Majority of the people in India register their business as a Sole Proprietorship due to the minimal compliance requirements. Consequently, as the business tends to grow, the revenue generated will be considered an excess.
A sole proprietorship will then be converted to a Private Limited Company to avoid personal tax filing and bank accounts and to restrict the liability.
By converting a sole proprietorship firm to a private limited company, which becomes a separate legal entity reduces the risk of liability and the personal assets will remain protected except in case of fraud.
Shares are held private and are not distributed to public as the private limited company is ruled by the Companies Act, 2013. In a similar way, the structure of taxation remains unique and separate under Income tax Act, 1961, unlike the sole proprietorship that considers the income as individual income.
Advantages of registering as Private limited company
Separate Legal Entity
A Private Limited Company is a legal entity and authorized person established via Companies Act. As such, the company has a range of legal attributes including hiring of employees, opening a bank account, obtaining licenses, or taking on equity and other privileges as an independent corporate entity. The risk is awarded to the company protecting the members of the company from the company’s liabilities of the creditors of the company.
A company being a separate legal person, is unaltered by the departure or demise of any member and it remains to be in existence regardless of any modifications in the ownership. Private Limited Company enjoys ‘perpetual succession’ which means, the existence will not be interrupted until it is legally dissolved.
In a company, ownership of the business can be easily transferred by simply transferring shares. The consent of the other shareholders may be required to effect share transfers in a private limited company. The process of filing, signing and transfer of share certificates and share transfer form are adequate to transfer ownership of a company.
In India, Private Limited Companies can issue debentures, preference shares, equity shares and accept deposits with the permission of RBI. In addition to that, they can also raise equity funds. Banks and Financial institutions prefer to provide funding to a Private limited company as opposed to a partnership or proprietary concern.
Private Limited Company being an artificial person, can own, obtain, enjoy, and separate property in its name. For as long as the company is the ongoing concern, shareholders cannot claim the property of the company. The property owned by a company could be tangible assets like building, land, machinery, factory, residential property, and intangible assets like rights, shares, etc.
Terms and conditions for conversion of Sole Proprietorship into Private Limited Company
Step by step process for conversion of Sole Proprietorship into Private Limited Company
Step 1: Apply for DSC (Digital Signature Certificate).
Step 2: Apply for the DIN (Director Identification Number)
Step 3: Apply for name availability.
Step 4: Register a private limited company by filing the MOA and AOA
Step 5: Apply for the Company PAN and TAN
Step 6: Issue certificate of incorporation by RoC with PAN and TAN
Step 7: Open a current bank account on the company name
Q: What are the minimum requirements of conversion?
A: Following are the minimum requirements for converting Proprietorship to Private Limited:
• Minimum two number of directors with DIN (for all the directors) and shareholder.
• Rs. 1 lakh as minimum paid up share capital.
Q: Documents required for conversion.
A: Copy of PAN Card, Aadhar card, Passport size photograph of the Directors and proof of address of the office and other documents if required for the conversion
Q: What are the requirements that are to be fulfilled for conversion?
• After the new company (private limited company) is incorporated both the old firm and the new company gets into an agreement with each other to transfer the business completely.
• The sole proprietor should hold equal to or more than 50% of shares for at least a period of 5 years from the date of commencement of Pvt Ltd.
• The assets and the liabilities of the sole proprietorship firm should become the assets and liabilities of the private limited company immediately after the succession.
• Any kind of benefits, directly or indirectly in any way other than the shares allotted should not be gained by the proprietor from the Private limited.
Q: Can the GSTN of the sole proprietorship be continued after the conversion also?
A: No, because the GSTN is given on the company name and though the name is same but the name will have a suffix as Pvt Ltd. Therefore, after conversion company should apply for a new GSTN.