Most of the business giants have started their businesses as a Proprietorship firm due to a very low compliance requirement. Once the business and the income start to grow, there is an immense need to segregate the bank accounts and the 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 has to be signed between the Proprietorship and the Private Limited Company for the business sale ( with some conditions added to it). In addition to this, a Private Limited Company so incorporated should have “the takeover of a Sole Proprietorship Concern” as their prioritized objective in its Memorandum of Association (MOA).
The Minimum Requirements for Conversion of Proprietorship into a p rivate limited Company in India
- Minimum 2 Shareholders
- Minimum 2 Directors are needed
- Minimum one lakh Share Capital
- MOA Stating, “The takeover of the Sole Proprietorship concern.”
- Creation of Slump Sale Agreement
- DIN for all directors
Documents Required for Conversion
- Identity and Address Proof
The address proof and the identity are a much-needed document to be submitted for all the directors and the shareholders of the company; whoever is a part of that firm. If all of them are of an Indian national, 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 which 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.
- Registered Office Proof
Each company should have its registered office in India. To prove the credibility of the registered office, a recent photocopy of either one among the mentioned here has to be submitted- electricity bill or gas bill or water bill or telephone bill.
In addition to the rental agreement, the utility bill or the sale deed, and a written letter from the respected landlord with her/ his consent to allow the office as the registered office of the company should be submitted.
- 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 Latest Bank Statement/Telephone or Mobile Bill/Electricity or Gas Bill.
- A scanned passport-sized photograph
- A specimen signature (blank document with signature- directors)
- Anyone 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).
- For the Registered Office
- A scanned copy of Latest Telephone or Electricity or Gas Bill or Water bill
- A scanned copy of the Notarized Rental Agreement in English
- A scanned copy of No-objection Certificate from the property owner
- A scanned copy of Sale Deed/Property Deed in English (in case of owned property)
- Your registered office need not be a commercial space, can be your residence as well.
- Income Tax Returns Acknowledgement
The sole proprietor needs to give an acknowledgment- income tax return.
Latest Passport size photograph of all directors and shareholders.
- 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 refer to the Directors PIN number – issued by MCA. If all of the directors of a firm already have the DSC and DIN, this initial step can be skipped.
- Name approval
You are supposed to supply six different options for your company name to MCA and from which anyone will be selected the MCA. The names provided by you should be unique and it must complement the business type.
The name of the company is very important. It is considered the first impression for the suppliers, buyers and stakeholders. It must, therefore, be suggestive, relevant and attractive. There are various factors that one must keep in mind while naming the company.
How to choose a better name for a private limited firm?
- It must be short & simple
The name should be concise and be as short as it could be. Every person shall be able to say it easily and they should be easily recollecting your company’s name the very first time they read it or hear it.
- It must be meaningful
The name of your company must be related to business. It must fit into the company’s branding.
- It must be unique
The name of the company should not be the same or identical to an existing company or a registered trademark. One must always avoid the plural version.
- Add Suffix
The company’s name must end with the suffix “Pvt Ltd” in the case of a Private limited company.
- It should not be offensive or illegal
The name of the company should not be against the 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 got approved, you are supposed to draft Memorandum of association(MOA) and Articles of Association (AOA); Stating the takeover of Proprietorship concern.
- Get 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 document will be received from the Income Tax department in 15-20 days (physically) approximately.
- Bank Account
You can then submit the Incorporation certificate, MOA, AOA with a preferred bank to open your bank account.
Benefits of conversion from Sole Proprietorship to Private Limited Company
- 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 possible to have its assets and enter any contracts in the name of the private limited company or a third party if there is any dispute in the mere 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 holding in the company.
- Limited Liability of Directors
Always in a private limited company, the personal assets of the director are to remain untouched, if there are any major debts on the company. Hence, the money invested for the business assets of the company can be sold off for paying the pending dues.
- 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 business’ shares with the consent of shareholders. This transformation is much easier in a private limited company, while in proprietorship such transferring options don’t exist.
- Uninterrupted existence
A private limited company is a separate legal entity, so it has a 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 any member joins in the company or to be left.