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Conversion Of Sole Proprietorship To Company

Conversion Of Sole Proprietorship To Company


Conversion Of Sole Proprietorship To Company

A Company tends to hold more freedom and opportunities taken into consideration the legal setting and the economic settings as the entity will now enjoy a separate legal entity, giving perpetual succession and also limited liability to its owners and investors. But there will be dilution in the ownership and loss of independence with respect to decision making along with profit-sharing with the investors. So, prior to making a decision with regard to converting sole proprietorship, the owner should make proper understanding and considerations regarding both such that they land into making the proper and apt decision.

Necessities for Conversion

For ensuring the conversion of the Sole Proprietorship into a company there are certain points that should be taken care of by the Sole Proprietor and the company. These points have been enlisted below:

  1. There should be mutual agreement reached between Sole Proprietorship to Company. For this, there should be a takeover agreement or sale agreement entered into between these two parties.
  2. The Memorandum of Association (MOA) of the company should carry the object as, β€œThe takeover of a Sole Proprietorship Concern.”
  3. All the assets and liabilities of the Sole Proprietorship should be transferred to the Company.
  4. The Sole Proprietor should hold not less than 50% of the shares of the company and the allied voting power and this should be held for a minimum period of 5 years or more.
  5. The proprietor should only be earning benefits in a direct or indirect format to the extent of shares held by him in the company.
  6. There should be a minimum of 2 directors and 2 members in the Private Limited Company.

Procedure for Conversion of Sole Proprietorship into Company

The following enumerated steps are to be followed by the Sole Proprietor who would want to convert the Sole Proprietorship Concern into a Company:

  1. The slump sale formalities should be completed by the Sole Proprietor. Slump Sale is nothing but the transfer of one or more undertakings for a lump sum consideration.
  2. All the directors on the Board of the new company should be having Digital Signature Certificates (DSC) and Director Identification Number (DIN).
  3. The Sole Proprietor should then file an application for the availability of name.
  4. Now the Articles of Association (AOA) and Memorandum of Association (MOA) should be prepared for specifying the rules and objects of the company newly formed.
  5. The application should now be submitted with the MCA (Ministry of Corporate Affairs) for the incorporation of the company along with the submission of all relevant documents for effecting the same.
  6. The receipt of the Certificate of Incorporation would be the next step.
  7. The company will be allotted with the PAN and TAN along with the incorporation certificate and can also modify the bank and other basic details in accordance with the Company Name and other particulars.

Documents to be Furnished for Effecting the Conversion of Sole Proprietorship to Company

  1. Identity proof of all directors, say a copy of PAN Card.
  2. Address proof of directors, say copy of Voter ID or Aadhaar Card.
  3. Passport size photographs of the Directors.
  4. If the business place is owned by the company, then the documents pertaining to such ownership.
  5. If the business place is rented then the rental agreement of the same.
  6. NOC or No Objection Certificate or Letter obtained from the landlord.
  7. Copy of utility bills like water or electricity bills.

Requirements for Forming a Private Limited Company

  1. Capital: There is not minimum paid up capital requirement for forming a Private Limited Company. However, in case of conversion of sole proprietorship into Company, the amount of capital shall be decided upon based on the value of the assets that are to be taken over by the company on its incorporation.
  2. Shareholders: A Private Limited Company should be having a minimum of 2 directors and 2 members. And here one major point to be noted is that the Sole Proprietor should be one of the directors and members of the company.
  3. Directors: For forming a company a minimum of 2 directors are mandatory and out of which one should be the Sole Proprietor himself, while the other one can be anyone.
  4. DIN: All the directors as such should have obtained DIN i.e., Director Identification Number prior to being appointed as the Director of the company.

Hence, we can conclude that despite having many benefits by converting to a Private Limited Company, there are also certain problems which might be faced by the Sole Proprietor. Amongst this one major point is the dilution in the ownership of the entity and also sharing of profits. So, any Sole Proprietor should first consider these points before converting their Sole Proprietorship Concern into a Company.
So as the final point lets discuss the pros and cons which are held by Private Limited Company and Sole Proprietorship Concern in a table:

Sole Proprietorship Simple, easy and fast registration process.
Easy management and operation.
Compliance requirements are limited.
The liquidation or termination process is simple, easy and fast.
Owner holds unlimited liability which might also affect his personal assets.
No perpetual succession, if the owner dies or is not available to operate the same.
The entity does not hold a separate legal identity, which affects the ability to raise capital.
Revenue shall be taxed at personal slab rates which restricts enjoying any tax benefits which are enjoyed by companies.
Private Limited Company Shareholders and owners have limited liability.
There will be high credibility and reputation for the company.
Corporate tax benefits shall be enjoyed.
Ease of entry and transferring of ownership as it is having separate legal standing.
Perpetual succession shall be possible as there is more than one shareholder.
The compliances are stringent or strict.
Strict code of conduct should be followed.
Liquidation and termination procedure shall not be simple.
Incorporation and Administration costs will be high for companies.




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