Conversion of Proprietorship Firm into Private Limited Company or OPC
Conversion of Proprietorship Firm into Private Limited Company OR OPC (One Person Company)
Conversion Process, Legal Formalities and Documents and expenses | Company is Eligible to Apply For Startup Recognition
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In India mostly people prefer to start their businesses as a sole proprietorship because of being easy to start and also less compliances as compared to other types of entities. As the business grow, entrepreneurs feel the need of separate the bank accounts and the tax filings and no more want to club their existing personal accounts with business. Demand also arises due to Govt StartupIndia Scheme. As the sole proprietorship firm is not eligible to apply for Startup Recognition, therefore many entrepreneurs showing interest in conversion of their existing Sole proprietorship into OPC ( One Person Company) or Private Limited Company for Startup Recognition.
To convert a sole proprietorship concern into a private limited company, an agreement has to be executed between the sole proprietor and the private limited company (once it is incorporated) for the sale of the business. Further, such private limited company so incorporated must have “the takeover of a sole proprietorship concern” as one of the objects in its Memorandum of Association. Further, there are also certain other requirements and issues related to this process
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Benefits of conversion of Proprietorship Firm into Private Limited Company or OPC
- Separate legal entity and limited liability
- Lower Income tax rate @ 22% ( 15% for manufacturing company)
- A Company is eligible to Apply for Startup Recognition
- Can issue shares to Investors and raise fund
- Easy transfer of shares from one shareholders to another
- Tax Liability of Company and Individual is separate
- No stamp duty – All movable and immovable properties of the firm automatically vest in the Company. No instrument of transfer is required to be executed and hence no stamp duty is required to be paid.
- Perpetual succession - Company enjoys the status of perpetual succession as it does not come to an end if the shareholders or members cease to exist. The company goes on and has perpetual succession.
- No capital gains tax – No Capital Gains tax shall be charged on transfer of property from Proprietorship firm to Company.
- Automatic transfer - On conversion all the assets & liabilities of the proprietorship firm automatically becomes the assets & liabilities of the Company.
Documents Requirements for Conversion of Proprietorship Firm into Private Limited Company or OPC
Below Documents (sl no 1 to 5) required for each Proposed Directors/Shareholders
- Copy of PAN Card of the Directors
- Passport size photograph of Directors
- ID proof:- Voter ID/ Driving License/Passport Copy ( Any one)
- Address proof:- Bank Statement or Mobile/Telephone/Electricity bill ( not more than 30 days old)
- Email ID and Mobile numbers of all Directors/Shareholders
- Address proof of Business Premises:- Electricity/ Water bill / Telephone/Mobile bill ( not more than 30 days old)
- NOC from Owner of the business premises
Income Tax Act Implication on Conversion of Proprietorship Firm into Private Limited Company or OPC
Conversion of a sole proprietorship into a private limited company entails a “transfer” within the meaning of the Income Tax Act, 1961, as amended (Income Tax Act). The assets of the sole proprietorship concern are considered transferred to new company.
- 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 (50%) of the total voting rights in the company and such shareholding continues to so remain as such for a period of five years from the date of the succession.
- 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.
- If any of the conditions laid down above are not complied with (say the sole proprietor sells his share in two years instead of holding on to the shareholding for five years), the amount of profits or gains arising from the transfer of such capital assets or intangible assets not charged earlier by virtue of these conditions, shall be deemed to be the profits and gains chargeable to tax of the successor company for the previous year in which the requirements are not complied with.
Pre-requisites for Conversion of Proprietorship Firm into Private Limited Company or OPC
Minimum 2 Shareholders and 2 Directors for Private Limited Company Registration OR in case of OPC Proprietor can be shareholder and director
Minimum Share Capital
Minimum Share Capital Rs 1 Lakh
All Directors must have DIN, if not then fresh apply with company incorporation
Share Allotment Agreement
Sole proprietor who intends to convert his sole proprietorship into a private limited company, and also allot shares to yourself, then it is imperative that an agreement is entered into for such allotment and one of the conditions in the agreement should state that your shareholding / voting rights will not fall below fifty per cent (50%) in the next five years.
Procedure for Conversion of Proprietorship Firm into Private Limited Company or OPC
Apply for the DSC ( Digital Signature) of the old proprietor and new director. New director not required in case of OPC
Apply for the DIN ( Director identification Number) for both people.
Prepare MOA & AOA of the company where new private limited company rules are mentioned with the objective of transfer the proprietorship firm into the company.
Ministry of Corporate affairs issued the Certificate of incorporation with PAN and TAN
Change old current bank account on new private limited company name
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Note : Govt. Fee and legal expenses payable as per actual and not included in above professional fee
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