How to convert Your Sole Proprietorship into a Private Limited Company

June 11, 2025

If you're running your business as a sole proprietorship, you’ve probably enjoyed the ease and flexibility it offers. But as your operations grow, so do the risks and responsibilities. This is where converting into a private limited company makes a lot of sense.

Through this guide, we’ll explain everything you need to know about the conversion of proprietorship into private limited company. We’ll break it down in simple terms so that even if you’re just exploring the idea, you’ll come out with clarity.

At BC Shetty & Co., we’re here to help businesses like yours take that next big step with confidence.

Conditions for Conversion

Before you begin, the following conditions must be met:

• Takeover Agreement: 2A formal agreement between the sole proprietorship and the new company must be signed. This outlines the transfer of all assets and liabilities.
• MoA Clause: S The Memorandum of Association should clearly state the objective of acquiring the proprietorship business.
• Full Transfer of Assets/Liabilities: The new company must take over the entire business—both its assets and liabilities.
• Shareholding Criteria: The proprietor should hold at least 50% of the company’s shares and voting power, and must retain this for five years.
• No Extra Benefits: The proprietor cannot receive anything other than shares—no cash or special treatment.

Proprietorship vs Private Limited Company: A Detailed Comparison

This comparison clearly shows why many businesses prefer to convert proprietorship to Pvt Ltd as they scale.

Procedure for Conversion of Proprietorship to Company

Here are the detailed steps in the procedure to convert proprietorship firm into private limited company:

• Get DIN and DSC:All directors need a Director Identification Number (DIN) and a Digital Signature Certificate (DSC). These are essential for digital filings with the Ministry of Corporate Affairs (MCA).
• Name Reservation via SPICE+ Form: Use the integrated SPICE+ form to reserve your company name. Make sure it reflects the legacy of your previous brand, if required.
• Draft MoA and AoA: Clearly mention your company’s business objective (including takeover of proprietorship) in the Memorandum of Association and set internal rules in the Articles of Association.
• File Incorporation Application: Submit all documents including MoA, AoA, ID/address proofs, and director declarations to the MCA.
• Receive Certificate of Incorporation: Once approved, you’ll receive the legal document that confirms the formation of your new company.
• Obtain PAN & TAN: Your new company must get its own Permanent Account Number (PAN) and Tax Deduction and Collection Account Number (TAN).
• Update Bank Details: Modify bank account details to reflect the new entity. This ensures all future transactions align with the company’s structure.
• Complete Slump Sale: Legally transfer all assets, liabilities, rights, and obligations of the proprietorship to the company as a single unit. This ensures continuity of business and tax neutrality.

Documents Required for Conversion

Make sure you have the following ready:

OWe know what investors look for, and we’ll help you present your business in a way that aligns with the current wave of investment in startups in India. Our approach is hands-on and customised.

• Creating investor-ready pitch decks and business plans
• Identity proof of all directors (PAN, Aadhaar, Passport)
• Address proof (utility bill, Aadhaar, etc.)
• Passport-size photographs of directors
• Property ownership proof or rent agreement for office space
• NOC from landlord if rented
• Latest electricity or water bill for address validation

These documents are required for MCA filings (Form 1, Form 18, Form 32).

Prerequisites for Forming a Private Limited Company

Before you initiate the conversion of sole proprietorship into private limited company, your new company must meet these conditions:

• Minimum Two Directors: One of them can be the proprietor. The second can be a relative or friend.
• DIN for Directors: Mandatory to file any legal documents.
• Minimum Two Shareholders: Can be the same as directors.
• Authorised Capital: Minimum ₹1,00,000 is required to register the company officially.

Advantages of Conversion

Here’s why conversion is a smart move:

• Limited Liability: OYour personal assets stay safe even if your business faces losses.
• Separate Legal Identity: Helps in signing contracts, owning property, and suing or being sued independently.
• Funding Potential: Investors and VCs prefer structured companies.
• Better Branding: ‘Pvt Ltd’ adds weight in the market.
• Transferable Ownership: Makes succession planning or exit easier.

No surprise that many growing startups opt for conversion of proprietorship to private limited company early on.

Disadvantages and Common Pitfalls

Disadvantages:

• More compliance and legal costs
• Need for regular audits and filings
• Shared control with other directors

Disadvantages and Common Pitfalls

Pitfalls to Avoid:

• Not adding the takeover clause in MoA
• Mistakes during asset transfer
• Not holding 50% shares post-conversion
• Skipping PAN/TAN or bank updates

Avoiding these errors will ensure a hassle-free experience.

Conclusion

The conversion of proprietorship to private limited company is not just a legal formality—it’s a strategic upgrade. It helps protect your assets, boosts your brand, and opens up growth opportunities. But the process must be handled with care. At BC Shetty & Co., we specialise in guiding entrepreneurs through this transition. As trusted chartered accountants in Bangalore, we’ll handle every detail, document, and deadline—so you don’t have to.