Comparison between Sole Proprietorship and Private Limited Company

Conversion Requirements

In order to transition from a sole proprietorship to a private limited company, certain steps need to be taken.

·         Firstly, the Memorandum of Association for the sole proprietorship must state that it will be taken over by a private limited company.

·         Secondly, all properties, assets and liabilities of the sole proprietorship must be transferred to the new private limited company.

·         Thirdly, the proprietor must maintain at least 50% of the voting power for a period of 5 years.

·       Lastly, the owner will not receive any additional benefits beyond their shareholding in the new company.

What is the process of changing a sole proprietorship to a company?

One way to convert a sole proprietorship into a private limited company is to create the new company and then transfer all ownership and obligations to it through a Memorandum of Association (MoA) agreement. This will ensure that all assets and liabilities are legally transferred to the new entity under the MoA.

Prior to submitting an application for a company's certificate of incorporation, certain requirements must be met.

·         In order to set up a private limited company, there must be no less than two directors. One of these directors can include the proprietor or owner of the company, while the other may be someone who is either a friend or relative.

·         An important step for the directors of the company is to obtain an Identification Number, known as a Director Identification Number or DIN, which is necessary for incorporation.

• To start a private limited company, there must be a minimum of two shareholders, who can also be the directors of the company.
• In the case of a sole proprietorship, the proprietor can also be one of the directors of the private limited company. In terms of capital, the minimum requirement to start the business is 1 Lakh rupees.

Advantages of Incorporating a Private Limited Company in India

• A private limited company that's registered carries more credibility when compared to those that aren't. The Ministry of Corporate Affairs official website provides all the information about private limited companies' registration. Registered private limited companies are preferred by suppliers, vendors, and investors, which, consequently, enhances the company's brand value among customers, suppliers, and other investors.
• Private limited companies have the advantages of credit availability and limited liability. Investors, such as venture capitalists and angel investors, can provide funds by investing in unsecured bonds or stocks. This corporate entity offers an opportunity for expansion and growth through financial support. Additionally, since it is a separate legal entity, the responsibility of shareholders and directors is only limited to their contribution to the company.
• International operations are facilitated by private limited companies which give assistance to Foreign Direct Investment. In contrast, other business entities require permits and government approval for foreign investments.
• The transfer of shares and issuance of fresh shares in a private limited company is a hassle-free process. Additionally, a private limited company is recognized as a distinct legal entity with the ability to initiate or defend legal actions. It operates as a fictitious person and has the authority to own property and assets in its own name.
• A private limited company has the advantage of uninterrupted existence. This means that it cannot be terminated or disbanded under any circumstance such as the death, retirement, or insanity of any of its directors, members, or shareholders.