Convert Sole Proprietorship into Private Limited Company

As the firm grows, the disadvantages of the sole proprietorship may drive the owner to switch to a more flexible business form, such as a private limited company. The private business has a number of benefits over the proprietorship firm, such as simplicity of investment, consistent presence, and so on. In this article, we will look at how to convert a sole proprietorship into a private limited company.

Vital Characteristics of a Private Limited Company

A private limited company is a privately held business entity that is not restricted to a single member and is governed by the Company Act 2013. A private limited corporation can have up to 200 shareholders. One of the key characteristics of this company model is limited liability, which allows members to repay debts solely to the amount of their shares. Also get your private limited business registered under the ministry of MSME ie. Udyam registration portal.

The following are some of the advantages of forming a private limited company:

  • A shareholder’s responsibility in a privately owned business is limited to the amount of their investment. In the event that the firm fails to repay its creditors, the shareholders’ personal assets are not at risk.
  • Due to the restrictions on the transferability of the shares, a hostile takeover of the private limited corporation is not feasible.
  • The private limited corporation survives far longer than other business forms due to perpetual succession. The loss of a key member has no effect on the organization’s ability to function normally.
  • Under the Income Act of 1961, private limited firms are not subject to a high tax burden.

Sole Proprietorship

A sole proprietorship business is governed, owned, and managed by a single person, and no legal distinction exists between the owner and the business. In contrast to a private limited corporation, the liability element in a sole proprietorship business form is virtually limitless. Also, register your proprietor company with the Ministry of MSME using the Udyam registration Certificate avail various benefits.

  • It is perhaps India’s most popular type of company.
  • In this company model, shareholders and the board of directors do not exist.
  • Self-governance
  • In compared to other company types, there are less legislative compliances.

Documents Needed to Convert a Sole Proprietorship to a Private Limited Company

To convert a sole proprietorship into a private limited company, the following documents will be required:

  • Identification of the company’s owner is required.
  • Letter of authority/power of attorney
  • Utility bills, sale deeds, and rent agreements are examples of registered office address verification.
  • The individual should go to the Ministry of Corporate Affairs (MCA) website and fill out Forms 1, 18, and 32. In addition, the applicant must upload the aforementioned papers and forms to the same webpage.

Declaration of Incorporation

Following completion of the aforementioned criterion, the MCA performs a comprehensive check of submitted papers. The authorities will issue the Certificate of Incorporation to the applicant after satisfactory verification. The conversion of a sole proprietorship into a private limited company will be completed upon receipt of the COI.

Both business models have advantages and disadvantages.

The following are the elements that serve as a significant basis for distinguishing these two entities.

Legal Entity That Exists Separately

It is common knowledge that a sole proprietorship business and its owner are recognised by the law as a single legal entity. Despite the fact that such a company model provides exceptional benefits such as self-governance and tax relief, the owner is constantly at risk of losing the firm due to unending financial commitments.

Liability

In contrast to a private limited corporation, a single proprietorship is more likely to be crushed by an economic downturn. Because the owner of such a firm is obligated to meet all financial commitments, the loan providers may take harsh action against the owner in order to collect the loan amount.

On the contrary, a private limited corporation is more dependable in this regard because the responsibility of organisation members is restricted to the amount of capital contributed by them. Self-government may appear to be an apparent benefit, yet it is accompanied by infinite liability. When it comes to dealing with strict financial debt, sole proprietorship businesses frequently fail.

Tax Obligation

Profits and dividends earned by private limited businesses are subject to taxation, while dividends received by shareholders are not. Meanwhile, in the case of a sole proprietorship, income tax is levied on the owner’s personal income.

Capital Restriction

A sole proprietorship has few options for generating funds, whether through equity fundraising from investors or bank loans. It indicates that the distribution of working capital is restricted to the owners’ own funds. Indeed Due to its lack of visibility and legal standing, sole proprietorship is a lucrative company strategy that does not attract investors. Private limited businesses, on the other hand, offer enormous potential in this area.

Indefinite Progression

Simply put, the absence of the owner jeopardies the single proprietorship firm’s viability. That is, it will only exist for as long as the owner is alive. As a result, as compared to a private limited company, a sole proprietorship business form is more prone to dissolution. A private limited company’s ownership is not restricted to a single member.

The general public’s perception

Because the reputation of sole proprietorships is less than positive, they frequently have difficulties in carrying out a comprehensive business strategy. Furthermore, these companies have a difficult time attracting high-caliber personnel that have the capacity to assure growth through strategic decision making. Sole proprietorships fail to provide dependability for a variety of reasons, which eventually contribute to the growth of the business.

A sole proprietorship firm is uneven on many fronts, whether it is an issue of long-term dependability or obtaining cash from investors. Another reason why single owners frequently migrate to alternative company types is the lack of a legal identity.

Under addition, the scope of expansion in this company strategy is limited. Private limited companies, on the other hand, have more flexibility in terms of expansion and tax rates than sole proprietorships. It has a high development potential and its risk is not restricted to a single member, making this business structure easier to manage.

 

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