Among the various business entities sole proprietorship firm registration and private limited company registration are the two. Both the business entities are suitable for different types of businesses. Sole proprietorship firms are good for the small businesses and for the mid-sized and big businesses private limited companies are good. In case small size businesses want to expand their business they can convert their proprietorship into private limited. Conversion of proprietorship into private limited is possible. This includes various steps and a lot of formalities. These formalities can be done by those who have ideas about the same. Because of the involvement of a lot of formalities we will suggest you to take help of the expert regarding the conversion of proprietorship into private limited.
Two Types of Most Preferred Entities by the Business Owner
Given below are the two most preferred entities by the business owner. Sole proprietorship firms are chosen by the small business owners and private limited companies have been chosen by the mid-sized as well as big businesses. Before knowing about the things related to the conversion of proprietorship into private limited, one must understand them separately. To understand them separately read the details discussed below:
Sole Proprietorship Firms
Business entities which are solely run by one person without separate legal status, separate legal liability, perpetual succession etc are called sole proprietorship firms. These firms are easy to form and there is no compliance like corporate bodies over there. These firms do not have any separate governing law, also they do not register separately like corporate bodies. If the proprietor took GST Registration or MSME Registration or Shop and Establishment Certification, it will be taken as registered. Proprietor is the sole owner of the proprietorship firms.
Private Limited Companies
Such entities are very famous among the mid-sized as well as big business owners. Mostly startups or businesses starting in the present time choose private limited companies as their entity type. This is because of the various benefits or advantages it offers. Such business entities are enjoying various benefits like perpetual succession, limited liability, status of separate legal entity etc.
Key Difference Between Proprietorship and Private Limited Companies
Some of the key difference between proprietorship and private limited companies are mentioned below in the table:
| Sole Proprietorship Firm | Private Limited Company |
| They are run by one person | There are multiple persons to manage these companies |
| Minimum one person is required to start such kind of entity | Minimum two directors are required to run such entities |
| Member of this entity is called proprietor | Member of this company is known as director |
| Such kind of entities do not need minimum paid up capital | They need minimum paid up capital in order to start their business |
| There is no separate registration for such types of firms. GST or MSME registration will recognize them as proprietorship firm | Separate registration needs to be done |
| They can die as not having perpetual succession | They cannot die as they are having perpetual succession |
| Shares are not there in these entities | There are shares of shareholder in these entities |
| Suitable for small businesses | Suitable for mid-sized as well as big businesses |
Governing Law for the Conversion of Proprietorship into Private Limited
Mainly there are two types of laws which govern the conversion of proprietorship into private limited. The first one is the Companies Act of 2013. Under this law all the things related to the procedure of conversion, documents required for the conversion etc have been given. The second law is related to the taxation which is known as the Income Tax Act of 1961. This basically governs the tax system of the entities.
Benefits of Conversion of Proprietorship into Private Limited
Some of the benefits of the conversion of proprietorship into private limited are discussed below:
- With a Private Limited Company, the owner’s liability is limited.
- Personal assets are not at risk in case of business debts or legal issues, providing financial security.
- Such entities will have a distinct legal entity from its owner.
- It is simpler for private limited companies to get loans and investments.
- Investors often prefer this structure due to the limited liability feature, making it more appealing for funding.
- The company’s existence is not affected by changes in ownership or the death of shareholders.
- Business continuity and stability even when there are changes in leadership.
- Shares of a Private Limited Company can be easily transferred, allowing for the smooth transition of ownership.
- Private Limited Companies often enjoy favorable tax treatment, including lower corporate tax rates.
- Private Limited Companies are generally perceived as more credible and trustworthy by customers, suppliers, and other stakeholders.
- Enhanced credibility can positively impact business relationships.
- Offering employee stock options becomes feasible in a Private Limited Company structure, helping attract and retain talented employees by making them stakeholders in the company’s success.
- The company has perpetual succession, meaning it continues to exist even if the original owner or shareholders change.
- A Private Limited Company’s structure frequently projects a more polished image, which can be helpful in luring customers, partners, and business prospects.
- Private Limited Companies are subject to specific regulations and compliance requirements, fostering a disciplined approach to business operations and financial management.
- Certain contracts and business opportunities may be available only to Private Limited Companies, providing access to a broader range of projects and collaborations.
- The “Private Limited” tag adds a level of formality and professionalism to the company’s name, contributing to brand recognition and trust among consumers and business partners.
- Private Limited Companies find it easier to expand globally, as the corporate structure aligns well with international business standards and expectations.
Why to Convert Proprietorship into Private Limited Entity?
After the Conversion of proprietorship into private limited entity following will be offered to the business due to which conversion has been suggested:
- Limited Liability
- Separate Identity
- More Credibility
- Easier Funding
- Long-Term Existence
- Ownership Transfer
- Tax Advantages
- Employee Benefits
- Professional Image
- Compliance Discipline
- Access to Contracts
- Global Expansion
- Brand Recognition
- Potential IPO
- Structured Decision-Making
Key Requirements of the Conversion of Proprietorship into Private Limited
Some of the key requirements for the Conversion of proprietorship into private limited company are:
- Have at least two directors for the Private Limited Company.
- Minimum two shareholders are needed, and the proprietor becomes one.
- Directors must obtain Director Identification Number (DIN) and Digital Signature Certificate (DSC).
- Draft Memorandum of Association (MOA) and Articles of Association (AOA) for the new company.
- Declare a registered office address for the Private Limited Company.
- Decide on the share capital structure and issue shares to the shareholders.
- Obtain approval from existing creditors for the conversion.
- Make a statement of the proprietorship’s assets and liabilities.
- Obtain tax clearances and ensure compliance with tax regulations.
- Conduct a board meeting to approve the conversion and related matters.
Process of Converting a Proprietorship into Private Limited
Follow the steps given below for the conversion of proprietorship into private limited:
- Visit the official portal of the MCA
- Choose and reserve a unique name for the Private Limited Company through the Ministry of Corporate Affairs (MCA).
- File the necessary forms, such as SPICe (INC-32), with the Registrar of Companies (RoC).
- Submit the application for conversion to the Registrar of Companies.
- Receive the Certificate of Incorporation from the RoC.
- Update all business records, licenses, and registrations with the new company details.
- Update the bank account details and open a new account in the company’s name.
Documents Required to Convert Proprietorship into Private Limited
Some of the key documents needed for the conversion of proprietorship into private limited are:
- Identity and Address Proof
- Photographs of the directors
- Proof of Registered Office
- NOC from Landlord (if the office is on rent)
- Utility Bill (if the office is own)
- Director Identification Number (DIN)
- Digital Signature Certificate (DSC)
- Name Approval Letter
- Memorandum of Association (MOA)
- Articles of Association (AOA)
- Affidavit of Non-Acceptance
- Consent of Directors
- Statement of Assets and Liabilities
- Power of Attorney
- Tax Registration Certificates
Conclusion
Conversion of proprietorship into private limited involves transitioning from a business structure managed by a single individual to a more complex entity governed by the Companies Act of 2013. This transformation offers several advantages, including limited liability, a separate legal identity, enhanced credibility, and easier access to funding. The process requires compliance with legal requirements, drafting essential documents such as the Memorandum of Association and Articles of Association, and obtaining approvals from authorities.
The size and type of the firm determines which structure is best: small to medium-sized businesses typically choose proprietorships, whereas private limited companies are preferred by major corporations. The Conversion of proprietorship into private limited company is guided by both the Companies Act and tax regulations, making expert assistance advisable.
