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Steps for Conversion of Proprietorship Firm Into Company



Steps for conversion of Proprietorship Firm Into Company A Proprietorship Firm is a small scale business operating unit as the individual is responsible for the assets, liabilities and other obligations. If an assessee wants to grow to a larger scale of business, proprietorship firm is not the way. Larger the business, higher the profits and returns. A single individual having own business can expand its resources by converting his small scale Proprietorship Firm into Company.

For converting a Proprietorship Firm into Company, few legal formalities & compliances needs to be complied with and it has many advantages too.

Benefits of conversion Into Company

  • 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.
  • 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.

 Key Requirements for conversion

1.  Shop Act License or Equivalent license/NoC issued by the Gram Panchayat.

2.  Minimum share capital of Rs. 1lac if converting into Private Limited Company and capital of Rs 5lacs if converting into Public Company.

3.  Minimum 2 directors for Private Limited Company and 3 for Public Company.

4.  DIN (Director Identification Number) for all the Directors.

5.  DSC (Digital Signature Certificate) for one of the Directors).

6.  The directors and shareholders can be same person.

Steps Involved in conversion process:

a)  DSC (Digital Signature Certificate) – DSC is required to be obtained by the directors of the company. To obtain DSC, documents are required to be submitted. Documents include –

  • Identity proof
  • Address proof

b)  Apply for DIN - DIN is a pre-requisite for incorporation process. The directors should apply for DIN and get a provisional DIN. For obtaining DIN, director’s personal details are required. For this, Identity proof and Address proof can be submitted to the Registrar in order to get it approved.

c)  Application for name availability – Application is required to be made in Form -1 for availability of name for the Company. Promoters can suggest 6 names in the order of priority and the application to be submitted to ROC for approval.

d)  Changes if any proposed by ROC – If any change in the name application is being proposed by ROC, it should be complied with. If the ROC finds that the name is not suitable he may reject the name.

e)  Documents required – Various documents are required to be submitted to the ROC. The MOA/ AOA are required to be drafted after getting it vetted by the promoters and the same should be sent for printing. Stamping is also required for various documents like MOA, AOA, Letter of authority/ PoA and Form 1.

f)  Other forms required – Other forms like form 18, form 32, form 1 and letter of Authority/ PoA is required to be filed with the ROC.

g)  Final process – Filing all the above documents with the ROC, follow up with the ROC, making changes to the MOA / AOA/other Incorporation documents as suggested by the ROC. The steps to be followed are -

  • Upload the forms – All the above mentioned forms shall be uploaded on the MCA site. Online services are being available for the forms.
  • Payment of fees – Fees are required to be paid for the incorporation process.
  • Collect the Certificate of Incorporation – ROC after being satisfied that all steps have been followed properly and no mistakes have occurred during the process, he will provide a Certificate of Incorporation to the Company.

About: 

Alok Patnia founded Taxmantra.com, an expert in tax advisory & compliance. He is a Chartered Accountant having prior exposure with Ernst & Young & KPMG.

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