Proprietorship to Private Limited

Small sole proprietorship businesses often face challenges in expanding their operations due to limited funds, unlimited liability, lack of separation between ownership and management, absence of perpetual succession in case of the owner's death, and inability to bring new investors on board, making them less attractive for investment.

Start-ups and expanding businesses that began as sole proprietorships opt to become Private Limited Companies to easily raise external funding, restrict the shareholders' liabilities, and provide employee stock options to attract top talent.

A Pvt Ltd Company is a privately owned small business entity that is legally separate from its owners, limits ownership to 200 or fewer shareholders, and cannot publicly trade shares.

Converting a sole proprietorship to a Private Limited can be done by signing a sale/takeover agreement and including the takeover of the sole proprietor's business as the primary objective in its Memorandum of Association (MOA).

Capital expansion: While a sole proprietorship is restricted to the owner's capital, a private limited company can pursue fundraising opportunities to secure additional capital for growth.

Limited liability: A sole proprietor bears full liability for losses, with their assets potentially used to repay creditors in the event of losses. Nevertheless, liabilities in a private limited company are restricted either by shares or warranty.

Continuity: A sole proprietorship relies on one individual, so its survival is tied to the proprietor's capacity to function. While the private limited company is its legal entity, it is not dependent on having a sole owner.

The process involves creating a private limited company and then transferring the assets and liabilities of the sole proprietorship to the new company through a Memorandum of Association (MoA). Therefore, the upcoming regulations should be addressed before requesting a certificate of incorporation.

• Directors: A minimum of two directors are necessary to form a private limited company. One of them might be the owner, while the other could be a family member or friend.
• DIN: A Director Identification Number is required for directors before they can be incorporated.
• Shareholders: Shareholders have to be at least two in number for the company, and they are allowed to also act as directors. The proprietor of the solo business must also be a director of the corporation.
• Capital: The business must maintain a minimum authorized capital of 100,000 rupees.

Conditions for Conversion

• The sole proprietor and the company must enter into a takeover agreement or sale agreement.
• The object "The acquisition of a sole proprietorship" must be included in the Memorandum of Association (MOA).
• All assets and debts of the individual business owner must be moved to the corporation.
• The owner must maintain ownership of at least 50% of the voting rights and keep it for a minimum of 5 years.
• The owner does not receive any extra advantages, whether it is through direct or indirect means, except for the shares they own.

These are the procedures followed when transforming a sole proprietorship into a company once the stated criteria are satisfied:

• Request for Approval of Name

A person needs to give 2 distinct names and main purposes for the suggested business to be sent to MCA for review, with one name being chosen for approval. If the name of the sole proprietorship is not similar to any existing company/LLP/trademark, the applicant can continue using the name with the addition of "Private Limited."

• Request for DSC (Digital Signature Certificate) Application

After the name is assigned, we will use the Digital Signature Certificate (DSC) of directors/shareholders to digitally sign the forms. If the directors/shareholders already possess a DSC, this step may be omitted.

• Filing of Forms for Company Formation

Once the name and DSC are validated, the next step is to submit an incorporation application in SPICE+ forms along with the MOA, AOA, and AGILE forms to complete the process.

• Obtain a document verifying the establishment of a company.

Typically, the incorporation certificate is received within 3-5 days of the final submission. Incorporation certification serves as evidence of the company's registration. PAN, TAN, ESIC, EPFO, and Professional Tax registrations will be obtained all at once.

• Modifications in information for additional enrollments.

Following the establishment of the private limited company, all registrations/licenses acquired by the Sole Proprietorship will be revoked and new ones will be obtained in the company's name.

The conversion necessitates the following documents:

• Copy of PAN Card for every director (Proof of Identity).
• Duplicate of Aadhar card/ Voters ID (Proof of Address).
• Photographs of Directors in passport size.
• Verification of ownership of commercial property (if applicable).
• If the property is rented out, a rental agreement will be required.
• Landlord's No Objection Certificate (NOC).
• Electricity and water bill.

The documents that need to be handed into the MCA are:

• The MOA, AOA, and various other documents must be submitted with Form 1.
• Form 18 outlines the information regarding the registered office.
• Form 32 provides details about the directors' information.

You can complete the Private Limited Company Registration process online without any hassle. At Corpseed, we efficiently handle online Company Registrations within a specified timeframe.