Sole Proprietorship to Pvt Ltd
No more delays or difficulties!
With growth, a sole proprietor cannot get all the benefits of an entity, so they convert into a private limited company. The private limited company has multiple advantages over the other form of entities.
Sole Proprietorship to Pvt Ltd - An Overview
Though due to lack of compliance, people start their business as sole proprietors, as the business of a company grows, it does not fit the limitations of the sole proprietorship. With growth, it is aiming to meet with the business world, and the drawbacks of a sole proprietorship do not meet its growth; thus, it goes for conversion into a private limited company. A private limited company has so many advantages over a proprietorship.
For converting a sole proprietor into a private company, an agreement has to be signed between the sole proprietorship and the newly incorporated private limited company for the sale of its business. Such an incorporated Private company should mention in its Memorandum of Association that it has taken over a sole proprietorship. The sole owner of the proprietorship should be made a part of the board of directors with the voting right.
FEATURES OF - Sole Proprietorship to Pvt Ltd
A private limited company has many benefits, such as:
- There is no formal registration for the sole proprietorship, but the Private Companies are registered under the Companies Act 2013.
- The sole proprietorship does not hold any separate legal entity, and the private limited company is a separate legal entity.
- In a sole proprietorship, shares cannot be transferred, whereas, in a private limited company, the shares are transferred easily.
- Unlike a sole proprietor, a Private Company can raise the fund or capital for expansion
- In case of losses, liabilities are limited by shares or warranty in a Private Limited Company, whereas in a sole proprietorship, the sole proprietor is wholly responsible for such losses.
- A Private Company enjoys tax benefits, where tax is levied on profits only and not on income, whereas the sole proprietor, not a corporate entity, cannot enjoy such benefits.
- A sole proprietorship cannot afford highly qualified and capable employees, whereas it is much easier for a private limited company.
- Liability in a sole proprietorship is unlimited, but it is limited to the shares in the private limited company.
Documents Required for Sole Proprietorship to Pvt Ltd
- Proof of identification of all directors
- Address Proof of all the directors
- Passport size photographs of all the directors
- Proof of the ownership of the place of business
- Lease/rent agreement, if the property is rented
- No Objection Certificate from the owner of the land
- Utility bills
Frequently Asked Questions
A Sole Proprietorship Firm cannot use the suffix Private Limited (Pvt Ltd) with its name.
A Private Limited implies a company that offers Limited Liability or legal Protection to its shareholder. In a Private Limited Company, the liability of a shareholder is limited to the extent of capital invested by him.
A Sole Proprietorship Firm, on the other hand, is owned, controlled and managed by a single person. There is no legal difference between the promoter and the business and the liability of the proprietor is unlimited. Hence a Sole Proprietorship Firm can not use Pvt Ltd in its name.
A sole proprietor is prohibited from calling his business any name that implies more than one owner. As such, it would be illegal to include terms like “associates,” “consultants,” “group,” “& company,” “& son” or “& family.” Using a name that implies more than one owner would be misleading to consumers and is prohibited as a result.
Names that imply legal structure are also restricted when naming a Sole Proprietorship. For example, you cannot use “Corp.” or “Inc.” or “Ltd.” in the name of your Sole Proprietorship; those terms are only available to companies that are incorporated. As with using a name that implies more than one owner, using a name that implies a legal structure is misleading and, as such, is illegal.
If you operate a Sole Proprietorship, you are the only participating owner and there are no other members. An LLP can have other participating members.Hence, for a Sole Proprietorship firm to be a Limited Liability Partnership, It has to get converted to an LLP by adding at least one more member as a partner.
Although a proprietorship is not technically a business entity, owners can hire employees. There is no limit on the number of employees that a sole proprietor can employ. As the employer, a sole proprietor is responsible for filing taxes and proper administration for these hires.