What Are The Benefits Of Converting A Sole Proprietorship To A Private Limited Company?

eligibility to convert a proprietorship to a corporation

In this article, we explore the benefits of converting a proprietorship into a private limited company!

Increasingly, entrepreneurs are converting their proprietorships into private limited companies. Besides being one of the most common types of business entity, the proprietorship is also the simplest. Firms operating as proprietorships have more freedom and independence than other business entities, making it easier for employees to adapt to their work environment. Further, employees are given more responsibility because financial aspects are less under their control. In the long run, a sole proprietorship isn’t as beneficial as a private limited company. In order to grow, one may feel the need to convert a sole proprietorship into a private limited company.

To Be Eligible, You Must Meet The Following Requirements:

  • The company and its sole owner would like to enter into a takeover or sale agreement
  • Taking over a sole proprietorship is the purpose of the Memorandum of Association (MOA)
  • As a sole proprietorship, your assets and liabilities must be transferred to a company
  • Owners must hold 50% or more of the shares for at least five years
  • In addition to the quantity of stocks held, the owner no longer receives any extra benefits.

When a proprietorship firm is considering becoming a company, a legal process must be followed.

To convert a proprietorship into a corporation, the following steps must be met:

  • Complete the slump sale formalities. This is the proprietor’s responsibility.
  • Each director must have a digital signature certificate (DSC) and director identification number (DIN)
  • The proprietor should submit Form – 1 to request availability of their name
  • Draft the Memorandum of Association (MOA) and Articles of Association (AOA) of the company with all its rules and objects
  • Through MCA, incorporate the company.
  • The entire document must be submitted
  • It is necessary to obtain an incorporation certificate
  • You should apply for a new PAN(Permanent Account Number) and (Tax Deduction Account Number) TAN
  • According to the entity conversion, modify the bank details.

Here are the steps you have to follow if you decide to form a private limited company from your sole proprietorship:

  • Forming a private limited company involves acquiring a sole proprietorship and transferring its assets and liabilities to the new company by way of a Memorandum of Association (MoA).
  • If you are a sole proprietor, you can serve as a director of your new private limited company. Other family members or friends can also act in that capacity.
  • Form a private limited company before obtaining an identification number.
  • In addition to directors, your company must also have at least two shareholders. This includes yourself, as a sole proprietor
  • The minimum authorized capital for your new private limited company is Rs. 1 lakh.

Summary

In India, private limited companies are the most common form of business organization. These benefits include:

Capital Growth

A private limited company can raise more funds to expand its capital than a sole proprietorship.

Limitation Of Liability

The personal assets of sole proprietors will be attached in case of a loss. However, private limited companies are limited in their liability due to their shares or warranties.

There Is Continuity

A private limited company does not have to have a single owner, as opposed to a sole proprietorship.

Leave a Reply

Your email address will not be published.