Due to the ease of setting up, most people start their business as sole proprietors. But eventually, as the business grows they face various struggles due to minimal investment capacity and unlimited liability. People who start their business as sole proprietors can convert it into a private limited company for scaling and expanding their business. As a separate legal entity, the private limited company will provide more room for growth and expansion. 

Sole Proprietorship v/s Private Limited

This means the owner has unlimited liability and is personally responsible for all debts and obligations. Sole proprietorships are easier to set up and manage with fewer compliance requirements.

A private limited company is a separate entity from its shareholders, providing limited liability to its owners. This allows for easier access to funding through equity, loans and other financial instruments. A private limited company is more complex to set up and has more ongoing compliance requirements but has more growth and business continuity through perpetual succession.

Benefits of Private Limited

The following are the main benefits of converting sole proprietorship into private limited company:

• Perpetual Succession: Business continuity despite change of ownership.
• Enhanced Credibility: More trust with customers, suppliers and investors.
• Limited Liability: Protects personal assets.
• More Funding: Easier to attract investors and loans.
• Tax Benefits: Potential tax benefits and savings. 

Conditions for Conversion

Before converting into a private limited company make sure to follow the below conditions:

• All the assets of the sole proprietor should be transferred to the new private limited company.
• No monetary transaction or sale of business should be involved in this process. It should only be a structural realignment.
• The proprietor should retain at least 50% of the voting power for 5 years from the date of incorporation.
• Compliance with the Companies Act 2013 including drafting of MOA which should mention the transition from sole proprietorship.
• There should be a takeover agreement or sale agreement between the sole proprietor and the company.

Documents Required for Conversion

The following are the main documents required for the conversion:

• PAN Card copy of directors
• Copy of Aadhar card/Voters ID of directors
• Latest Passport size photographs of Directors.
• Rental agreement if rented.
• No Objection Certificate (NOC) of Landlord.
• Copies of utility bills such as Electricity or water bills.
• Proof of ownership of business place like property papers or sale deeds (if owned)

Steps involved in converting Sole proprietorship to a Private Limited Company

The following are the steps involved in converting a sole proprietorship to a private limited company:

Step 1: Complete Slump Sale Formalities

The first step is to complete the formalities of transferring all assets and liabilities from a sole proprietorship to a new company through a slump sale agreement.

Step 2: Obtain DSC & DIN

Get Digital Signature Certificates (DSC) and Director Identification Numbers (DIN) for all proposed directors.

Step 3: Name Approval

Apply and get name approval through form-1 on the MCA portal.

Step 4: Draft MOA & AOA

Draft the Memorandum of Association (MOA) and Articles of Association (AOA) stating the company’s objectives and rules.

Step 5: Incorporation Application

Apply for incorporation online through the MCA portal. Submit necessary documents such as MOA, AOA, identity proof, address proof, etc.

Step 6: Certificate of Incorporation

Get the Certificate of Incorporation from ROC, officially recognizing the new private limited company.

Step 7: PAN & TAN Application

Apply for a Permanent Account Number (PAN) and Tax Account Number (TAN) for the new company.

Step 8: Update Bank Details

Last but not least, update the bank details to reflect the new company name and to continue the financial transactions.