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Conversion of Proprietorship into Private Limited Company

Conversion of Proprietorship into Private Limited Company

If you are running a business under sole proprietorship, you would surely like to Conversion of Proprietorship into Private Limited Company. Now, the question arises here why you need to do so. Actually, there could be various reasons behind doing so — from saving taxes to arranging fund, but the most important one is the business expansion. If you want to expand your business to the next level after successfully running your business under sole proprietorship, you need to get it converted into a private limited company.

For all these various reasons, converting your Sole Proprietorship or into a Private limited company is often a wise decision. Such changes can help you to expand your business, have better access to financing, protect your assets, risk-manage your liabilities, enjoy corporate tax incentives, attract investors and recruit quality talent on board your team.

Proprietorship vs Private Limited Company:

These issues are significant contemplations at the front line of worries for entrepreneurs who need to change over from sole ownership to a Private Limited Company:

  • A sole proprietor would be incurred with unlimited liabilities for any losses incurred, which means that he/she will be required to pay personally for any losses incurred by the firm. Whereas in case of private limited company the liability of the owners is limited.
  • Sole proprietors will be taxed on their personal income tax rate, which isn’t the case with a private limited entity.
  • Sole proprietorship firms are not vested with adequate fund-raising options, in contrast to a private limited entity.
  • In case death or retirement of a sole proprietor would lead to the closure of the firm, whereas a private limited Company facilitates the legal heirs to rightfully take over the affairs of the business.

 Necessities of Conversion of Proprietorship into Private Limited Company:

  1. First, you will have to incorporate a new Private Limited company, indicating that the company is to take over the business of the sole proprietorship.
  2. Next, all business assets will have to be formally transferred to the newly incorporated Private Limited company.
  3. Finally, the sole proprietorship is to be terminated and informed that you have ceased to carry on business as a sole proprietorship.

Benefits of Conversion :

01
Easier to Raise Funds

Raising funds as a private limited company is a comparatively easy task as it gives an opportunity for raising shares and has many ways to raise funds in the form of private equity and Banks and Financial Institutions.

02
Limited Liability of Owners

The obligation or debts of the company does not create a charge over the owner’s personal assets. Their liability is limited only to the subscribed capital unpaid by them.

03
Separate Legal Existence

A Private Limited Company is registered, a legal entity is born in eyes of law, which is separate from its owners and managers. The company can operate in its own name from opening a bank account to own assets and enter into a contract with parties. This also provides the capacity to sue third parties.

How to Conversion of Proprietorship into Private Limited Company

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Documents Required For Conversion of Proprietorship into Private Limited Company

  • PAN CardPAN Card of shareholders and Directors. Foreign nationals must provide a passport.
  • Identity ProofVoter ID/ Passport/ Driving License of Shareholders and Directors
  • Address ProofTelephone Bill /Electricity Bill/ Latest Bank Account Statement of Shareholders and Directors
  • PhotographLatest Passport size photograph of Shareholders and Directors
  • Business Address ProofLatest Electricity Bill/ Telephone Bill of the registered office address
  • Financial StatementsDuly certified copy of latest audited Finacial Statements
  • ITRITR of proprietor.
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Frequently asked questions on Conversion of Proprietorship into Private Limited Company

1. How can I change proprietorship into Private Limited Company?

Ans. To convert Sole Proprietorship into Private Limited Company, an agreement has to be executed between the , Sole Proprietor and the Private Limited Company (once it is incorporated) for the sale of the business.

2. Can proprietorship be converted to Pvt Ltd in India?

Ans. All the assets and liabilities of the sole proprietorship firm must be transferred to the private limited company. … It may be noted that a private limited company must have a minimum of two directors. The incorporation rules of a private limited company that there is no  minimum share capital requirement.

3. Can a private limited company be a proprietor of a firm?

Ans. It’s not possible to convert a private limited company into a sole proprietorship as it is not governed by any law. … As per the Companies Act 2013 & Companies Incorporation Rules 2014 there is no specific provision for this type of conversion. As Sole Proprietorship Firms are not governed by any law.

4. How do you sell a proprietorship firm?

Ans. The following steps should be taken in order to sell a sole proprietorship:

  • Determine the selling price. Estimate the total value of the business based on forward earnings.
  • Find a buyer.
  • Negotiate with potential buyers.
  • Review offers.
  • Create a sales agreement.
  • Transfer assets.

5. Who can be proprietor?

Ans. It simply refers to a person who owns the business and is personally responsible for its debts. A sole proprietorship can operate under the name of its owner.

6. How can I make my company private limited?

Ans. 1.  Procure Digital Signature Certificate: The first and foremost step is to procure the DSCs of the Personnel involved in Private Company Incorporation in India.

  1. Obtain Director Identification Number.
  2. Reservation of Name.
  3. Certificate of Incorporation.

7. Can Private Limited Company has FDI or Foreign direct investment?

Ans. Yes, a private company is allowed to have foreign direct investment in their company.

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