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Conversion Proprietorship to Private Limited Company

Conversion Proprietorship to Private Limited Company

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Proprietorship firm also known as the sole proprietorship firm is the business structure that is controlled and managed by a single owner. Thus, the legal identity of the sole owner and the business are considered as one and the same. This form of business structure is most suitable for the small businesses with less capital investment. One of the major drawbacks of this type of business structure is that the liability of the sole owner is unlimited.

On the other hand, the private limited company is the most preferred form of business structure for the startups.  The private limited company is a privately held business that is incorporated by minimum 2 members.  One of the most crucial benefits of the private limited company over proprietorship is that the private limited company limits the liability of the members to their share only and provides them a legal protection.

Many entrepreneurs generally start their business as sole proprietorship due to lesser compliance requirements. However as the business and the revenues of the company grow, there is a need to separate the bank accounts and the tax filings of the sole proprietor and that of the business. Due to these reasons the sole proprietorship firm covert themselves into the private limited company.

In this article, we have discussed the procedure of converting Proprietorship firm into the private limited company.

Conditions to be fulfilled

For converting Sole Proprietorship firm to Private Limited Company following conditions are required to be fulfilled otherwise the conversion cannot be carried-

  1. Prior to the conversion all the assets and the liability of the Sole Proprietors concern relating to the business become the assets and the liability of the company.
  2. In the new private limited company formed the shareholding of the sole proprietor is not less than 50% of the total voting power in the company. Moreover, his shareholding continues to remain so for a time period of 5 years from the date of the succession.
  3. No benefit is enjoyed by the sole proprietor directly or indirectly, in any form or manner, other than by way of allotment of shares in the company.


The Board of Directors shall enter into an agreement with the firm for its acquisition. Shares have to be allotted by the Board of Directors to the sole proprietor according to the terms of the agreement.

The sale of the business agreement must be executed in order to convert a sole proprietorship concern into a private limited company. One of the requirements for such conversion into the private limited company is that the memorandum of association of proprietorship must have “the takeover of a sole proprietorship concern” as one of the objects.

To effect the conversion the desired private limited company must be formed reflecting that the company is to take over the business of the sole proprietorship.

Further, all the assets and liabilities of the sole proprietary concern relating to the business must be transferred to newly form the private limited company.

Finally, the sole proprietorship is to be terminated and ACRA is to be informed that you have ceased to carry on business as a sole proprietorship now.

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