Conversion of a proprietorship into a private limited company
A proprietorship does not itself become a company. Company Suggestion incorporates a new private limited company and transfers the proprietorship business to that company by agreement.
How does a proprietorship become a private limited company?
A proprietorship is not a separate legal person. Section 366 of the Companies Act, 2013 does not register a one-owner firm as a company.
The proprietor incorporates a private limited company. The company needs at least two shareholders and two directors. The proprietor is one shareholder. A second person takes at least one share.
After the certificate of incorporation, the proprietor and the company sign a business-transfer agreement. The assets and liabilities named in that agreement move to the company. The proprietor then stops carrying on that business in the old name.
Who should move a proprietorship into a company?
Two plans fit this route:
- An owner who will issue shares to an investor.
- An owner who wants the business debts limited to the company.
One owner who wants limited liability and will not add a second shareholder can incorporate a one person company instead.
Which documents does the transfer need?
The work uses two sets of papers.
To incorporate the company
- PAN, identity proof, address proof and a photograph of each shareholder and director
- Proof of the registered office, and a no-objection from the owner of the premises
To transfer the business
- The proprietor’s latest income-tax return
- A statement of the business assets and liabilities
- The business-transfer agreement
What are the steps?
Company Suggestion completes the move in four steps.
- A second shareholder is named, and digital signatures are taken.
- SPICe+ incorporates the private limited company.
- The proprietor and the company sign the business-transfer agreement.
- The company opens its bank account and applies for its own GST registration. The proprietorship GST registration is closed after the move.
Frequently asked questions
4 questions cover the rules that decide this registration.
Can a proprietorship file URC-1?
No. Section 366 is for an LLP, a partnership firm or another body with two or more members. A proprietorship is one person. The route is a new company plus a business-transfer agreement.
Why does the company need a second shareholder?
A private limited company needs at least two shareholders and two directors. The proprietor can be one of them. A second person holds at least one share.
Does the proprietorship GSTIN move to the company?
No. The company applies for its own GST registration. The proprietorship’s GST registration is closed after the business has moved.
What is signed between the owner and the company?
A business-transfer agreement. It lists the assets and liabilities that move from the proprietor to the company.