued existence and more. In this
article, we look at the requirement and procedure for conversion of
proprietorship into a private limited company.
Proprietorship vs Private Limited Company
1. A
sole proprietor would be incurred with unlimited liabilities for any
losses incurred, which means that he/she will be required to pay
personally for any losses incurred by the firm. The regulation of a
private limited company makes a distinction between the owner and the
entity, thereby making his/her liabilities limited.
2. Sole
proprietors will be taxed on their personal income tax rate, which isn’t
the case with a private limited entity.
3. Sole
proprietorship firms are not vested with adequate fund-raising options, in
contrast to a private limited entity.
4. The demise of a sole proprietor
would lead to the closure of the firm, whereas a private limited Company facilitates the legal heirs to rightfully take over the affairs of the
business.Requirements for Conversion
The
proprietor should ensure compliance with the following requirements before
beginning the conversion of proprietorship into company:
- An
agreement must be entered into between the sole proprietor and the private
limited company for conversion. Know more about slump sale
agreement.
- The Memorandum
of Association (MOA) of the Private Limited Company must include
an object that states.
- All
the assets and liabilities of the sole proprietorship firm must be
transferred to the private limited company.
- The
sole proprietor should be a part of the company’s directorial board with a
voting power which constitutes to at-least 50% of that of the company. It
may be noted that a private limited company must have a minimum of two
directors.
- The incorporation rules of a
private limited company mandate the minimum share capital requirement to
be Rs 1,00,000.
Initiating the Process of Conversion
A sole
proprietorship can be converted if the above-mentioned conditions are met.
Talking about the conversion process, the following measures must be initiated
by an entrepreneur to get the proprietorship firm converted into a private
company:
- Obtaining
the Digital Signature Certificate (DSC) and Director
Identification Number (DIN) for the sole proprietor and new
director.
- Acquiring
permission for naming the company, the application for which must be made
in Form-1.
- Apply
to MCA for incorporation of company.
- Completing
the slump sale formalities.
- Modifying
details of the bank account in accordance with the conversion.
- Submitting the relevant documents
and forms.
Documents Required
Conversion
of an entity prompts the need of the following documents:
- Basic
ID and Address proof of the directors.
- Proof of registered office
address, which could be a copy of the utility bill, rent agreement, sale
deed and the likes of it.
With
respect to forms, the concerned person needs to furnish form 1, Form 18 and
form 32. The documents and forms mentioned here should be uploaded on the
website of the Ministry of Corporate Affairs (MCA).
Certificate of Incorporation
After the completion of all
the procedures specified above, the MCA validates the prescribed compliance
requirements. If the administering body finds it satisfactory, the entity will
be provided with a Certificate of Incorporation, which effectively gives birth
to a new private limited company.
Created & Posted by Navneet Kumar
CA Article at TAXAJ
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