Conversion of Proprietorship into Company- An Overview
A proprietorship or more commonly known as a sole proprietorship is an entity which is managed by a single individual. There are no concerns related to the management of a sole proprietorship as the business is managed by an individual.
If there is an increase in business of the individual, then the liabilities would also increase. Hence, it is crucial to limit the liability of the sole proprietor. The personal concerns of the sole proprietor must be differentiated and distinguished from the business entity. The best option for a sole proprietor is to go for conversion of proprietorship into company.
However, there is a formal process to carry forward for the above. An agreement must be formally drafted between the sole proprietorship and the company. Such an agreement is known as a “Slump Sale Agreement”. One of the primary objectives which has to considered in the objects of the MOA is to take over the business of a sole proprietor.
Why Conversion of Proprietorship into Company is suitable?
The process of conversion or proprietorship into company is suitable for an individual due to the following reasons:
The liability of a sole proprietorship entity is unlimited. This form of liability is not present when considering a business of a private limited company. Limited liability means the liability is limited to only a particular amount of capital contributed to the company. By conversion of proprietorship into company, an individual can get the benefits of limited liability.
By conversion of proprietorship into a company, an individual would have less responsibility. As a company has more amounts of shareholders and directors, the responsibility would be delegated to other individuals.
Benefits of Conversion of Proprietorship into Company
The following benefits can be enjoyed by a sole proprietor through conversion of proprietorship into company:
Liability is Limited-
The main reason for conversion of proprietorship into company is the principle of limited liability. Limited liability means the liability is limited to only a specific amount of unpaid capital of the firm.
This would mean after the death of the proprietorship concern, the entity will come to an end. This is not for a private limited company or a company. Even after the exit of an individual the company would still be operating.
Ability to Raise Funds-
Private limited companies would easily be able to raise funds from different sources.
A private limited company would definitely have more reputation when compared to a sole proprietorship concern. The company would be registered with the Ministry of Corporate Affairs (MCA). This registration would make the company more reputed in the eyes of the public.
Eligibility Criteria for Conversion of Proprietorship into Company
The following eligibility criteria have to be satisfied for conversion of proprietorship into company:
- DIN- All the directors of the private limited company have to have a director identification number.
- Minimum Directors- A minimum of two directors must be appointed to manage the affairs of a private limited company.
- Shareholders- A minimum of two shareholders have to be appointed to look into the affairs of the company.
- No Minimum Capital Requirements- As per the Companies (Amendment Act) 2015, there is requirement for conversion of a proprietorship into a company.
Conditions for Conversion of Proprietorship into Company
The following conditions have to be satisfied for conversion of proprietorship into company:
- All the assets and liabilities of the proprietorship get transferred to the company.
- The individual sole proprietor shareholding should not be less than 50%.
- The shareholding must be valid for a period of 5 years.
- No benefits related to allotment of shares must be provided to the sole proprietor.
- Sale Agreement or the takeover agreement must be carried out between the proprietorship firm and the company.
- In the MOA, one of the objectives of the business must be the takeover of the business of the sole proprietorship.
Procedure for Conversion of Proprietorship into Company
The following procedure has to be considered for conversion of proprietorship into company:
- Slump Sale Formalities- In the first step, the proprietor has to complete the steps related to slump sale.
- Secure the DIN and DSC for the directors- In the next step, the sole proprietor has to obtain the DIN and the DSC for all the directors.
- Check and Apply for Name Availability in Form 1- In the next step, the individual would have to apply for checking the name availability.
- Prepare MOA and AOA- In the next step, the proprietor has to draft the Articles of Association and Memorandum of Association. In the MOA the main objectives of the business must be stated.
- Go online and apply for Company Registration- In the next step, the applicant must go online to the Ministry of Corporate Affairs (MCA) to apply for the process of company registration.
- Submit Documents- All the documents related to conversion of proprietorship into company must be submitted online.
- Secure Certificate of Incorporation (COI) from the Registrar- The applicant after this must secure the certificate of incorporation from the registrar.
- Apply for PAN and TAN Number- In the next step, the applicant must apply for the PAN and TAN number with the requisite authority.
- Update Bank Details- After this process, the bank details must be updated to carry out transactions.
Documents Required for Conversion of Proprietorship into Company
The following documents are required for conversion of proprietorship into company:
- Details of all the directors of the company
- Utility Bills- Electricity, Water Bills
- Ownership of Sole Proprietorship
- NOC (No-Objection Certificate)
- MOA and AOA
- Certificate of Incorporation
- Address Proof of the Office
- Form 1
- Form 18- Which has requisite details of the registered office
- Form 32- Which has the details of the directors of the company.