The conversion process

The first step to converting your sole proprietorship firm into a private limited company is to incorporate a new
private limited company.

At the time of the new Private Limited Company, it is appropriate to mention in the Memorandum of Association
(MOA) that the company is a “takeover of a sole proprietorship concern.”

After the Company Formation, an agreement needs to be executed between the Company and the Proprietor
for the takeover of the assets and liabilities of the proprietorship by the Company. The details of assets,
liabilities and the consideration in exchange of such assets need to be specified in the agreement.

The agreement should be executed in a Stamp Paper of requisite value to make it a valid legal document.

As per the Income Tax Act, 1961, capital gains on such transfers are exempted if:

 All the assets and liabilities of the sole proprietorship, immediately before the conversion, are transferred to the
company
 The proprietor’s shareholding is more than 50% of the total voting rights of the new company for a continuous
period of not less than 5 years from the date of succession
 The proprietor receives shares in the Company only in exchange of the net assets of the business.
 In case any of these conditions are not complied with, the profits or transfer of assets shall attract capital gains
tax.

Once the new private limited company comes into existence, the sole proprietorship can be duly terminated.
The bank accounts in the name of the proprietary firm need to be formally closed and a new corporate account
is to be opened for the Company.

Any contracts/ leases/ agreements signed by the proprietor need to be re-signed under the name of the newly
incorporated company.

All tax and other registrations in the name of the Proprietorship need to be surrendered and new registrations
should be obtained in the name of the Private Limited Company.