A sole proprietorship is the most common form of business in India for small business owners. A private limited company is a company that is privately held by its shareholders. Its members are liable for only their shareholdings. The shares of such companies cannot be traded publicly. This article discusses all the important points hovering around the steps involved in sole proprietorship to private limited company conversion.
Conversion of a Sole Proprietorship Into a Private Limited Company Conditions
- After the succession, the assets and liabilities of the sole proprietorship business become the assets and liabilities of the new private limited company.
- Ownership shares in the new company are not less than 50% of the total voting power, and they remain in the hands of the proprietor for a period of five years after succession.
- In addition to receiving shares in the new company, the proprietor does not receive any other benefit or consideration.
- Among the main object clauses of the MOA of the Private Limited Company is “Takeover of a sole proprietorship business by the new company”.
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An Explanation of the Procedure for Converting a Proprietorship Business Into a Private Limited Company
According to the Income Tax Act, at least 2 persons over the age of 18 are required to incorporate a private limited company.
Private limited company conversion procedure for proprietorship businesses:
1. According to the Income Tax Act, at least one of the directors must be an Indian citizen and resident in order for a Private Limited Company to be incorporated.
2. A digital signature certificate should be obtained for all the new company’s directors and shareholders.
3. An application for name reservation, known as a RUN Test, must be filed online with the Registrar of Companies.
4. A name reservation application must be submitted electronically through the MCA Portal (SPICePartB with SPICeMOA, SPICeAOA, AGILEPRO, and SPICeINC9) after approval. In the main object clause of the Memorandum of Association (MOA), it must state: “Takeover of a sole proprietorship business by the new company”.
5. For a private limited company to form and obtain the incorporation certificate, it typically takes 3 to 4 days. The certificate includes the company name, date of incorporation, registered address, and CIN number.
6. As soon as the company is incorporated, the company must open a current account with any bank in India. All company transactions should be conducted through the current account.
7. For the new Company to take over the assets and liabilities of the proprietorship, an agreement needs to be signed between the new Company and the proprietor. An agreement should specify the details of all assets, liabilities, and considerations in exchange for such assets. The agreement should be signed on stamp paper with the appropriate stamp duty to be a valid legal document.
In addition to enjoying a legal existence, you can keep your goodwill and brand value intact through conversion. In addition to limited liability, the ability to attract equity capital, the ability to continue existing, and other advantages, a private limited company offers a number of other advantages over the proprietorship business form.
Your firm can benefit from such changes by expanding its business, gaining better access to various forms of financing, managing liability risks, attracting investors, and finding quality talent.
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