As the business grows, the requests of business and the impediments of the ownership of the firm could restrain a business person from beginning the procedure for converting ownership into private limited company. The proprietorship is a one man business in which only one individual does all the work pertaining to the business. It is completely different from the private limited companies. A proprietorship involves the sole ownership of the individual and liability is also unlimited. This means that the liability of a proprietor stands completely different from that of the company. There are many entrepreneurs who start their business as a sole proprietor only. But as the business and the revenues grow, there is a need to separate the bank accounts and the tax filings of then sole proprietor and that of the business. This is usually done by converting a sole proprietorship into a private limited company. Generally, an agreement is executed between a sole proprietor and the private limited company(once its has been incorporated) for the sale of the business. A private limited company always offers considerable amount of benefits in comparison to the sole proprietorship. The details of the conversion of a sole proprietorship into a private limited are discussed in detail below.
PROS AND CONS
There are always certain pros and cons of a particular business. No business stands in isolation. The concealment of certain facts never does good to anybody.it is always better to consider the advantages and disadvantages of a particular activity that has to be undertaken. Similarly there are both benefits as well as drawbacks of every business. Some of the benefits and detriments of sole proprietorship and a private limited in aggregate form are mentioned below.
SEPARATE LEGAL ENTITY
In regard to the sole proprietorship, the proprietor and the business are in and the equivalent ender law and in dealings with the general society. The fact the individual has benefit of more self-governance over each and every business dealings and on the activities. The individual in a proprietorship is a legitimate and monetary incharge of all the risk against the business.
The liability of sole proprietorship and a private limited is completely different from each other. According to The Companies Act 1956, a registered private limited company has a different legal identity from that of the proprietor. The members of that organisation has a restricted liability. The liability of a private limited is unlimited whereas that of a sole proprietorship, it is limited. In a business of sole ownership, the loan providers can easily take action against the sole proprietor for the debts and the losses incurred and can simply venture into the assets and the property. This clearly means that a sole owner faces enormous danger of individual budgetary ruin contrasted with a CEO of a private limited organisation. There are also many tax benefits in which a private limited make a god corporate tax on their benefits and profits. Also their profits are not taxed. All the duties are resolved at the person’s own risk.
The sole proprietorship depends entirely upon the very presence of the individual. If there is the retirement of the proprietor, this means the complete end of the whole business. In the case of private limited, this does not actually that easily. If the relatives or the companions wants to proceed the business further they cannot do so in the sole proprietorship without a managerial problem of joining the business.
PERCEPTION OF THE PUBLIC
There are clear issues of recognition in a sole proprietorship. They face problem troubles in working together on a bigger scale in light of the same fact. But if the sole proprietor
actually wants the recognition, that could happen if he/she turns the business into the private limited. Also, it has become difficult for sole owners to pill in a high value workers which is not the case within private limited.
There are higher consistency prerequisites of a private limited company than that of the sole ownership. The private limited company is administered by the laws, principles and guidelines under the Indian Companies Act.
A CONSTRAINT OF LIMITED CAPITAL
There is a strong constraint of limited capital in the sole proprietorship. This means that the sole owner who is running the business alone faces the problem of limitation of money while doing his work. Also the sole proprietors does not get loans and aids that easily in comparison to that of private limited company. Fundraising is a major problem. This means that sources of working capital are limited to one’s own money and the rolling over of any profits one make from business.
HOW TO CONVERT THE SOLE PROPRIETORSHIP INTO A PRIVATE LIMITED COMPANY?
In order to convert any business to some other form, there always exists certain necessities and formalities to be fulfilled. The requirements for the same are as follows:
- There should be an agreement that needs to be entered by both the sole p[roprietor and the private limited company in order to convert the same. There should be a sale of an undertaking, a business is sold on going concern basis, assets and liabilities are need to be transferred to the buyer and consideration needs to be finalised which could be lump sum also.
- The Memorandum of Association of a private limited company must include that states “the takeover of a sole proprietorship concern”.
- The sole proprietor must be a part of company’s directorial board with voting power. It constitutes to at least 50% of that particular company. A private company must always have at least two directors.
- The incorporation of a private company rules mandarte the minimum share capital requirement of Rs. 1,00,000
THE PROCESS INITIATION
The sole proprietorship can be converted into a private limited by following measures that need to be undertaken:
- The first thing is obtaining the Digital Signature Certificate(DSC) and the Director Identification Number(DIN) for the sole proprietor and the new director.
- The application to MCA for incorporation needs to be done after the application through Form-1
- The completion of slump sale formalities need to be done.
- Modification of the details of the bank account in accordance with the conversion has to be done.
- The submission of relevant documents and forms is required.
The conversion of any of the entity requires the documents that are as follows:
- The basic ID and address proof of the director
- A letter of Authority or POA
- The proof of registered office address which could be a copy of a utility bill or a rent agreement or a sale deed and the likes of it.
In matter of forms, the concerned person need to furnish form-1, form-18 and the form number 32. The documents and forms required to be uploaded on the website of the Ministry of Corporate Affairs(MCA).
CERTIFICATE OF INCORPORATION
After completing all the procedures which are specified, the MCA validates a particular prescribed compliance requirements. If the administering body finds the same satisfactory and upto the mark, the entity will automatically be provided with the Certificate of Incorporation which will effectively give birth to new private limited company. This can be either be electronic or one can choose printed one that s/he can frame and hang it at the business premises. His will serve to show that the business is properly and legally formed. It shows the name of the company and the date it was incorporated. It shows what type of the company has been set up and where the registered office located. When somebody is opening a new business bank account, one’s certificate of corporation is one of the important documents that one needs to take with himself or herself. It clearly shows that it is a legal entity in its own right and that it is on the public register of the companies.
In order to sum up, it has become important to note that a sole proprietorship can be converted to a private limited. This has been the biggest doubt of many people. However it is clear that converting a sole proprietorship into a private limited company is neither a mammoth task. It can easily be done by following certain crucial steps only. Also there exists many benefits of one being in private limited company than that of the sole proprietorship. As a sole proprietorship demands the involvement of only one person and also there are many challenges such as limited capital, unlimited liability, the perception of the public, perpetual progression and a lot many more. This clearly reflects that if a person runs a private limited company or converts his sole proprietorship business into a company, it will benefit the person in the long run. As the legal liability of the business also changes from unlimited to limited. This makes the person to be on an advantageous position in contrast to the earlier disadvantages.