Conversion of Sole Proprietorship into Private Limited Company

Last Updated On: Nov. 21, 2021, 2:28 p.m.


What is Sole Proprietorship?

A Sole proprietorship is a business or an organisation owned, managed ,controlled and operated by single person who is the sole beneficiary of all profits or loss, and responsible for all risks. It is a popular kind of business, especially suitable for small business at least for its initial years of operation. 


Features of Sole Proprietorship:

1) In Sole Proprietorship, the sole owner has unlimited liability.

2) He should bear the risk and profit recipient

3) Sole Proprietorship is a type of business organization formed by the owner itself. The Owner can close the business at his own discretion

4)In the case of the beneficiary, successor or legal heir of sole proprietor, he can run the business on behalf of the proprietor.

5) As all the rights and responsibilities lie with the sole proprietor that is why he controls all the business activities


What is Private Limited Company?

A private company is a company which is owned by non-governmental organisations or a relatively small number of shareholders or members of a company. Usually, a private company does not offer or trade its shares to the general public on the stock exchanges, but rather the private stock of the company is owned and traded. 


Features of Private Limited Company:

1) Private Limited Company requires a certian amount of minimum paid up capital to start their business

2) It has a easy formation of business. It can start its business right after getting Certificate of Incorporation from the registrar.

3)The members of Private limited Company are restricted to minimum two and maximum 50-200 only

4)Private Limited Company is not able to invite mass people for selling its shares and debentures to them. There is a strict restriction on the transferability of shares in these companies. 

5)The liability of members of Private Limited Company is limited to only the extent of the amount of the face value of the shares purchased by them. 



Let us understand the conditions to convert first.

Conditions for Converting Sole Proprietorship into Private Limited Company:

  • The shareholding of the proprietor should not be less than 50% of the voting power, and the same must continue to be held for a period of 5 years.
  • A takeover agreement or sale agreement needs to be entered into between the sole proprietor and company.
  • The Memorandum of Association (MOA) needs to carry the object “The take over of a sole proprietorship”.
  • All the assets and liabilities of the sole proprietorship must be transferred to the company.
  • The proprietor does not receive any additional benefits either directly or indirectly, except to the extent of shares held.


What are the documents Required for Conversion


The following documents are required for conversion:

  • PAN Card copy of all directors (Identity Proof).
  • No Objection Certificate (NOC) of Landlord.
  • Electricity or water bill.
  • Copy of Aadhar card/ Voters ID (Address Proof).
  • Passport size photographs of Directors.
  • Proof of ownership of business place (if owned).
  • Rental agreement if rented.


What are the forms to be submitted to  MCA?

  • Form 18 specifies the details of the registered office. 
  • Form 1 must be filed with the MOA, AOA and other documents. 
  • Form 32 contains particulars of the information of the directors.


What is the procedure for Conversion of Proprietorship to Company

The following are the steps involved in the conversion of aproprietorship to acompany when the above mentioned requirements are met:

  • The proprietor must complete the slump sale formalities.
  • The Director Identification Number (DIN) and the Digital signature certificate (DSC) must be obtained for all the directors.
  • The proprietor must apply for the availability of name in Form – 1.
  • Prepare the MOA and Articles of Association (AOA) of the company specifying the objects and the rules of the company.
  • Apply for the incorporation of the company to the Ministry of Corporate Affairs (MCA).
  • Submit all the relevant documents.
  • Receive the Certificate of Incorporation.
  • Apply for a new PAN and TAN.

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