As business progresses, its demand and responsibilities increases which can provoke a proprietorship firm to convert his proprietorship into Private limited Company. Conversion of Proprietorship into Private Limited Company can be beneficial in many ways; this Article provides the procedure, benefits and requirements for converting proprietorship into private limited company.
Proprietorship and Private Limited Company:
In case of Private Limited Company the liability of the shareholders is limited to the extent of their shareholdings; the liabilities are limited to the assets of the company.
Whereas, in case of Sole Proprietorship there is no legal difference between the business and the owner and the liability of the proprietor is unlimited to the personal assets of the owner.
Business is identified because of the proprietor in case of proprietorship having no separate legal identity and it ends with the death of owner, whereas in Private Limited Company the company has its separate legal identity, which continues even after the death of the owner by his heirs.
Advantages of Conversion of Proprietorship into Private Limited Company :
- Separate Legal Identity- Conversion of Proprietorship into Private Company would lead to birth of a new identity, separate from its owner. A private limited company has its own personality which exist even after the death of the owner.
- Limited Liabilities- In case of Private Company the liability is limited to the amount of shares held by them , owners personal assets are not affected. The liability is limited to the assets of the company and owners personal assets cannot be claimed unless in case of
- Adequate Fund-raising options- Conversion of Proprietorship into Private Company creates a better prestige in market of the company , which helps the company in fund raising in market either by way of loans or by offering shares to a limited extent.
- Perpetual succession.– A Private Company is a legal person having its own identity it is not dependent on the owner, in case of death of the owner the company is continued by the legal heirs. Unlike in case of proprietorship where the company ends with the death of the proprietor. Private Limited Company provides continuation of the Company by legal heirs even after the death of the Director
- No Stamp Duty- All movable and immovable properties of the Proprietorship firm automatically vest in the Company and there is no need of instrument of transfer to be executed and hence no stamp duty is required.
- Carry forward of losses – The accumulated losses of proprietorship firm shall be carried forward further to the successor company for a period of eight years.
Requirements or Pre – conditions for Conversion:
- Setting up of a Private Limited Company- The first step for conversion of Proprietorship into Private Company is setting-up of a private company.
- An Agreement must be entered between sole proprietorship and Private Limited Company by way of Slump Sale Agreement. (These are agreements providing transfer of one or more business , without assigning individual value to each and every assets and liabilities)
- The Memorandum of Association (MOA) of a private company must include an object that states: “The takeover of the Sole Proprietorship concern.”
- The shareholding of the old proprietor must be at least 50% in the new private limited company or you can say min 50% voting rights power. Even after the incorporation of new company old proprietor has to hold the shareholding at least for the 5 years.
- The Incorporation rules of a Private Limited Company mandate minimum share capital. Thus, a Private Company cannot be incorporated without a share capital.
- Minimum two Directors are required for setting up of a Private Limited Company. In case of Private Company being setup by an NRI it is important that one Director should be an Indian resident.
- All the assets and liabilities of Proprietorship firm must be transferred to Private Limited Company.
Procedure of Conversion:
- Applying for the Digital Signature Certificate (DSC) and Director Identification Number (DIN) for all the Directors.
- Application for name availability- An Application for the availability of name has to be made in Form-1 for approval of the Company, to ensure that no one else can use same name in future.
- Changes if any proposed by Registrar of Companies (ROC) – Any changes proposed by Registrar of Companies in the name application should be complied with.
- Prepare Memorandum of Association (MOA) and Articles of Association(AOA) of the Company.
- Apply to Ministry of Corporate Affairs for incorporation of a Company.
- Apply for fresh Permanent Account Number (PAN) & Tax Deduction and Collection Account Number (TAN) number of the Company.
- Certificate of Incorporation: After the fulfillment of all the requirements specified above, the Ministry of Corporate Affairs on being satisfied, will issue the certificate of incorporation of a company thereby, giving birth to a new Private Limited Company.
- Change old current bank account on new Private limited company.
- Complete the Slump sale formalities.
- Submitting the relevant documents and forms.