In India, many small business owners begin their careers as sole proprietors. A pvt ltd company is a company that is privately owned by its shareholders. The liability of its members is limited to the number of shares they possess. In this article, all the important points of conversion of sole proprietorship to private limited company are discussed. Shares of such companies cannot be traded on the open market.
The Conditions for Conversion of a Sole Proprietorship Into a Private Limited Company
- As soon as the succession occurs, all assets and liabilities of the Sole Proprietorship business are transferred to the new private limited company.
- He retains his shareholding in the new company for a period of five years from the date of succession, but must hold at least 50% of the total voting power.
- Apart from the allotment of shares in the new company, the proprietor receives no other benefit, directly or indirectly.
- The main object clause of the Memorandum of Association of the Private Limited Company declares “Takeover of a sole proprietorship business by the new company.”.
Conversion of an Existing Proprietorship Into a Private Limited Company
In order to form a private limited company, at least two people over 18 years old must be Indian citizens and residents as per the Income Tax Act.
The process of converting a proprietorship business into a private limited company is described below.
- The minimum requirement for the incorporation of a Private Limited Company is 2 persons over the age of 18 years, at least one of whom must be an Indian citizen and a resident in India, as per the Income Tax Act of 1961.
- Make sure that you apply for a Digital Signature Certificate for all of the new company’s directors and shareholders.
- By filing an application for name reservation with the Registrar of Companies, which is commonly referred to as a “RUN Test”, a company name can be reserved online with the Registrar of Companies.
- In order to complete the name reservation process, you need to submit an application electronically to the MCA Portal. (SPICePartB with SPICeMOA, SPICeAOA, AGILEPRO, SPICeINC9). In the main object clause of the Memorandum of Association of a Private Limited Company, it must state that the company intends to take over a sole proprietorship business.
- A Private limited company is generally formed within three to four days, and the incorporation certificate is the official proof that the company has been created. The certificate also includes the company name, the date of incorporation, the registered address, and the CIN number of the company.
- Upon incorporation of the Company, the Company needs to open a current account in the name of the Company with any bank located in India. All transactions and payments made by the Company should only be made through the current account of the Company.
- If the new company wishes to take over the business assets and liabilities of the proprietorship, an agreement must be signed by the new company and the proprietor.
Conversion Capital Gain
In accordance with section 47(xiv), capital assets transferred from a sole proprietorship to a private limited company upon conversion of the sole proprietorship are not considered transfers under the Income Tax Act if all conditions are met. If the company sells these assets later, the cost of acquisition of those assets in the company’s hands would be the same as the cost of acquisition of the assets in the sole proprietorship concern’s hands.
Solvent Proprietorship Termination
Upon the formation of the new private corporation, the business of the sole proprietorship must be closed. The bank accounts that were opened in the name of the proprietary firm must be closed and a new corporate account has to be opened for the new corporation.
There is a need to re-sign all of the contracts/agreements of the business signed by the proprietor under the newly formed Private Limited Company’s name in order to make the changes effective.
Hope, this added value to your information search and gave you an idea about the reasons why you should convert your sole proprietorship into a private limited company.