Many promising companies of tomorrow exist as proprietorships today. There are numerous stories of entrepreneurs choosing the proprietorship way instead of straightaway incorporating as a company. It is a predictable trend since a proprietorship has no stringent procedures for commencing or operating a business. It is an easier affair to run a proprietorship than to float a private limited company. There are no minimum capital requirements specified or a minimum number of directors needed to start a sole proprietorship. In colloquial terms, a sole proprietorship may be called a ‘one man show’.
Some proprietorships reach a point where it can no longer be run by an individual without losing potential earnings, or when the existing organisational structure is no longer able to cater to the demands generated in the market. This is the point when there should be rethinking about the type of ownership. It would be time to think about prospective liabilities as well, as the principle ‘higher the returns, higher the risk’ kicks in. The reason being the sheer scale of investments that would be needed to cater to the projected demand. Of course, it may not be possible to source it from the proprietor’s assets alone. The concept of funding is introduced. There can be no funding without some interests in business ownership or operations. All these factors encourage change in business type.
Why Incorporate As A Private Limited Company?
A Private Limited Company is an ideal form of business for a rapidly expanding proprietorship. The number one reason for incorporation would be limited liability. The liability in a private limited company is limited to the extent of investments made by the promoters. This is not the case with proprietorships, where losses faced by the business could be compensated with the personal assets of the proprietor. Further, Angel Investors and Venture Capitalists would invest only if there is professionally run corporate body, to begin with. It is easier to get loans and finances if you are incorporated as a private limited company.
How Does The Conversion Work?
There is no direct way of converting a sole proprietorship into a Private Limited Company. All it takes is an agreement between a sole proprietorship and a newly formed company for sale of business. When a sole proprietorship is taken over by a private limited company, it loses the status of a business entity and merges into the entity of the company. This shall result in all assets of the proprietorship being transferred to the company and all liabilities to be settled by the new company. So, technically, the procedure for converting a sole proprietorship into a company is the same as starting a new company and then creating an agreement for takeover or sale of business of the sole proprietorship.
The procedure for incorporating the new company would be the same as with incorporating any private limited company. The company would require at least two directors. The standard procedures include:
DSC and DIN
An application must be made for Digital Signature Certificate of the directors for being affixed into future applications and transactions of the company. The signature would also be used in the online forms for incorporation at the online portal of the Union Ministry of Corporate Affairs. The Director’s Identification Number is a unique number assigned to the persons appointed as directors in a company.
Filling of Forms
The new integrated Form-29 makes filing easier for companies. This form eliminates filling of multiple forms each for name approval of the company, registred address of the company, application of incorporation, and appointment of directors to name a few. These forms are available online.
Once the forms are filled online, the Registrar accepts the forms and issues certificate of incorporation.
PAN and TAN
Once the incorporation is complete, applications have to be made for PAN and TAN for income tax requirements and for Tax Deduction at source respectively. Please note that the previous PAN for the sole proprietorship will not be converted since PAN numbers are different for all entities.
Intellectual Property Rights
Trademarks and other intellectual properties of the erstwhile sole proprietorship need to be transferred to the newly formed Private limited company. If the trademark is already registered under the Trade Marks Act, 1999, they may be assigned to the new company after its incorporation. An assignment marks the transfer of rights of a trademark. It is done by making a request through Form 23 or 24. Once the Registrar accepts the application, the details are entered in the register.
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