Most business giants have started their businesses as sole Proprietorships due to a very low compliance requirement. Once the business and income start to grow, there is an immense need to segregate the bank accounts and tax filings of the individual Sole Proprietor and that of the business. To accompany this separation, the most flexible and possible way is to convert the Sole Proprietorship into a Private Limited Company.
To change a Proprietorship firm into a Private Limited Company in India, a legally written agreement ( with some conditions added to it) has to be signed between the proprietorship and the private limited company for the business sale. In addition to this, a Private Limited Company so incorporated should have “the takeover of a Sole Proprietorship Concern” as its prioritized objective in its Memorandum of Association (MOA).
The Minimum Requirements for Conversion of Sole Proprietorship into a Private Limited Company in India
- Minimum 2 Shareholders
- Minimum 2 Directors are needed
- Minimum one lakh Share Capital
- MOA states, “The takeover of the Sole Proprietorship concern.”
- Creation of Slump Sale Agreement
- DIN for all directors
Documents Required for Conversion
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Identity and Address Proof
The address proof and the identity are much-needed documents that must be submitted to all the directors and shareholders of the company, regardless of whether they are a part of that firm. If all of them are Indian nationals, then the PAN card is mandatory. For foreign nationals, a notarized copy of their country’s passport must be submitted without any delay. Each document that is being submitted must be valid to date. The proof documents, such as the residence and the bank statement, or the electricity bill, are to be less than 2 months old.
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Registered Office Proof
Each company should have a registered office in India. To prove the credibility of the registered office, a recent photocopy of one of the bills mentioned here has to be submitted: an electricity bill, gas bill, water bill, or telephone bill. In addition to the rental agreement, the utility bill or the sale deed, as well as a written letter from the respected landlord with her/ his consent to allow the office to be the registered office of the company, should also be submitted.
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List of documents to be submitted by the Director and the Shareholders
- A scanned copy of PAN Card or Passport (Foreign Nationals & NRIs)
- A scanned copy of Voter’s ID/Passport/Driver’s License
- A scanned copy of the Latest Bank Statement/Telephone or Mobile Bill,/Electricity or Gas Bill.
- A scanned passport-sized photograph
- A specimen signature (blank document with signature- directors)
- Any of the directors must self-attest their first three documents. If they are foreign nationals and NRIs, all the documents must be notarized (if currently in India or a non-Commonwealth country) or apostilled (if in a Commonwealth country).
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For the Registered Office
- A scanned copy of the Latest Telephone, electricity, gas, or Water bill
- A scanned copy of the Notarized Rental Agreement in English
- A scanned copy of the No-objection Certificate from the property owner
- A scanned copy of the Sale Deed/Property Deed in English (in case of owned property)
- Your registered office need not be a commercial space; it can be your residence as well.
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Income Tax Returns Acknowledgement
The sole proprietor needs to give an acknowledgment- an income tax return.
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Photograph
Latest passport-size photograph of all directors and shareholders.
Proprietorship to Pvt Ltd Conversion Procedure
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Application of DSC DIN
In the first stage, all the partners have to apply for a Digital Signature and DIN. The Digital signature is an online signature usually used for filing, and the DIN refers to the Directors’ PIN issued by the MCA. If all of a firm’s directors already have the DSC and DIN, this initial step can be skipped.
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Name approval
You are supposed to supply six different options for your company name to the MCA, from which the MCA will select one. The names you provide should be unique and complement the business type. The company name is significant. It is considered the first impression for suppliers, buyers, and stakeholders. Therefore, it must be suggestive, relevant, and attractive. Various factors must be kept in mind while naming the company.
How do you choose a better name for a private limited firm?
- It must be short and simple. The name should be concise and as short as possible. Everyone should be able to say it easily, and they should easily recall your company’s name the very first time they read it or hear it.
- It must be meaningful. Your company’s name must be related to the business and fit into the company’s branding.
- It must be unique – The company’s name should not be the same as or identical to an existing company or a registered trademark. Plural versions must always be avoided.
- Add Suffix—In the case of a private limited company, the company’s name must end with the suffix “Pvt Ltd.”
- It should not be offensive or illegal – The name of the company should not be against Indian law. Not to be abusive or against customs and the beliefs of any religion.
MOA & AOA drafting & submission of forms
As soon as the name is approved, you are supposed to draft a Memorandum of Association (MOA) and Articles of Association (AOA) stating the takeover of the Proprietorship concern.
Get an incorporation certificate, PAN, and TAN.
In general, it takes between 7 and 12 days for a company to get registration and the incorporation certificate. The Incorporation certificate is legal proof that the company has been converted into a private firm in India. The further process, including the PAN and TAN documents, will be received from the income tax department in approximately 15-20 days (physically).
Bank Account
You can then submit the Incorporation certificate, MOA, and AOA to a preferred bank to open your account.
Benefits of conversion from Sole Proprietorship to a Private Limited Company
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Separate Legal Existence
The private limited company will come under a separate legal entity, and its existence is separate from its members. This enables the business to have its assets and enter into any contracts in the name of the private limited company or a third party if there is any dispute in the near future. The members, such as the directors and shareholders of a company, have nil percentage of personal liability to the creditors of a company for the company’s debts beyond their holdings in the company.
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Limited Liability of Directors
In a private limited company, the personal assets of the director are to remain untouched if the company has any significant debts. Hence, the money invested in the company’s business assets can be sold off to pay the pending dues.
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Easy Transferability
In a private limited company, the ownership of the business can be shifted to an individual or to another company by transferring the company’s shares with the consent of shareholders. This transformation is much easier in a private limited company, while in a proprietorship, such transferring options don’t exist.
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Uninterrupted Existence
A private limited company is a separate legal entity, so it has perpetual succession. Unlike a sole proprietorship, it is not affected by the death of the director/shareholder or other termination of any member. It continues to exist irrespective of whether any member joins or leaves the company.
