A sole proprietorship is limited in its ability to reap the full rewards of business expansion. Therefore, transforming the sole proprietorship into a Private Limited Company is beneficial for many businesses. Benefits like increased capital, limited liability, and more may follow the conversion as a result of the business structure change. Although changing from sole ownership to private limited company has its advantages, it also results in a loss of control and authority for the original owner. In light of this, the choice must be made only after thorough examination of all relevant circumstances, including whether or not the projected benefits would actually be realized. Furthermore, the important information related to Proprietorship Conversion into Private Limited Company mentioned in this article should be kept in mind to avoid errors and difficulties of the process.
Understand the Difference between Proprietorship and Private Limited Company
- Sole proprietors have unlimited liability for business debts, which implies they must cover business losses out of their own pockets. Liabilities of the owner are separated from those of the firm itself by the rules governing private limited companies.
- When it comes to taxation, sole proprietors are subject to the same rules as individuals, but private limited companies are subject to a separate rate.
- When compared to a private limited company, businesses having sole proprietorship registration have less opportunities for acquiring capital.
- While a sole proprietorship would end at the death of its owner, a private limited company would allow the proper heirs to continue running the company.
Important Note: GST registration on death of proprietor can be continued for both the private limited company and sole proprietorship business.
You can also understand about Private Limited Company in detail through our guide available at: Private Limited Company Incorporation.
Benefits of Private Limited Company Registration
- While a sole proprietorship can only grow as much as its owner is willing to put in, a private limited company has more room to maneuver in terms of capital raising. A private limited company can easily get bank loans or raise funding through investors by creating an impressive pitch deck.
- If a lone proprietor incurs losses, the losses are their full responsibility, and the creditors can go after the owner’s personal assets to get paid. On the other hand, a private limited company’s liability is restricted by its shareholders’ equity or by a warranty.
- Due to its dependence on a single individual, the longevity of a sole proprietorship is directly tied to the proprietor’s health and capacity to run the business. However, a private limited company operates independently from its owners and is not subject to the regulations of any one person.
Important information regarding Proprietorship Conversion into Private Limited Company
- The sole proprietor and business must enter into a purchase or takeover agreement.
- The purpose of the MOA must state “The acquisition of a sole proprietorship.”
- It is necessary to transfer all assets and liabilities from the single proprietorship to the company.
- With the exception of dividends paid on shares, the owner receives no further benefits.
- A minimum of two directors is needed to start a private limited company. The owner himself or a close family member or acquaintance are eligible to become the other director.
- In order to incorporate a private limited company, it is required that the directors each obtain their own Director Identification Number.
- Minimum of two shareholders are required, and they aren’t required to be different from the board of directors. The sole proprietor must be appointed as a director of the private limited company.
- The minimum authorized capital for the company registration is 1 Lakh Rupees.
Steps in Brief for Proprietorship Conversion into Private Limited Company
- Apply for a Director Identification Number (DIN) and a Digital Signature Certificate (DSC).
- In order to legally establish a name for the business, a Form-1 application for approval must be filed.
- To incorporate a company, submit an application to the MCA.
- Carrying out the necessary steps for a slump sale
- Changing the bank account’s information to reflect the conversion.
- The submission of the necessary paperwork to government authorities.
- After successful approval, applying for commencement of business and appointment of auditor.
For understanding the steps in detail it is best that you consult our team of experts.
When all the steps outlined above are taken carefully with keeping the important information in mind, the MCA verifies that the required standards have been met. Assuming the governing body has approved the application, the company will be issued a Certificate of Incorporation, officially establishing it as a private limited company. You can learn more or get conversion done without any hassle through hiring our team of experts online. Call us at: 8881-069-069.
Also, require any other guidance with respect to Company Formation please feel free to contact our business advisors at 8881-069-069.
Download E-Startup Mobile App and never miss the latest updates relating to your business.