A Sole Proprietorship is a non-registered business entity that doesn’t require anything other than a GST registration certificate to exist. Its perks consist of less legal compliance combined with the freedom to operate in any way a proprietor wishes. However, because there is no regulatory oversight, a proprietorship firm lags in funding and other expansion opportunities.
In such cases, Convert sole proprietorship into private limited company becomes an optimal choice.
Why convert Sole Proprietorship to Pvt Ltd Company?
It is not a light decision to convert a proprietorship firm and evolve it to become a private limited company. However, the following reasons justify the change:
- Access to a proper infrastructure: A sole proprietorship firm is disorganized for lack of appropriate words. While there exists something of a pseudo-chain-of-command, you can’t consider it to be a proper organization. Thus, such a firm cannot survive when the government introduces sudden regulatory changes that shake its foundation. With the conversion to a company, it will get the right infrastructure.
- Access to funding: Expansion is required for a business to thrive, but a sole proprietorship firm can’t get it. It’s unable to attract investors; its non-legal nature makes even banks provide loans. However, once a proprietorship firm transforms into a private limited company, investors start to take it seriously, and banks begin to show more confidence.
- Separate legal entity: A private limited company is an infrastructure that can act on its own accord. As an entity separate from its director, it can own property, fight legal battles, and file taxes. When a company suffers a loss, its directors hold liability only to the extent of their investments.
- Perpetual succession: When the proprietor dies, so does the sole proprietorship. It’s not the case with a private limited company. Through endless series, the rights of a company can be transferred to another director, which ensures the company’s survival.
How to convert a sole proprietorship to a private limited company?
If you wish to tap into the benefits that we have just discussed, you can follow the steps given below:
- Choose the name of the company: First, you must choose a suitable name for your company. While you can select the proprietorship firm’s name in this case, we strictly recommend against it. The companies act, 2013, while it doesn’t have anything against choosing a proprietorship’s name for a company, has certain rules about uniqueness. You need your company’s name to be unique, and the chances for it to happen are low if you select the name of your proprietorship.
- File the RUN application: After you’ve chosen an appropriate name for your company, you must reserve it as soon as possible. You can do so by filing a RUN application to Reserve a Unique Name.
- Get the DSC for all the company’s directors: Company incorporation is an online process that requires online authentication of the applicant’s identity. Aiding in that procedure is the DSC or Digital Authentication certificate.
- Draft Memorandum of Association and Articles of Association: Now, you must draft a legal document known as Memorandum of Association. It will contain the objective of your business as well as details about directors and shareholders of your company. On the other hand, articles of association are documents stating the rules and regulations of your enterprise.
- File the online Spice Form: After drafting the documents highlighting your company’s objectives, laws, and regulations, you must file the file online SPICe form. Abbreviated from “Simplified Performa for Incorporation of a Company”, a Chartered Accountant must fill this form carefully or a Company Secretary.
- Obtain the Incorporation Certificate: If the Registrar of Companies accepts your application, you will obtain the Certificate of incorporation – establishing your company in India.
The next logical step that a Sole proprietorship firm can take to grow is to convert into a private limited company. The process is not simple, and however, the bounties are many. Consult with our experts if you want to go through this conversion process and establish yourself as a legal business entity. Read more in this blog(In SetupPost).