Do you own a business on sole proprietorship and thinking about taking it to the next big level? Well, you can consider converting your sole proprietorship into a private limited company. It is a huge step towards the growth of your business. You will unlock a new realm of credibility and funding opportunities with limited liabilities. That means you can protect your personal assets while scaling up your business. Sounds sweet, right?
We are here today with a step-by-step guideline explaining the challenges, benefits, and legal process. Are you ready to take the next big step to level up your sole proprietorship? Let’s get started.
Preliminary Considerations
Some preliminary considerations need your attention before you move on to the conversion process. Here are the factors that will ensure a smooth and beneficial transition:
- First question is your business ready for the increased compliance and operational changes? Before making the decision, make sure our customer base, revenue, and growth potential align with the big step.
- Don’t forget to resolve any existing debts or legal factors of your sole proprietorship before you step into the transition. It will be really helpful in reducing the complexities of the conversion process.
- Of course, the business transition has to be beneficial for your business; that’s the entire point! So, go through the benefits and make sure they align with your long-term business planning.
5 Steps to Convert Sole Proprietorship Into Private Limited Company
Throwing the whole process at you will be overwhelming. So, we have divided the process into 5 simple steps for better understanding. These are –
1. Obtain Digital Signatures and Director Identification Number (DIN)
Firstly, let’s solve the digital signature mystery. Every director of the company needs a DSC (Digital Signature Certificate). You have to use it to sign documents digitally during the registration process.
Now, let’s talk about the Director Identification Number (DIN). It’s not very complex, and you just need to apply for the DIN through the Ministry of Corporate Affairs (MCA) portal for all directors.
2. Name Approval for the Company
Your new private limited business requires a name, correct? However, you must obtain MCA approval for the name and fulfill their naming standards. Remember that the name must be original and avoid similarities to current companies or trademarks. Add “Private Limited” at the end of the name.
Once the name is selected, it’s time to submit it for approval through the RUN (Reserve Unique Name) service. You can also submit it as a part of the SPICe+ form.
3. Drafting and Filing Legal Documents
This part is crucial and a bit complex, so pay careful attention. Here are the documents you need to go through.
- Memorandum of Association (MoA): This document defines the company’s vision and scope. Don’t forget to mention that the new company will take over the business operations of the sole proprietorship clearly.
- Articles of Association (AoA): It outlines the rules, regulations, and governance structure of your new private limited company.
- SPICe+ Form Submission: Include MoA and AoA with the SPICe+ form for submission. You also have to add proof of registered office address and consent letters from directors. Don’t forget the copies of the ID and address proofs of the directors and shareholders. You have to pay the registration fee in this part.
When your submission is approved, you with get the Certificate of Incorporation and Company Identification Number (CIN).
4. Transfer Business Assets and Liabilities
Well, you got your new CIN, but there is still a lot to do. You have to transfer the assets and liabilities of the sole proprietorship to the new private limited company, remember?
- Draft a transfer agreement to start the legal procedure to transfer all assets, liabilities, and goodwill of the sole proprietorship to the private limited company.
- Of course, mention the details of bank accounts, inventory, equipment, and receivables in the agreement.
- Transfer the property ownership, licenses, trademarks, and contracts to your new company’s name.
- Don’t forget to inform everyone relevant to the company about the changes.
- Open a new bank account in the company’s name and transfer the funds from the sole proprietorship.
5. Registration with Relevant Authorities
This is the final step of the conversion process. You have to acquire a bunch of registrations to kick off the company. First, apply for a new PAN (Permanent Account Number) of the company. Following this, you need to update your GST registration.
Also, check if you need to update or reapply for any license for the new company. Finally, inform the regulatory bodies like ROC or the Tax Department about the conversion.
That’s it! Your new private limited company is ready to roll.
Bottom Line
In a nutshell, you can convert the sole proprietorship into a private limited company if you feel like the company is ready for the change. Just follow the steps and don’t ignore any documentation. If you can follow this step-by-step guide, the conversion will be easy.
