{"id":1675,"date":"2019-09-11T15:58:46","date_gmt":"2019-09-11T10:28:46","guid":{"rendered":"https:\/\/aktassociates.com\/blog\/?p=1675"},"modified":"2019-09-13T16:42:54","modified_gmt":"2019-09-13T11:12:54","slug":"conversion-proprietorship-to-private-company","status":"publish","type":"post","link":"https:\/\/aktassociates.com\/blog\/conversion-proprietorship-to-private-company\/","title":{"rendered":"Conversion of Proprietorship to a Private Company"},"content":{"rendered":"<div id=\"ez-toc-container\" class=\"ez-toc-v2_0_66_1 counter-hierarchy ez-toc-counter ez-toc-grey ez-toc-container-direction\">\n<div class=\"ez-toc-title-container\">\n<p class=\"ez-toc-title \" >In this article, we will discuss about...<\/p>\n<span class=\"ez-toc-title-toggle\"><a href=\"#\" class=\"ez-toc-pull-right ez-toc-btn ez-toc-btn-xs ez-toc-btn-default ez-toc-toggle\" aria-label=\"Toggle Table of Content\"><span class=\"ez-toc-js-icon-con\"><span class=\"\"><span class=\"eztoc-hide\" style=\"display:none;\">Toggle<\/span><span class=\"ez-toc-icon-toggle-span\"><svg style=\"fill: #1e73be;color:#1e73be\" xmlns=\"http:\/\/www.w3.org\/2000\/svg\" class=\"list-377408\" width=\"20px\" height=\"20px\" viewBox=\"0 0 24 24\" fill=\"none\"><path d=\"M6 6H4v2h2V6zm14 0H8v2h12V6zM4 11h2v2H4v-2zm16 0H8v2h12v-2zM4 16h2v2H4v-2zm16 0H8v2h12v-2z\" fill=\"currentColor\"><\/path><\/svg><svg style=\"fill: #1e73be;color:#1e73be\" class=\"arrow-unsorted-368013\" xmlns=\"http:\/\/www.w3.org\/2000\/svg\" width=\"10px\" height=\"10px\" viewBox=\"0 0 24 24\" version=\"1.2\" baseProfile=\"tiny\"><path d=\"M18.2 9.3l-6.2-6.3-6.2 6.3c-.2.2-.3.4-.3.7s.1.5.3.7c.2.2.4.3.7.3h11c.3 0 .5-.1.7-.3.2-.2.3-.5.3-.7s-.1-.5-.3-.7zM5.8 14.7l6.2 6.3 6.2-6.3c.2-.2.3-.5.3-.7s-.1-.5-.3-.7c-.2-.2-.4-.3-.7-.3h-11c-.3 0-.5.1-.7.3-.2.2-.3.5-.3.7s.1.5.3.7z\"\/><\/svg><\/span><\/span><\/span><\/a><\/span><\/div>\n<nav><ul class='ez-toc-list ez-toc-list-level-1 eztoc-toggle-hide-by-default' ><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-1\" href=\"https:\/\/aktassociates.com\/blog\/conversion-proprietorship-to-private-company\/#IntroductionScenario\" title=\"Introduction(Scenario):\">Introduction(Scenario):<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-2\" href=\"https:\/\/aktassociates.com\/blog\/conversion-proprietorship-to-private-company\/#Benefits_for_the_conversion_from_proprietorship_to_a_private_company\" title=\"Benefits for the conversion from proprietorship to a private company:\">Benefits for the conversion from proprietorship to a private company:<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-3\" href=\"https:\/\/aktassociates.com\/blog\/conversion-proprietorship-to-private-company\/#Requirements_for_ConversionAdditional_Requirements\" title=\"Requirements for Conversion(Additional Requirements):\">Requirements for Conversion(Additional Requirements):<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-4\" href=\"https:\/\/aktassociates.com\/blog\/conversion-proprietorship-to-private-company\/#Conditions_for_exemption_of_capital_gain_on_conversion_of_proprietorship_to_Private_Company\" title=\"Conditions for exemption of capital gain on conversion of proprietorship to Private Company\">Conditions for exemption of capital gain on conversion of proprietorship to Private Company<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-5\" href=\"https:\/\/aktassociates.com\/blog\/conversion-proprietorship-to-private-company\/#To_be_Noted_that\" title=\"To be Noted that:\u00a0\">To be Noted that:\u00a0<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-6\" href=\"https:\/\/aktassociates.com\/blog\/conversion-proprietorship-to-private-company\/#ContractsService_AgreementsLeases\" title=\"Contracts\/Service Agreements\/Leases\">Contracts\/Service Agreements\/Leases<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-7\" href=\"https:\/\/aktassociates.com\/blog\/conversion-proprietorship-to-private-company\/#LicensesPermits\" title=\"Licenses\/Permits\">Licenses\/Permits<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-8\" href=\"https:\/\/aktassociates.com\/blog\/conversion-proprietorship-to-private-company\/#Conclusion\" title=\"Conclusion\">Conclusion<\/a><\/li><\/ul><\/nav><\/div>\n<h2><span class=\"ez-toc-section\" id=\"IntroductionScenario\"><\/span><b>Introduction(Scenario):<\/b><span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p><span style=\"font-weight: 400;\">In India, the scope of business opportunities is increasing every day and every person, doing a business, wants to expand it. Like in every business, the competition is also increasing and customer buys the products or services from the person in which they have a belief.