Conversion of Proprietorship to Private Limited Company

Conversion of Proprietorship to Private Limited Company - Process, Procedure, Document Required, Fees, Eligibility, Duration

A proprietorship, often known as a sole proprietorship, is a type of business owned and operated by one person, with no legal distinction between the owner and the business entity. The proprietor (the owner of a business, or a holder of property) is entitled to all earnings and is personally liable for all debts, losses, and liabilities. On the profits earned from the business, the owner pays personal income tax.

A Private Limited Company, on the other hand, is a privately held firm for small businesses. A member's liability in a Private Limited Company is limited to the number of shares they own. A corporation must pay corporation tax on whatever profits it makes and then distribute the remainder to shareholders. A Private Limited Company's shares cannot be traded publicly. Any type of business, such as a photographer, lawyer, dentist, accountant, and so on, can register a Private Limited Company. Shareholders are the proprietors of a Private Limited Company.

Advantages of conversion of proprietorship to Private Limited Company

A Private Limited Company has several advantages over a sole proprietorship. They are:

• A sole proprietor is subject to unlimited liability for any losses incurred. However, a Private Limited Company's regulation distinguishes between the owner and the entity, limiting the owner's liability.
• A sole owner is taxed at their income tax rate, however, a private limited business is not. A company must pay corporation tax on whatever profits it makes.
• A sole proprietorship is limited to the owner's cash, but a Private Limited Company has fundraising alternatives and can raise larger amounts of capital for expansion.
• Because a sole proprietorship is based on a single individual, its survival is limited to the proprietor's ability to function. The Private Limited Company, on the other hand, is a separate legal entity that is not bound by the presence of a single owner.

Prerequisites of conversion to Private Limited Company

To convert a sole proprietorship into a Private Limited Company, the following prerequisites must be fulfilled:

• To convert a sole proprietorship into a Private Limited Company, the Private Limited Company has to be created first. Then the sole proprietorship should be taken over using a Memorandum of Association (MoA).
• The sole proprietorship firm's assets and liabilities must be transferred to the Private Limited Company.
• The Private Limited Company must have at least two directors. The sole proprietor should be a member of the company's directorial board.
• A minimum of two shareholders is required for the Private Limited Company.
• A minimum authorized capital of Rs one lakh is required for the Private Limited Company.