How to Convert a Proprietorship Business to a Private Limited Company?

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The most common type of business in India for small business owners is the sole proprietorship. The shares of a private limited company cannot be traded publicly. It is a company that is privately held by its members. Members of such companies are liable for only their shareholdings. 

This article discusses all the important points to answer your question, about how to convert proprietorship to private limited company in India.

An Overview of How to Convert a Proprietorship Business to a Private Limited Company

Capital Gain on Conversion

In accordance with section 47(xiv), the transfer of capital assets from a sole proprietorship to a private limited company on conversion is not regarded as transfer by the income tax act if all the conditions of section 47(xiv) are met. As long as the company meets the same conditions as a sole proprietorship concern when calculating capital gains on the sale of these assets, the cost of acquisition of such assets will be the same for the company.

The Sole Proprietorship Should Be Terminated

To convert the sole proprietorship into a corporation, the business of the sole proprietorship must be terminated, the proprietary firm’s bank accounts closed, and a new corporate account established.

Click Here For Procedure For New Company Registration

Contract/Agreement Revisions

There are many contracts and agreements that have been signed by the proprietor of a business that will need to be re-signed under the new name of the newly formed Private Limited Company.

The Benefits of Conversion

  • Limited Liability

In relation to the company’s debts, the members/shareholders are only liable for the face value of the shares they have purchased. In the event of a winding-up, the members of a company limited by shares are only liable for the unpaid amount on their shares.

  • An Independent Legal Entity

Due to its separate legal entity, a private limited company can operate a bank account in its own name, own assets, and enter into contracts with third parties. Suing and being sued can be done in the name of the company.

  • Shares Are Easily Transferable

Shareholders are able to easily trade their shares of a company from one member of the company to another, contrary to the business that is run as a proprietary concern and transferred from one party to another.

  • Fundraising Made Easy

According to the Companies Act, companies are allowed up to 200 shareholders. This many shareholders makes it easier to raise capital funds than if the firm was a sole proprietorship.

Points to keep in mind:

  • Using our experts, you can verify whether DIR-3 KYC has been completed by the proposed Director if he or she already has a DIN. If it hasn’t yet been completed, you can use Legal Window to verify.
  • Upon incorporation of a private limited company, it is responsible for managing all compliances, such as the appointment of a statutory auditor, the filing of the commencement of business, the filing of the income tax return, and the filing of annual returns with the Revenue Commissioner. You will be reminded by mail when your compliances are due by a team of experts at Legal Window.
  • In the event of succession, the Sole Proprietorship’s assets & liabilities with respect to the business shall become the Company’s assets & liabilities.
  • As long as the sole proprietor’s shareholding is not less than 50% of the total voting power in the private limited company and remains as such for a period of five years after the succession, capital gains are not triggered.
  • It is not possible for a sole proprietor to receive any other benefit or consideration besides stock allotment.

 

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