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Comparing a Sole Proprietorship with a Private Limited Company, one similarity that can be pointed out, is that both forms are highly considered by Entrepreneurs while setting up their business. Sole Proprietorship anyhow is easy to set up and the owner has the complete control of the company’s working. In contrast, the private limited company is a bit difficult to set up. However, it is way more reliable, considered as a separate legal entity and gives limited liability to its members. Also, raising funds for a private limited company is comparatively easy when compared to proprietorship. It may happen, that you wish to convert your proprietorship into a private limited company. It may be due to the growth of the company or the need of sharing powers and responsibilities. In order to convert your proprietorship into a private limited company, there is no specific legal procedure as such because proprietorship cannot be registered anywhere except for a Shops and Establishments license, for tax purposes and with any specific sector related regulatory authority, if any. Conversion into a private limited company requires a simple incorporation of a private limited company. Incorporation of a private limited company requires certain documents and some modifications. Described below is how you can go about the proprietorship conversion by incorporation.
The conversion is governed by the Companies Act, 2013 and the Income Tax Act, 1961. Proprietorship conversion can be done by following the below-mentioned steps:
You will need to apply for a PAN card in the company’s name.
You will require at least two directors in order to proceed with the conversion. Also, a rise in share capital will be required. The minimum share capital for a private limited company is rupees one lakh.
Next, you will require a DSC (Digital Signature Certificate) and a DIN (Director Identification Number).
You will then require a memorandum of association and articles of association. They are very important documents and must be submitted in a particular format as specified under the Companies Act. Legal advice is suggested before drafting both the documents.
Conduct a Name search and hence apply for a name approval. Company’s name should end with a private limited company. Name search should be done carefully. The name should be unique and easy to remember. It should not be offending in any manner.
A new company is set up by filing forms along with specified documents and fees. The company further takes over the Sole Proprietorship. This takeover is governed by an agreement. A written agreement is drafted by passing a resolution in a Board meeting.
The documents will include identity proof, address proof of registered office, rental agreement, Memorandum of association, article of association and the consent of all the directors including some affidavits.
Recently the Ministry of Corporate Affairs (MCA) issued an integrated incorporation form INC-32. So now, a Private Limited Company can be incorporated online by filling the Simplified Proforma for Incorporating Company Electronically (SPICe) e-form in Form INC-32 (using Digital Signature Certificate of the Director)along with (eMoA) in Form INC-33 and (eAoA) in Form INC-34.
The takeover is then done by submitting the agreement also known as contract and other few documents like the company’s PAN card and certificate of incorporation. These documents are submitted to the Registrar of the Companies with prescribed fees. By completing this process of taking over, all the assets and liabilities concerning the sole proprietorship becomes the assets and liabilities of the company.
Also, the proprietorship will then be needed to shut down officially. Use of any licenses or tax registrations by the proprietorship can then be discontinued or they can be surrendered to the authorities. That is the government should be informed of the closing.
This whole process is considered to be gruesome. The process involves registering a whole company and then furnishing more documents in order to complete the takeover and finally terminating the proprietorship. Proprietorship conversion thus is labeled as very tiresome.