<\/span><\/p>\n<p><img loading=\"lazy\" decoding=\"async\" class=\"size-full wp-image-1671 aligncenter\" src=\"https:\/\/aktassociates.com\/blog\/wp-content\/uploads\/2019\/09\/proprietorship-1.png\" alt=\"Convert proprietorship to private company\" width=\"700\" height=\"400\" srcset=\"https:\/\/aktassociates.com\/blog\/wp-content\/uploads\/2019\/09\/proprietorship-1.png 700w, https:\/\/aktassociates.com\/blog\/wp-content\/uploads\/2019\/09\/proprietorship-1-300x171.png 300w, https:\/\/aktassociates.com\/blog\/wp-content\/uploads\/2019\/09\/proprietorship-1-20x11.png 20w\" sizes=\"(max-width: 700px) 100vw, 700px\" \/><\/p>\n<p><span style=\"font-weight: 400;\">\u00a0Now, since the company is having a separate legal business entity and it has to file many statutory forms to ROC, the customers would always prefer to buy the product from a company instead of from any proprietor. <\/span><span style=\"font-weight: 400;\">For Example, <\/span><span style=\"font-weight: 400;\">If I told you to buy a mobile phone from Reliance Digital or any local mobile shop, then you will prefer Reliance Digital. The reason is very simple because it has a brand and a separate entity in the eyes of law.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">I<\/span><span style=\"font-weight: 400;\">n other words<\/span><span style=\"font-weight: 400;\">, if any proprietor doing business on a small scale and wants to expand it, then he should convert this proprietorship to a private company and this is what we will discuss today in this article.\u00a0<\/span><\/p>\n<h2><span class=\"ez-toc-section\" id=\"Benefits_for_the_conversion_from_proprietorship_to_a_private_company\"><\/span><b>Benefits for the conversion from proprietorship to a private company:<\/b><span class=\"ez-toc-section-end\"><\/span><\/h2>\n<ul>\n<li><b>Transfer of Assets and liabilities:<\/b><span style=\"font-weight: 400;\"> On conversion, all the assets and liability will automatically become the assets and liability of the company.<\/span><\/li>\n<li><b>Exemption from Tax(No Capital Gain): <span style=\"font-weight: 400;\">As per section 47 of the income tax act, there are certain transactions are defined which shall not be considered as transfer, hence on conversion, the <\/span><span style=\"font-weight: 400;\">assessee<\/span><span style=\"font-weight: 400;\"> is not liable to pay <a href=\"https:\/\/aktassociates.com\/blog\/capital-gain-tax-deduction-sale-property\/\">Capital Gain Tax<\/a>. Although, the exemption shall be given<\/span><span style=\"font-weight: 400;\"> only<\/span><span style=\"font-weight: 400;\"> after compliance of certain conditions which has been explained below in this article.<\/span><\/b><\/li>\n<li><b>Perpetual Succession(separate legal entity<span style=\"font-weight: 400;\">)<\/span>: <span style=\"font-weight: 400;\">As we already discussed above that the company is a separate legal entity. Another characteristic of a company is perpetual succession. It means, we always assumed that the company has an indefinite life and this also increases the confidence of the customer on the company.<\/span><\/b><\/li>\n<li>Carry forward and set off loss &amp; unabsorbed depreciation:<span style=\"font-weight: 400;\"> If the <\/span><span style=\"font-weight: 400;\">assessee <\/span><span style=\"font-weight: 400;\">is having a loss in proprietorship business then such loss can also be carried forward in the company for <\/span><span style=\"font-weight: 400;\">fresh<\/span><span style=\"font-weight: 400;\"> 8 financial years <\/span><span style=\"font-weight: 400;\">after conversion from <\/span>proprietorship to a private company.