How to Convert Sole Proprietorship into Private Limited Company

The benefits of owning a business can't be reaped by a sole proprietorship as it grows. Consequently, the proprietorship must be converted into a limited company. By converting to a company, all the benefits of a company can be gained, like limited liability, higher capital, etc. It can be beneficial to convert a proprietorship into a private limited company, but it also entails the loss of independence and the diffusion of power. Therefore, all factors involved must be carefully considered before deciding and seeing if the privileges intended are actually brought about.

The conversion conditions:

• The sole proprietor and the company need to enter into a takeover agreement or sale agreement.
• "Takeover of a sole proprietorship" must be the purpose of the Memorandum of Association (MOA).
• As soon as the sole proprietorship becomes a corporation, it must transfer all assets and liabilities to the new organization.
• An owner must hold a minimum of 50% of the voting power for a period of five years, and this must continue to be the case.
• Apart from the benefits associated with shares held, the proprietor receives no additional benefits.

An overview of the conversion process from proprietorship to company:

Upon meeting the above requirements, a proprietorship can be converted into a corporation as follows:

• Formalities for slump sales must be completed by the proprietor.
• It is necessary for all directors to obtain their Director Identification Numbers (DIN) and digital signature certificates (DSCs).
• To request the availability of a name, the proprietor must fill out Form - 1.
• Set out the objects and the rules of the company in the Memorandum of Association (MOA) and Articles of Association (AOA).
• The Ministry of Corporate Affairs (MCA) must be notified that the company has been incorporated.
• Submit all the documents
• The incorporation certificate is received.
• New PANs and TANs should be applied for.
• As per the conversion, modify the bank details.

For conversion, you will need the following documents:

Documents needed for conversion include:

• All directors' PAN cards (identity proof).
• Obtain a copy of the Aadhar card / voter identification card (proof of address).
• Director photographs in passport size.
• Business location proof (if owned).
• If rented, the rental agreement.
• Water or electricity bill.

Here are the forms you need to submit to the MCA:  

• MOA, AOA, and other documents must be accompanied by Form 1. 
• The registered office is specified in Form 18. 
• The directors' information is contained in Form 32.

Formation Requirements for Private Limited Companies:

A sole proprietorship can become a private limited company by first forming the private limited company, and then transferring all benefits and liabilities to the limited company through the Memorandum Of Association (MoA). Before applying for an incorporation certificate, you must meet the following requirements.

• The minimum number of directors required for the formation of a private limited company is two. A relative or friend of the proprietor can be one of them.
• Identifying Number of Directors: It is a requirement for incorporation that the directors have an identification number.
• Company shareholders can be the same as company directors. The company must have a minimum of 2 shareholders. 
• There is a minimum requirement of 1 lakh rupees in authorised capital for the company.

Private limited companies have many benefits:

• An incorporated company's capital is not limited to its owner's capital, unlike a sole proprietorship, which has fundraising options.
• If a sole proprietor incurs losses, he or she will be entirely responsible for them, and his or her personal assets may be attached to repay creditors. Private limited companies, however, limit their liabilities by shares or warranties.
• Sole proprietorships can only operate as long as their proprietor can continue to do so. An independent company, however, is not bound to a single owner, because it is a separate legal entity.