As a company evolves, the demands of the commercial world and the disadvantages of sole ownership may limit growth and development. Due to this, business owners change their sole proprietorship into a private limited company.
A private limited company offers several benefits over other forms of ownership arrangements, including restricted liability, the potential to attract new capital, perpetual succession, and so on.
The Pros and Cons of Conversion
Before opting to change your sole ownership to a private limited company, you must evaluate the following critical components:
1. Legal entity
Under the law, the proprietor and the business are the same in the case of sole proprietorships. Although sole owners have self-governance over their business operations, they are individually liable for any risks associated with their firm. In contrast, A private limited corporation is a distinct legal entity which has its assets and liabilities.
2. Liability
Unlike a sole proprietorship, the responsibility of shareholders of a private limited company gets limited to the amount of their shareholding. Except in situations of fraud, shareholders’ assets do not require to satisfy the company’s debts.
In the event of a sole proprietorship, loan providers may sue and take the proprietor’s assets and property. As a result, a lone owner is more likely than a shareholder in a private limited business to experience absolute financial ruin.
3. Taxation
Private limited firms benefit from corporate taxation, in which taxes are imposed on profits rather than income. A sole proprietorship cannot benefit from the corporate tax structure’s exclusions and benefits because it is not a corporate entity.
4. Capitalization and Fundraising
Sole proprietorships lack adequate fund-raising choices, but limited private corporations have a plethora of fund-raising possibilities. In comparison to a sole proprietorship, private limited entities would have minimal difficulty for funds from various sources. Banks are more likely to lend to a limited liability corporation than to a sole proprietorship.
5. Perpetual advancement
Unlike a private limited company, which has endless succession, a sole proprietor’s legal permanency is governed by the proprietor’s life duration. As a result, the proprietorship will dissolve upon retirement or death. The successors who want to inherit and lead the company will be unable to do so.
6. The general public’s perception
As their reputation isn’t as credible, if they run a larger corporate structure, such as a private limited company, sole proprietorships have difficulty networking and cooperating on a broader scale.
Furthermore, sole proprietors are finding it challenging to attract skilled and capable personnel. This lack is due to potential workers being aware of the firm structure’s restricted possibility for development.
Burden of Administration
A private limited company’s compliance formalities and standards are far more stringent than sole ownership. This is because of the rules, regulations, and standards included in the Businesses Act of 2013. The act regulates the functioning of private limited companies. However, the reputation gained by business organisations due to satisfying compliance standards makes the administrative effort worthwhile.
Conversion Requirements
The following requirements must be met for a proprietorship to be converted into a private limited company:
- The sole proprietor and the corporation must sign a takeover or sale agreement.
- The assets and liabilities of the sole proprietorship must be transferred directly to the corporation.
- The Private Limited Company’s Memorandum of Association (MOA) should include a statement that its goal is “the takeover of a sole ownership company.”
- The owner’s shareholding should not be less than 50% of the voting power, and it should remain that way for five years.
- The owner should not get any extra benefits, directly or indirectly, other than the number of shares possessed.
- The private limited company’s authorised share capital should be at least Rs. 1,000,000.
Prerequisites for Conversion
- A minimum of two shareholders
- a minimum of one lakh in share capital
- DIN for all directors
- DSC for all directors
- a minimum of two directors
Documents Required for Conversion
The following documents are required for the conversion of a sole proprietorship to a private limited company:
- A copy of each director’s PAN card (identity proof)
- A copy of Aadhar card/voter ID (address proof)
- Photographs of directors (passport size)
- Proof of ownership of the company location (if owned)
- Rental contract (if rented)
- A bill for electricity or water
- No Objection Certificate (NOC) from the landlord (if rented)
What are the Forms?
- Form 1 filed with MOA, AOA, and other documents
- Form 18 elaborating details of the registered office
- Form 32 specifying information about the directors
Incorporation Declaration
Following completion of the registration procedure via the SPICE+ form and Agile Pro with the relevant papers, the MCA verifies the conversion and issues the Certificate of Incorporation.
We at Corproots can assist you in converting your Sole Proprietorship into a Private Limited Company. We will handle everything for you, from filling out paperwork to preparing all necessary papers. So, what are you waiting for? Visit our website right away!
