Many business people start their businesses as a Sole Proprietorship due to the low compliance requirements. As the business and the incomes grow, there is a need to separate the bank accounts and the tax filings of the Sole Proprietor and that of the business. To accomplish this separation a possible solution is to convert the Sole Proprietorship into a Private Limited Company.

To convert a Sole Proprietorship into a Private Limited Company, an agreement has to be executed between the Proprietorship and the Private Limited Company (once it is incorporated) for the sale of the business. Further, such Private Limited Company so incorporated must have “the takeover of a Sole Proprietorship Concern” as one of the objectives in its Memorandum of Association.

This conversion can bring in all the benefits of a company like higher capital, limited liability, and so on. Conversion of a proprietorship into a private limited company provides many benefits, but it also brings along the separation of power and loss of independence. Therefore the decision must be taken after careful consideration of all the factors involved and see if it genuinely brings about privileges intended.

The process of conversion or proprietorship into company is suitable for an individual due to the following reasons:

Limited Liability-: The liability of a sole proprietorship entity is unlimited. This form of liability is not present when considering a business of a private limited company. Limited liability means the liability is limited to only a particular amount of capital contributed to the company. By conversion of proprietorship into company, an individual can get the benefits of limited liability.

Less Responsibility-: By conversion of proprietorship into a company, an individual would have less responsibility. As a company has more amounts of shareholders and directors, the responsibility would be delegated to other individuals.

• An agreement of takeover or sale needs to be entered between the Proprietorship and the Private Limited Company.
• The Memorandum of Association (MOA) needs to carry the object “The take over of a sole proprietorship”.
• All the assets and liabilities of the sole proprietorship must be transferred to the company.
• The shareholding of the proprietor should not be less than 50% of the voting power, and the same must continue to be held for a period of 5 years.
• The proprietor does not receive any additional benefits either directly or indirectly, except to the extent of shares held.

Following are the steps, which are involved in the conversion of a proprietorship to a company when the above-mentioned requirements are met:

• The proprietor must complete the slump sale formalities.
• The Director Identification Number (DIN) and the Digital signature certificate (DSC) must be obtained for all the directors.
• The proprietor must apply for the availability of name in Form – 1.
• Prepare the MOA and Articles of Association (AOA) of the company specifying the objects and the rules of the company.
• Apply for the incorporation of the company to the Ministry of Corporate Affairs (MCA).
• Submit all the relevant documents.
• Receive the Certificate of Incorporation.
• Apply for a new PAN and TAN.
• Modify the bank details as per the conversion.

Following are the documents, which are required for the conversion:

• Copy of PAN Card of the Directors
• Passport size photograph of Directors
• Copy of Aadhaar Card/ Voter identity card
• Copy of Rent agreement(If rented property)
• Electricity/ Water bill (Business Place)
• Copy of Property papers (If owned property)
• Landlord NOC (Format will be provided)

The forms to be submitted to the MCA are:  

• Form 1 must be filed with the MOA, AOA and other documents. 
• Form 18 specifies the details of the registered office. 
• Form 32 contains particulars of the information of the directors.

Checklist for Registering a Company in India

To form a private limited company from a sole proprietorship, the procedure is to first form the private limited company, then take over the sole proprietorship through a Memorandum of Association (MoA), and transfer all benefits and liabilities to the limited company. Therefore, the following requirements must be taken care of before applying for a certificate of incorporation.

Two Directors: A private limited company must have at least two directors and at most, there can be 15. Of the directors in the business, at least one must be a resident of India.

Unique Name: The name of your business must be unique. The suggested name should not match with any existing companies or trademarks in India.

Minimum Capital Contribution: There is no minimum capital amount for a company. A company should have an authorized capital of at least Rs. 1 lakh.

Registered Office: The registered office of a company does not have to be a commercial space. Even a rented home can be the registered office, as long as an NoC is obtained from the landlord.

Memorandum Of Association( MOA): In the objective clause of Memorandum Of Association (MOA), there should be a phrase present “ the takeover or acquisition of a sole proprietorship concern”.

Annual returns: The private limited company should file an annual financial accounts statement and annual returns with the registrar of the company every year.

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.

Following are the benefits which can be enjoyed by a sole proprietor through conversion of proprietorship into company:

Liability is Limited: The main reason for conversion of proprietorship into company is the principle of limited liability. Limited liability means the liability is limited to only a specific amount of unpaid capital of the firm.

Perpetual Succession: This would mean after the death of the proprietorship concern, the entity will come to an end. This is not for a private limited company or a company. Even after the exit of an individual the company would still be operating.

Ability to Raise Funds: Private limited companies would easily be able to raise funds from different sources.

More Reputation: A private limited company would definitely have more reputation when compared to a sole proprietorship concern. The company would be registered with the Ministry of Corporate Affairs (MCA). This registration would make the company more reputed in the eyes of the public.

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