Conversion of Proprietorship firm into Private Limited Company

As you are running your proprietorship firm which is not governed by any law. If you are filing Income tax return for sole proprietorship firm and you want to grow your business, then it is good to recommend you for converting it into Private Limited Company. Though there is no specific provision given under Companies Act 2013 for conversion of Proprietorship firm into Private Limited Company, but as a normal practice, we advise for proprietorship firm being takeover by new Private Limited Company while registering it.

 Why conversion:

• The foremost benefit is branding of your business as Private Limited Company is widely accepted business structure in India and also the oldest business Structure. So, if you are converting your stakeholders will have the idea that the business is growing. 
• Automatic transfer- On conversion all the assets & liabilities of the proprietorship firm automatically becomes the assets & liabilities of the Company. 
•  No capital gains tax – No Capital Gains tax shall be charged on transfer of property from Proprietorship firm to Company.
• 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. 
• Carry Forward and Set off Losses and Unabsorbed Depreciation - The accumulated loss and unabsorbed depreciation of Proprietorship firm is deemed to be loss/ depreciation of the successor company for the previous year in which conversion was effected. Thus such loss can be carried for further eight years in the hands of the successor company. 
• Limited liability – In a company the liability of the members is limited to the amount of shares held by them. 

Procedure for conversion of Sole Proprietorship firm into Private Limited Company: 

• Obtaining Digital signature Certificate: Digital Signature Certificate is required to be obtained by any one of the director of the company. 
• Apply for DIN: The directors should apply for DIN.
•  Uploading form with Registrar : Application is required to be made in Form INC-32. E Form INC-33 and INC-34 deals with the one single integrated application for reservation of name, incorporation of a new company and/or application for allotment of DIN. This e Form is accompanied by supporting documents including details of Directors & subscribers, MoA and AoA etc. Once the e Form is processed and found complete, company would registered. Also DINs gets issued to the proposed Directors who do not have a valid DIN. Maximum three Directors are allowed for using this integrated form for allotment of DIN while incorporating a company. 
• Further attachments to this conversion would be the following; 
• Affidavit by the Sole Proprietor
• Statement of Assets & Liabilities as on date by Chartered Accountant if the proprietorship is doing business from long
•  Income Tax Returns Acknowledgement 
• PAN Card of the Sole Proprietor
• Sales Tax Registration Number, if you have
•  Any other Proof showing the name of the Proprietorship firm

 It is important to note that if you want the same name of the Company running under the new Private Limited Company as well, then, it is recommended to show the proofs of the old name like LOGO trademark receipt, Sales Tax Registration documents, etc., so that the same name can be applied again. Probably, if the old name has not been taken by any Private Limited then, you can register the old name again.

TAXATION: 

The given transaction shall not be subject to any taxation, provided the given conditions are satisfied taken from Income Tax Act;

where a sole proprietary concern is succeeded by a company in the business carried on by it as a result of which the sole proprietary concern sells or otherwise transfers any capital asset or intangible asset to the company : 

Provided that— 

(a) 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; 

(b) 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 

(c) 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;

KLB & Associates

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