Why Convert Your Sole Proprietorship into a Pvt Ltd Company?
When starting a small business, many entrepreneurs opt for a sole proprietorship due to its unsophistication. While this structure works well initially, it may not be the best choice as the business expands. A sole proprietor bears full liability, which can make securing investors and loans challenging. Converting to a private limited company helps mitigate this risk by distributing liability among shareholders, making the business more attractive to potential investors and financial institutions.
What are the conditions for conversion?
To convert a sole proprietorship firm into a private limited company, the following steps must be taken:
- A takeover or sale agreement must be executed between the sole proprietor and the newly formed company.
- The Memorandum of Association (MOA) should explicitly state the objective of acquiring the sole proprietorship.
- All assets and liabilities of the sole proprietorship must be transferred to the company.
- The proprietor must hold at least 50% of the voting rights in the company and retain this shareholding for a minimum of five years.
- No additional benefits, whether direct or indirect, should be provided to the proprietor beyond the shares allotted.
How to proceed for conversion of proprietorship to company
Once the necessary conditions for conversion are met, the process of transforming a sole proprietorship into a private limited company involves the following steps:
- Complete the slump sale formalities.
- Obtain a Director Identification Number (DIN) and Digital Signature Certificate (DSC) for all directors.
- Apply for name approval using Form-1.
- Draft the Memorandum of Association (MOA) and Articles of Association (AOA), outlining the company’s objectives and operational rules.
- Submit an application for company incorporation to the Ministry of Corporate Affairs (MCA).
- Provide all required documents for verification.
- Obtain the Certificate of Incorporation.
- Apply for a new PAN and TAN for the company.
- Update bank account details to reflect the conversion.
To convert a sole proprietorship firm into a private limited company, the process involves first establishing the private limited company and then acquiring the sole proprietorship through the Memorandum of Association (MoA). This ensures that all assets, liabilities, and benefits are transferred to the newly formed company. The following requirements must be met before applying for a Certificate of Incorporation:
- Directors: A minimum of two directors is required. The proprietor can be one of them, while the second can be a relative or friend.
- Director Identification Number (DIN): All directors must obtain a DIN before incorporation.
- Shareholders: The company must have at least two shareholders, who may also be the directors. The proprietor must be one of the directors of the new company.
- Capital Requirement: The company must have a minimum authorized capital of ₹1 lakh.
Documents Required for Conversion:
- Copy of PAN Card for all directors.
- Copy of Aadhaar Card or Voter ID.
- Passport-size photographs of all directors.
- Ownership document if the premises are owned or a rental agreement if leased.
- Required from the landlord in case of rented premises.
- Recent electricity or water bill as address proof.
Forms to be Submitted to the MCA:
- Form 1: Filed along with the Memorandum of Association (MOA), Articles of Association (AOA), and other supporting documents.
- Form 18: Contains details of the company’s registered office.
- Form 32: Provides information regarding the directors of the company.
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