<\/li>\n<\/ul>\n<h2><span class=\"ez-toc-section\" id=\"Requirements_for_ConversionAdditional_Requirements\"><\/span><b>Requirements for Conversion(Additional Requirements):<\/b><span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p>Before beginning the conversion of proprietorship into the company, the proprietor should ensure compliance with the following requirements:-<\/p>\n<ol>\n<li style=\"font-weight: 400;\"><b>Agreement:<\/b><span style=\"font-weight: 400;\"> There should be an agreement that must specify the conversion of it.<\/span><\/li>\n<li style=\"font-weight: 400;\"><b>Memorandum Of Association(MOA)<\/b><span style=\"font-weight: 400;\">: Its object( that is&#8230; newly\u00a0 formed company from Sole proprietorship to Pvt company) must state the \u2018The Takeover of Sole Proprietorship Concern<\/span><b>\u2019<\/b><\/li>\n<\/ol>\n<h2><span class=\"ez-toc-section\" id=\"Conditions_for_exemption_of_capital_gain_on_conversion_of_proprietorship_to_Private_Company\"><\/span><b>Conditions for exemption of capital gain on conversion of proprietorship to Private Company<\/b><span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p><span style=\"font-weight: 400;\">As we discussed above that <\/span><b>section 47 exempts<\/b><span style=\"font-weight: 400;\"> the capital gain tax on the conversion of proprietorship to a Private Company. However, for exemption following conditions are required to be satisfied:<\/span><\/p>\n<ul>\n<li style=\"font-weight: 400;\"><b>Assets and liabilities:<\/b><span style=\"font-weight: 400;\"> All the assets or liabilities of the <a href=\"https:\/\/aktassociates.com\/blog\/proprietorship-procedure-advantages\/\">proprietorship firm<\/a> will become the assets of the private limited company immediately before conversion.<\/span><\/li>\n<li style=\"font-weight: 400;\"><b>Holding in the private company:<\/b><span style=\"font-weight: 400;\"> The proprietor shall become the shareholder in the company and hold at least 50% shareholding in the new private limited company. In simple words, the <\/span><span style=\"font-weight: 400;\">assessee<\/span><span style=\"font-weight: 400;\"> should have a minimum of 50% voting power in the company. Also, the proprietor has to maintain this 50% shareholding at least for the 5 years.<\/span><\/li>\n<li style=\"font-weight: 400;\"><b>No other consideration<\/b><b>(benefits)<\/b><b> should be received<\/b><span style=\"font-weight: 400;\">: The proprietor should not be received any consideration from the company directly or indirectly other than the allotment of shares.<\/span><\/li>\n<\/ul>\n<h2><span class=\"ez-toc-section\" id=\"To_be_Noted_that\"><\/span><b>To be Noted that:<\/b><span style=\"font-weight: 400;\">\u00a0<\/span><span class=\"ez-toc-section-end\"><\/span><\/h2>\n<ul>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">The benefit of the section is available for the proprietor <\/span><span style=\"font-weight: 400;\">assessee<\/span><span style=\"font-weight: 400;\"> who is engaged in any business. If he is a professional then exemption shall not be available.<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">\u00a0<\/span><span style=\"font-weight: 400;\">if the company allots share to the relative of the proprietor and the above conditions are satisfied then also the exemption shall be available.<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">The exemption shall be available for short terms as well as long term capital gains and it also includes the depreciable assets.<\/span><\/li>\n<\/ul>\n<p><span style=\"font-weight: 400;\"><strong>Note:<\/strong> Once the capital gain is satisfied but thereafter if the condition has not complied then the capital gain previously exempted shall be taxable in the hands of the company in the year of non-compliance.<\/span><\/p>\n<p><strong>Let\u2019s understand the above conditions with an example:<\/strong><\/p>\n<p><span style=\"font-weight: 400;\">Mr. A is a sole proprietor of a business and his net investment as on 31.03.2019 is Rs. 50 lakhs. On 01.04.2019 he formed a private company and transfer his business to the company for Rs. 70 lakhs for the issue of shares at 700000 share with 10 each.