Proprietorship is the simplest legal form of a business entity and the easiest kind of business to be established. It is an unincorporated business owned and controlled by a single individual. This single owner pays personal income tax on profits earned from the business. Private limited company is a limited liability entity that can have a maximum of 200 shareholders. There are many benefits of operation that a business entity achieves as it grows; like higher capital and limited liability. There are limitations to a Proprietorship in terms of availing these benefits. Such benefits can be availed if the Proprietorship is converted into a Private Limited Company. Even though diffusion of power and loss of independence are inherent of this conversion, the benefits associated are significant. Conversion can enhance the authenticity of the company, which in turn can possibly attract more clients.
It is required of the Proprietorship to fulfil certain conditions in order to initiate the conversion.
Applying for Name is the first step to conversion. Application must be made to ensure the availability of name.
Digital signature is mandatory for Private Limited Companies. Obtaining Director Identification Number (DIN) and Digital Signature Certificate (DSC) for all the directors is the next step of conversion.
MoA and AoA of the company specifying the objects and the rules of the company needs to be drafted.
Once the MoA and AoA are prepared, application for conversion along with the relevant documents needs to be filed with the Ministry of Corporate Affairs.
After due scrutiny, the application for conversion will be approved, and Certificate of Incorporation for the newly formed Private Limited Company will be granted.
A Proprietorship is an unincorporated business with just one owner whereas a Private Limited Company is a limited liability entity that can have a maximum of 200 shareholders.
Despite the coveted advantages of independence, total control over the business and having lesser compliances to follow, Proprietorship lacks what it takes to flourish into a greater business. That’s where the conversion to Private Limited Company becomes relevant. Conversion can result in higher capital, limited liability and contribute to the authenticity of the business.
Takeover agreement, also known as Sale agreement, is a pact that the Proprietor and the Company enters into, so as to facilitate the conversion.
The assets of proprietorship can be converted into capital for the Private Limited Company. Similarly, the newly formed Private Limited Company will be responsible for the existing liabilities of the Proprietorship.