Conversion Of Proprietorship To Private Limited Company

A sole proprietorship is having characteristic of unlimited liability and stakeholders shall have no clarity on succession planning but are privileged with less compliance. The era of obtaining funds from outside by issuing various instruments like Shares and Debentures is provoking sole proprietors to convert their Proprietorship into a Private Limited Company.

After conversion, there shall be restrictions on Independent decisions and the division of power lies with Board or management. After consideration of pros and cons and based on the vision and mission of the business of every owner, the right steps shall be considered for the betterment of an organization.

CONDITIONS FOR CONVERSION

1. A takeover agreement or sale agreement needs to be entered into between the sole proprietor and the company.
2. The Memorandum of Association (MOA) needs to carry the object “The take over of a sole proprietorship”.
3. All the assets and liabilities of the sole proprietorship must be transferred to the company.
4. The shareholding of the proprietor should not be less than 50% of the voting power, and the same must continue to be held for a period of 5 years.
5. The proprietor does not receive any additional benefits either directly or indirectly, except to the extent of shares held.

PROCEDURE FOR CONVERSION OF PROPRIETORSHIP TO COMPANY

The following are the steps involved in the conversion of a proprietorship to a company when the above-mentioned requirements are met:

• The proprietor must complete the slump sale formalities.
• Class 3- Digital Signature Certificates are mandatory for each Director and Shareholder
• DIN is mandatory for Directors and we can obtain DIN if not possessed.
• The proprietor must apply for the availability of the name in SPICE PLUS (PART A)
• SPICE PLUS – PART B is to be submitted towards the incorporation of the company into the Ministry of Corporate Affairs (MCA)
• E-MOA and E-AOA are to be submitted along with SPICE PLUS – PART B
• AGILE PRO is also to be submitted along with SPICE PLUS – PART B

On approval, the following registration will be completed

1. PAN
2. TAN
3. ESIC
4. EPF
5. PT

• Directors: For the formation of a private limited company minimum of two directors are required. One of them can be the proprietor himself, and the other can be any relative or friend.
• Director Identification Number: The directors need to have an Identification Number as a prerequisite to incorporation.
• Shareholders: The company needs to have a minimum of two shareholders, and they can be the same as the directors. The owner of the sole proprietorship needs to be one of the directors of the limited company.
• Capital: The company needs to have a minimum authorized capital of 1 Lakh rupees.
• So to summarize, it is as shown below:

Conclusion:

Transfer of a capital asset or intangible asset on the conversion of sole Proprietorship Concern into a Company is not treated as Transfer if the above conditions are satisfied and hence no Capital Gain arises. Fundraising opportunities are available in the case of a private limited company that issues various permissible instruments and shall also have an opportunity by listing on stock exchanges.