<\/span><\/p>\n<table>\n<tbody>\n<tr>\n<td><span style=\"font-weight: 400;\">\u00a0<\/span><\/td>\n<td><span style=\"font-weight: 400;\">Particulars<\/span><\/td>\n<td><span style=\"font-weight: 400;\">Amount in Lakhs<\/span><\/td>\n<\/tr>\n<tr>\n<td><\/td>\n<td><span style=\"font-weight: 400;\">Sale consideration<\/span><\/td>\n<td><span style=\"font-weight: 400;\">70<\/span><\/td>\n<\/tr>\n<tr>\n<td><span style=\"font-weight: 400;\">Less:<\/span><\/td>\n<td><span style=\"font-weight: 400;\">Cost of acquisition<\/span><\/td>\n<td><span style=\"font-weight: 400;\">50<\/span><\/td>\n<\/tr>\n<tr>\n<td><\/td>\n<td><span style=\"font-weight: 400;\">Capital Gain<\/span><\/td>\n<td><span style=\"font-weight: 400;\">20<\/span><\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<p><strong>Now, this capital gain shall be exempted if the conditions of Section 47 has been satisfied which are:<\/strong><\/p>\n<ul>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Condition 1: He has transferred all the assets and liabilities of the proprietorship business to the assets and liabilities of the company immediately before the succession.<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Condition 2: He has acquired 4,00,000 lakh shares which are more than 50% of the total shareholding of the company.<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">He has not received any other benefit or consideration from the company other than the allotment of shares of the company.<\/span><\/li>\n<\/ul>\n<p><span style=\"font-weight: 400;\">If Mr. A sold 100000 shares on FY 2020-21 then the shareholding will get reduced from 50% of the total holding before completion of 5 years hence, the capital gain exempted earlier of Rs. 20 lakhs shall be taxable in the hands of the company in the year of non-compliance i.e. 2020-21.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">This is all about the taxation effect that the <\/span><span style=\"font-weight: 400;\">assessee<\/span><span style=\"font-weight: 400;\"> has to consider at the time of conversion his proprietorship business into the <a href=\"https:\/\/aktassociates.com\/blog\/private-limited-company-registration\/\">private limited company<\/a>. Now, we will discuss the steps for creation of a private company. Presently, there is no minimum requirement of share capital for the incorporation of a private company.<\/span><\/p>\n<p><b>Following are the things that the<\/b><b> assessee<\/b><b> should have it before the creation of a private company<\/b><\/p>\n<ul>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Digital Signature<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Director I<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">identification number (DIN)<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Reservation of Name<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Memorandum of Association<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Article of Association<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Declaration from a professional about the truth of the content<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Declaration from each subscriber of the memorandum of the company<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Directors consent in form DIR-12<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">PAN Number (Permanent Account Number)<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">GSTIN ( <a href=\"https:\/\/aktassociates.com\/blog\/goods-service-tax-gst\/\">Goods and Services Tax<\/a> Identification Number)<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">EPFO ( Employees Provident Fund Organization)<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">ESIC ( Employees State Insurance Corporation)<\/span><\/li>\n<\/ul>\n<p><span style=\"font-weight: 400;\">I know, this is a long list but you do not have to worry because under make in India, government has specified a new <\/span><b>form SPICe INC-32<\/b><span style=\"font-weight: 400;\"> under which an <\/span><span style=\"font-weight: 400;\">assessee<\/span><span style=\"font-weight: 400;\"> can file an application to ROC for the incorporation of the company and this form can be used for application of DIN or PAN or ESI or EPF number, etc. In simple words, with this form, you will be able to file an applications and obtain all the necessary numbers required for the incorporation of the company.