Conversion Of Firm Into Private Limited Company

convert firm into private limited

Registering the sole proprietorship is very simple because there is no particular certificate which the proprietor has to take to start its business. The business can be started only by taking GST or the license which is specified by the government according to the business activity. But if the entrepreneur is looking for expansion, then the private limited company is the very best option because there are many benefits provided under a private limited company as well as it is regulated by the Ministry of Corporate Affairs, and the main features are limited liability, separate legal entity, perpetual succession, etc. Any person can be a shareholder in the company including an individual whether Indian or foreign or any corporate. In a sole proprietorship, the compliance burden is always very low as compared to other companies and LLPs, that is why most people start their business under this model of business in India. But if the proprietor is looking for the growth of his business and wants to convert sole proprietorship into a private limited company then there are certain procedures that have to follow.

Requirement Before Conversion Of Firm Into Private Limited

  • The proprietor must enter into an agreement with the company for selling all the undertaking of the proprietorship on lump sum consideration as a slump sale to the company under either sale deed or takeover agreement
  • The Memorandum of association of the company must have the provision for “takeover of the sole proprietorship” under its object clause
  • All the assets & liabilities must be transferred to the company
  • The proprietor or the holder must possess at least 50% of shareholding and voting right in the company and the same must be continuous for the period of 5 years.
  • The proprietor does not receive any other benefit whether directly or indirectly in any manner, other than the allotment of shares.
  • There must be two persons who will be the director and shareholder of the company.

Documents Required For Registration Of Pvt Ltd

Documents Required For Director/ Member

  • Photo
  • PAN card
  • Aadhar card
  • Id proof (voter id/ passport/ driving license); anyone
  • Address proof (electricity bill/ bank statement/ telephone bill/ mobile bill); anyone but should not be older than 2 months

Documents Required For Office Address Proof

  • Sale deed or tax receipt if the property is owned, or
  • Rent agreement or lease deed if rented 
  • Utility bill (electricity bill/ mobile bill/ gas bill/ telephone bill); anyone but should not be older than 2 months
  • NOC from the owner of the property

Process To Convert Firm Into Private Limited Company

  • A name reservation application shall be made to the registrar to start the private limited company procedure. The word “Pvt Ltd” should be mentioned at the end of the name
  • The proposed directors must have DSC before filing converting firm into a company
  • Once the name is approved by the government there are certain forms that need to be drafted and the same shall be signed by the applicant. For example AOA, MOA, Director’s consent, etc.
  • After completion of all documentation, the final Spice form shall be filed to the ROC for seeking their approval along with the declaration from the professional
  • ROC may grant the certificate of Incorporation, PAN, TAN, and DIN if he satisfied with the request

Advantages of Private Limited Company

  • There is no minimum capital required to incorporate the company
  • The company can issue and allot equity shares to 200 shareholders during its tenure but it cannot transfer its shares to any other person other than its existing members
  • The death of the member and directors doesn’t affect the validity of the company
  • It becomes easy to get investment from the financial organisation.
  • The company is permitted to carry any business activity
  • The liability is always limited which means the shareholder & director doesn’t have any responsibility for the debts or losses of the company
  • It has its own identity due to which it has its own existence, rights, and power, it can hold assets on its own name

Concerns Of Private Limited Company

  • Now there is no more single ownership the profits will be distributed among all the shareholders of the company in the way of dividends.
  • It cannot raise funds from the general public by issuing share but in the future, if it is required to raise fund then it can be converted into a public limited company if it is allowed as per its articles
  • The company has to do mandatory compliance every year even if there is no income earned during the year. It has to submit its all records like accounts, annual returns, audit report, and other relevant information to the MCA annually which are applicable on it to avoid penalties and other provisions
  • There is a flat 25% tax rate which is leviable on the profit which is earned during the year. The taxes need to pay even if there is a profit of Rs. 10000/-
  • At least 4 board meeting needs to be conducted during the year
  • Once it is incorporated 1st director’s meeting should be conducted within 30 days from its registration

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