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Conversion of Proprietorship to Private Company

A Proprietor, willing to expand its business and area of operations may opt to convert its proprietary business to Private Company. A proprietor may opt for such conversion taking into account the synergies associated with such conversion of business to Private limited Company. A Private Limited company is a separate legal entity having perpetual succession, having limited liability with regard to defaults, subject to certain conditions.

CLOSURE/ CONVERSION OF BUSINESS








Current year
Previous year


Advantages of Private Company:

  1. Limited Liability– Each member or shareholder has a limited liability. It means that in case of any loss the shareholders are liable only to the extent of their share. Their personal assets cannot be used for company’s benefit.
  2. Perpetual succession– Company’s identity is different from its owner. Therefore death, insolvency, or bankruptcy of any of its members has no impact on company’s existence.
  3. Better reputation: Since a Private Company is required to get its accounts audited as per the provisions of the Companies Act, it drastically improves the trust of the clients and other stakeholders on the Company.
  4. Lower tax rates: Companies having turnover upto Rs 50 crores are taxable at the rate of 25% starting from the financial year starting April 1, 2017.
  5. Separate legal assistance: The private company has a separate legal existence from that of its owners. It can own property and sue and be sued.

Steps for conversion:



Drafting of the agreement for the sale of Proprietory business to the new company.


Checking the name availability of the Company and applying to ROC for obtaining the approval of the name.


Applying for the DIN and digital signatures of the Directors of the Company.


Drafting of the Memorandum and the Articles of association of the Company.


Filing/ E-filing of the all the relevant documents with the ROC and obtaining the Certificate of Incorporation of Company.

DOCUMENTS REQUIRED


  • DIN of all those directors of a proposed company;
  • DSC – Digital Signature Certificate for all the Directors;
  • PAN of all the Directors;
  • Identity proof of all the directors;
  • Passport sized photograph of the Directors;
  • Copy of the bank statement/ electricity bill/ telephone bill;
  • NOC from the landlord, in case of rented premises;
  • Copy of telephone bill/ electricity bill/ gas bill, etc as proof of place of business;

Minimum Requirements for conversion:


  • all the assets and liabilities of the sole proprietary concern relating to the business immediately before the succession become the assets and liabilities of the company;
  • the shareholding of the sole proprietor in the company is not less than fifty per cent of the total voting power in the company and his shareholding continues to remain as such for a period of five years from the date of the succession; and
  • the sole proprietor does not receive any consideration or benefit, directly or indirectly, in any form or manner, other than by way of allotment of shares in the company;

Non-compliance of these conditions would entail heavy tax liabilities on the Proprietor

FREQUENTLY ASKED QUESTIONS


1. What is the basic qualification to be a Director in a Private Company?

– The Director needs to be over 18 years of age and must be a natural person. Foreign nationals can also be directors in an Indian Private Limited Company. However, out of the 2 directors, atleast 1 should be an Indian resident.

2. Can a Company have any name?

– Yes, Company can be given any name provided it should comply with the rules as laid down in the Companies (Incorporation) Rules, 2014.

3. Is it mandatory to have DIN and DSC by Directors?

– Yes. DIN is a unique identification number that is required for all the Directors and DSC is required for the Directors to sign the forms electronically.

4. Can a Foreign National or an NRI hold shares of a Private Limited Company?

– Yes, a Foreign National or an NRI Foreign Companies can hold shares of a Private Limited Company subject to Foreign Direct Investment (FDI) Guidelines.

5. Is it mandatory to have a proper place of business to incorporate a Company?

– No it is not mandatory to have a proper place of business to incorporate a Company. However, you shall need to have a place which shall act as the Registered Address of the Incorporated Company.

6. What is the due date of Income Tax Return filing in case of Companies?

– For Domestic Companies: September 30 of each year
– For Companies governed by Transfer Pricing provisions: November 30 of each year.

7. What shall be the date of Incorporation of the Company?

– The date of issuance of Certificate of Incorporation of the Company shall be the date of incorporation of the Company.

8. Is it necessary for the Company to get the books of Accounts audited by the statutory auditor?

– Yes, as per the provisions of the Companies Act, 2013, all companies shall need to get its accounts audited by the Statutory Auditor, who shall be Chartered Accountant or a Company of Chartered Accountant.

9. What is the current rate of tax in case of Companies?

Before April 1, 2017:
All companies: 30% as increased by surcharge and education cess
After April 1, 2017:
Companies having turnover < Rs. 50 crores: 25% as increased by surcharge and education cess.
Companies having turnover > Rs. 50 crores: 30% as increased by surcharge and education cess.

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