<\/span><\/p>\n<p><a href=\"https:\/\/aktassociates.com\/start-a-business\/private-limited-company-registration\"><img loading=\"lazy\" decoding=\"async\" class=\"size-full wp-image-1253 aligncenter\" src=\"https:\/\/aktassociates.com\/blog\/wp-content\/uploads\/2019\/08\/Register-your-Private-Limited-Company-Banner-image-1-1.png\" alt=\"Register your Private Limited Company\" width=\"700\" height=\"150\" srcset=\"https:\/\/aktassociates.com\/blog\/wp-content\/uploads\/2019\/08\/Register-your-Private-Limited-Company-Banner-image-1-1.png 700w, https:\/\/aktassociates.com\/blog\/wp-content\/uploads\/2019\/08\/Register-your-Private-Limited-Company-Banner-image-1-1-300x64.png 300w, https:\/\/aktassociates.com\/blog\/wp-content\/uploads\/2019\/08\/Register-your-Private-Limited-Company-Banner-image-1-1-20x4.png 20w\" sizes=\"(max-width: 700px) 100vw, 700px\" \/><\/a><\/p>\n<p><span style=\"font-weight: 400;\"><strong>Note:<\/strong> Maximum 3 DIN number can be obtained from a SPICe form.<\/span><\/p>\n<h2><span class=\"ez-toc-section\" id=\"ContractsService_AgreementsLeases\"><\/span><b>Contracts\/Service Agreements\/Leases<\/b><span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p><span style=\"font-weight: 400;\">The contracts\/service agreements\/leases signed under the sole proprietorship business will have to be novated or even re-signed under the new entity.<\/span><\/p>\n<h2><span class=\"ez-toc-section\" id=\"LicensesPermits\"><\/span><b>Licenses\/Permits<\/b><span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p><span style=\"font-weight: 400;\">New licenses\/permits are not transferable in most cases, therefore need to be re-applied from the government authority issuing the licenses\/ permits.<\/span><\/p>\n<h2><span class=\"ez-toc-section\" id=\"Conclusion\"><\/span><b>Conclusion<\/b><span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p><span style=\"font-weight: 400;\">In this article, we have cover\u00a0<\/span><\/p>\n<ul>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">The benefits for the conversion of proprietorship to a private company<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Conditions for the exemptions of capital gain tax on transfer under section 47 of the<a href=\"https:\/\/aktassociates.com\/blog\/income-tax-rules-for-nri\/\"> income tax act<\/a>, 1961.<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Steps for the <a href=\"https:\/\/aktassociates.com\/blog\/incorporation-of-company\/\">incorporation of the company<\/a><\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">A quick reference of new form SPICe INC-32 used for fast track registration of a company.<\/span><\/li>\n<\/ul>\n","protected":false},"excerpt":{"rendered":"<p>Introduction(Scenario): In India, the scope of business opportunities is increasing every day and every person, doing a business, wants to &#8230; <\/p>\n<p class=\"read-more-container\"><a title=\"Conversion of Proprietorship to a Private Company\" class=\"read-more button\" href=\"https:\/\/aktassociates.com\/blog\/conversion-proprietorship-to-private-company\/#more-1675\">Read more<span class=\"screen-reader-text\">Conversion of Proprietorship to a Private Company<\/span><\/a><\/p>\n","protected":false},"author":4,"featured_media":1684,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[1],"tags":[],"acf":[],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v22.8 - https:\/\/yoast.com\/wordpress\/plugins\/seo\/ -->\n<title>Conversion of Proprietorship business to private Company AKT Associates<\/title>\n<meta name=\"description\" content=\"Need for the conversion Benefits of the conversion of Proprietorship business to private Company Exemption from capital gain tax under section 47 of income tax act 1961 Conditions to be complied for taking such exemption Steps for conversion of\u00a0Proprietorship business to private Company\" \/>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" 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