Proprietorship to Pvt Ltd Company

Overview:

A proprietorship is an unincorporated business owned and managed by a single individual, also known as a sole proprietor. On the other hand, a private limited company (Pvt Ltd) is a type of business entity in which the company is privately held, and the liability of the shareholders is limited to the shares they own.

Converting a proprietorship to a private limited company is a significant decision that can provide numerous benefits. For example, it can help the business to establish a separate legal entity, raise capital through the sale of shares, and gain greater credibility among potential customers, suppliers, and investors.

Prerequisites for changing into a Private Limited Company

A binding acquisition or sale contract is essential between the proprietor and the emerging private limited company. The acquisition must be specified in the MOA of the new Private Company as a primary objective. The proprietorship’s entire assets and liabilities must be conveyed to the newly established Private Company. The proprietor’s shareholding must constitute a minimum of 50%, maintained for a subsequent five-year period. The proprietor must refrain from obtaining any supplementary advantages.

Legal requirements for proprietorship and a private limited company

Proprietorship:

1. Registration: Proprietorships typically do not require formal registration to commence business operations. The owner can start the business under their name or a fictitious business name, also known as a “doing business as” (DBA) name.
2. Taxation: The owner must obtain a tax identification number and report the business income and losses on their personal tax return. The tax obligations are tied to the owner’s personal tax liabilities.
3. Liability: The owner has unlimited personal liability for the business’s debts and obligations. This means personal assets could be at risk to satisfy business obligations.
4. Regulations: Proprietorships may be subject to local business licensing and regulations. These regulations can vary depending on the location and the nature of the business.

Private Limited Company (Ltd.):

1. Incorporation: The first step is to incorporate the company by filing the necessary documents with the relevant government authority, such as the Companies House in the UK or the Registrar of Companies in India. This includes providing information about the company’s directors, shareholders, and its registered office.
2. Memorandum and Articles of Association: A private limited company must have a memorandum of association outlining the company’s constitution and a set of articles of association, which define the internal management of the company.
3. Shareholders and Directors: A minimum number of shareholders and directors are required. In some jurisdictions, a single individual can act as both the director and the shareholder.
4. Compliance: Companies are subject to various compliance requirements, such as annual filing of financial statements, maintenance of statutory registers, and adherence to corporate governance standards.
5. Limited Liability: Shareholders have limited liability, meaning their personal assets are generally protected from the company’s debts and obligations.
6. Taxation: Private limited companies are subject to corporate tax on their profits, and the shareholders are taxed on any dividends they receive.
7. Regulations: PLCs are subject to more extensive regulations and oversight than proprietorships due to their separate legal entity status.

These legal requirements underscore the different levels of complexity and formality associated with proprietorship and private limited companies, highlighting the considerations and obligations involved in each business structure.

Advantages of Transforming Proprietorship into a Private Company

The transition to a private limited company offers numerous advantages that attract  Proprietorship to convert into a Private Company. 

• Registration:  Proprietorships lack formal registration, whereas private companies are registered under the Companies Act 2013.
• Legal Identity:  proprietorships are not separate legal entities, unlike private limited companies which are.
• Share Transferability: Shares in a proprietorship are non-transferable, but in a private limited company, they can be transferred with ease.
• Capital Acquisition: A private company can secure funds for growth, which is not feasible for a proprietor.
• Liability: In a private limited company, liability is limited to shares or guarantees, contrasting with proprietorships where the owner bears full liability.
• Taxation: Private companies benefit from taxation on profits rather than income, a perk not available to non-corporate proprietors.
• Succession: Private companies enjoy uninterrupted succession, whereas proprietorships are dependent on the proprietor’s lifespan.
• Employment: Hiring highly skilled employees is more feasible for a private limited company than for a proprietorship.
• Liability Limitation: Liability is restricted to share contributions in a private company, unlike the unlimited liability in a proprietorship.
• Credibility: Private limited companies, being registered, offer enhanced credibility over unregistered proprietorships.

Procedure:

The procedure for converting a proprietorship to a private limited company involves the following steps:

Pre-Conversion Conditions:

1. Asset and Liability Transfer: Upon incorporating the new private limited company, all assets and liabilities of the sole proprietorship are fully transferred to the new entity.
2. Shareholding: The sole proprietorship will retain 50% of the shares in the new private limited company, thereby holding 50% of the voting rights.
3. Share Retention: The sole proprietor must retain shares for at least 5 years from the date of incorporation of the new private limited company.
4. Non-Monetary Consideration: The conversion involves no monetary transaction between the sole proprietorship and the private limited company, as it is a conversion and not a sale.

Steps for Conversion:

1. Complete Slump Sale Formalities: The sole proprietor must finalize all slump sale-related procedures.
2. Obtain DIN and DSC: Secure Director Identification Numbers (DIN) and Digital Signature Certificates (DSC) for all prospective directors of the new company.
3. Check Name Availability: Apply to confirm the availability of the desired name for the new private limited company.
4. Draft MOA and AOA: Prepare the Memorandum of Association (MOA) and Articles of Association (AOA) for the new company. The MOA must include an objective stating that the sole proprietorship has been taken over by the new company.
5. Apply for Company Registration: Submit an online application for company registration through the Ministry of Corporate Affairs (MCA) portal.
6. Submit Documents: Ensure all necessary documents are submitted along with the application form.
7. Secure Certificate of Incorporation: Obtain the Certificate of Incorporation from the Registrar of Companies.
8. Apply for PAN and TAN: Request the Permanent Account Number (PAN) and Tax Deduction and Collection Account Number (TAN) from the relevant authority.
9. Update Bank Accounts: Update the bank accounts to reflect the new private limited company’s details for transaction purposes.

Final Steps:

Upon completion of the above steps, the MCA will verify the application and documents. Once satisfied, the MCA will issue a Certificate of Incorporation, officially establishing the private limited company.

Documents Required:

The documents required for converting a proprietorship to a private limited company are:

1. PAN card of the proprietorship
2. Identity proof and address proof of the proposed directors
3. Digital Signature Certificate (DSC) of the proposed directors
4. Director Identification Number (DIN) of the proposed directors
5. Copy of the proprietorship registration certificate
6. MOA and AOA of the company
7. Proof of registered office address
8. NOC from the proprietor for using the business name
9. Bank statements and financial statements of the proprietorship
10. Tax registration documents such as GST, VAT, and Service Tax registration certificates.

Checklist:

Here is a checklist of things to keep in mind while converting a proprietorship to a private limited company:

1. Choose a unique name for the company that is not already taken.
2. Ensure that the proposed directors have a Digital Signature Certificate (DSC) and Director Identification Number (DIN).
3. Draft the Memorandum of Association (MOA) and Articles of Association (AOA) of the company carefully.
4. File the incorporation documents with the Registrar of Companies (ROC) within the specified time frame.
5. Obtain a Certificate of Incorporation from the ROC.
6. Apply for a new PAN and TAN for the company.
7. Open a new bank account for the company and transfer all the assets and liabilities from the proprietorship to the new company.
8. Update all relevant stakeholders such as customers, suppliers, and employees about the conversion.