Conversion of Sole Proprietorship into Private Limited Company
Many small business owners start their business as a sole proprietorship in India. A private limited company is a company which is privately held by shareholders of the company. The liability of the members of the company is limited to the amount of shares which are held by them. Shares of such company cannot be publicly traded. All the important points of conversion of sole proprietorship into Private Limited Company is discussed in this article.
Conditions of Conversion of Sole Proprietorship Into Private Limited Company
- All the assets and the liability of the Sole Proprietorship business immediately before the succession become the assets and the liability of the new private limited company.
- The holding of shares of proprietor in the new company is not less than 50% of the total voting power and his shareholding continues to remain for a period of 5 yrs from the date of the succession.
- The proprietor does not receive any other benefit or consideration, directly or indirectly, in any form or manner, other than by way of allotment of shares in the new company.
- The MOA of the Private Limited Company declares “Takeover of a sole proprietorship business by the new company” in main object clause.
Procedure for Conversion of Proprietorship business into Private Limited Company
To incorporate a Private limited Company minimum 2 Persons are required over the age of 18 yrs with at least one person being an Indian citizen and resident as per income tax act.
Procedure for Conversion of Proprietorship business into private limited company.
- To incorporate a Private limited Company minimum 2 Persons are required over the age of 18 yrs with at least one person being an Indian citizen and resident as per income tax act.
- Apply for Digital Signature Certificate for all the directors/shareholders of the new company.
- Reserve the company name online with the Registrar of Companies by filing an application for name reservation which is known as RUN Test.
- After approval of name reservation, you have to file an application electronically at MCA Portal. (SPICePartB with SPICeMOA, SPICeAOA, AGILEPRO, SPICeINC9). The Memorandum of Association (MOA) of the Private Limited Company must declares “Takeover of a sole proprietorship business by the new company” in main object clause.
- It typically takes 3 to 4 days to form a Private limited company and get the incorporation certificate. Certificate of incorporation is the proof of creation of company. It also includes company name, date of incorporation, registered address & CIN number of the company.
- After incorporation of the Company, it is necessary to open a Current Account in the name of the Company with any Bank in India. All the transactions of the company should be transacted through the Company Current Account only.
- An agreement needs to be executed between the new Company and the Proprietor for the takeover of the business assets and liabilities of the proprietorship by the Company. The details of all the assets, liabilities and the consideration in exchange of such assets need to be specified in the agreement. The agreement should be executed in a Stamp Paper with proper stamp duty to make it a valid legal document.
Capital Gain on conversion
As per section 47(xiv) transfer of capital assets by a sole proprietorship to a company on conversion of proprietorship into private limited company are not regarded as transfer under the provisions of the income tax Act if all the conditions of section 47(xiv) are satisfied. While computing capital gains on subsequent sale of such assets by the company, the cost of acquisition of asset in the hands of the company would be the same as that in the hand of the sole proprietorship concern.
Terminate Sole Proprietorship
Once the new private company comes into existence, the business of sole proprietorship has to terminated. The bank accounts in the name of the proprietary firm need to closed and a new corporate account is to be opened for the Company.
Revision of Contracts/ Agreements
All the contracts/ agreements of the business signed by the proprietor need to be re-signed under the name of the newly Private Limited company.
Advantages of Conversion
The liability of the members/shareholders in respect of the company’s debts is limited only to the extent of the face value of shares taken up by them. Therefore, where a company is limited by shares, the liability of the members on a winding-up is limited to the unpaid amount on their shares.
Separate Legal Entity
A Pvt. Ltd. company is considered as a separate legal entity. Company can operate a bank account on its own name to own assets and enter into contract with parties. And the company can sue and also it can be sued under its own name due to separate legal entity.
Easy Transferability of Shares
Shares of a company can be transferable by the shareholder to any other person. The transfer is easy as compared to the transfer of business run as a proprietary concern to other party.
Easy Fund Raising
As per companies act, Maximum shareholders of the company are allowed up to two hundred in numbers, this many numbers of shareholders makes easier to raise capital funds in comparison to Sole Proprietorship.
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