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From saving taxes to arranging funds, the most important one is business expansion. If you want to expand your business to the next level after successfully running your business under sole proprietorship, you need to get it converted into a private limited company.
Proprietorship vs Private Limited Company:
These issues are significant contemplations at the front line of worries for entrepreneurs who need to change over from sole ownership to a Private Limited Company:
- A sole proprietor would be incurred with unlimited liabilities for any losses incurred, which means that he/she will be required to pay personally for any losses incurred by the firm. Whereas in the case of a private limited company, the liability of the owners is limited.
- Sole proprietors will be taxed on their income tax rate, which isn’t the case with a private limited entity.
- Sole proprietorship firms are not vested with adequate fund-raising options, in contrast to a private limited entity.
- In case the death or retirement of a sole proprietor would lead to the closure of the firm, whereas a private limited Company facilitates the legal heirs to rightfully take over the affairs of the business.
Benefits of converting a sole proprietorship into a private limited company in India:
- Limited liability: A private limited company provides limited liability protection to its shareholders, which means that the personal assets of the shareholders are protected in case of any business losses or legal liabilities.
- Separate legal entity: A private limited company is a separate legal entity from its shareholders, which means that the company can enter into contracts, own assets, and sue or be sued in its own name.
- Credibility: A private limited company has more credibility in the eyes of customers, suppliers, and investors, as it is subject to stricter regulations and compliance requirements.
- Tax benefits: A private limited company is eligible for various tax benefits, such as lower corporate tax rates, tax deductions on business expenses, and exemptions on capital gains tax.
- Fundraising: A private limited company can raise funds more easily than a sole proprietorship, as it can issue shares to investors and borrow money from banks and financial institutions.
- Continuity of existence: A private limited company has perpetual existence, which means that it can continue to exist even after the death or retirement of its shareholders.
Converting a sole proprietorship into a private limited company can provide several benefits, including limited liability protection, enhanced credibility, tax benefits, and easier access to funding. However, it is important to weigh the costs and legal requirements associated with the conversion process before making a decision.
The process of converting a sole proprietorship to a private limited company in India?
- Obtain Digital Signature Certificate (DSC) and Director Identification Number (DIN): The first step is to obtain a DSC and DIN for all the proposed directors of the company. The DIN can be obtained by filing Form DIR-3 with the Ministry of Corporate Affairs (MCA).
- Reserve a company name: The next step is to reserve a unique name for the new company by filing Form RUN with the MCA.
- Prepare and file the incorporation documents: The next step is to prepare and file the incorporation documents with the MCA, including the Memorandum of Association (MOA) and Articles of Association (AOA). These documents should be drafted in compliance with the Companies Act, 2013.
- Obtain the Certificate of Incorporation (COI): Once the MCA approves the incorporation documents, it will issue a COI, which signifies the formation of the new company.
- Transfer assets and liabilities: After obtaining the COI, the sole proprietorship must transfer all its assets and liabilities to the new company. This can be done through a transfer agreement or by issuing shares to the sole proprietor.
- Obtain necessary registrations: The new company must obtain necessary registrations, such as Goods and Services Tax (GST) registration, employee provident fund (EPF) registration, and professional tax registration, among others.
- Close the sole proprietorship: Finally, the sole proprietorship must be closed by canceling all the registrations and licenses obtained in its name.
It is important to note that the conversion process may vary depending on the specific circumstances of the sole proprietorship and the new company. Therefore, it is recommended to consult with a professional to ensure compliance with all legal and regulatory requirements.
How we can help?
We can provide valuable guidance and support in the process of converting a sole proprietorship to a private limited company in India. Some of how we can help are:
- Assessing the viability of conversion: We can help in assessing the viability of the conversion process by conducting a feasibility study, evaluating the legal and regulatory requirements, and analyzing the potential benefits and risks.
- Drafting and reviewing documents: We can assist in drafting and reviewing the necessary documents for the conversion process, including the Memorandum of Association (MOA), Articles of Association (AOA), and other legal agreements and contracts.
- Compliance with legal and regulatory requirements: We can help in ensuring compliance with various legal and regulatory requirements, such as obtaining necessary licenses and registrations, filing necessary forms with the Registrar of Companies, and complying with tax and labor laws.
- Transfer of assets and liabilities: We can assist in transferring the assets and liabilities of the sole proprietorship to the new private limited company, including drafting transfer agreements and conducting due diligence on the assets and liabilities.
- Intellectual property protection: We can help in protecting the intellectual property of the new company by registering trademarks, patents, and copyrights.
- Resolving disputes: We can help in resolving any disputes that may arise during the conversion process, such as disputes related to ownership of assets or liabilities, or disputes with creditors or suppliers.
We can provide valuable assistance and support in the process of converting a sole proprietorship to a private limited company, helping to ensure a smooth and compliant transition while minimizing legal and financial risks.
Documents Required for Conversion Sole Proprietorship to Private Limited Company?
- PAN Card details of all directors;
- A copy of the Aadhar card, Driving License, and Voters ID of all the directors;
- Passport-sized photographs of Directors;
- Proof of ownership in the form of a sale deed for the Registered Office (if owned);
- Rental Agreement (if rented);
- NOC (No Objection Certificate) from Landlord;
- Utility Bill in the form of electricity or water bill.
The forms required for the conversion are:
- Form 1: The directors need to file this form with the MOA and AOA of the company.
- Form 18: This form specifies the details of the Registered Office.
- Form 32: This form provides details of the directors.