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ACQUISITION OF SOLE PROPERTRSHIP CONCERN
BY PRIVATE LIMITED COMPANY
There is no such provisions given in Companies act 2013 to convert Sole proprietorship into Private Limited Company or take-over of Sole Proprietorship by Private Limited Company. You are running your proprietorship firm which is not governed by any law. If you are filing Income tax return for sole proprietorship firm and you want to grow your business, then it is good to recommend you for converting it into Private Limited Company. Though there is no specific provision given under Companies Act, 1956 and Companies Act, 2013 for conversion of Proprietorship firm into Private Limited Company, but as a normal practice, the proprietorship firm being takeover by new Private Limited Company. You can follow the procedure as stated below for converting sole proprietorship business into Pvt. Ltd. company.
PROCEEDURE TO BE FOLLOWED BY PRIVATE LIMITED COMPANY
1. Private limited Company must contain object to take-over the sole proprietorship as one of its main object in the Memorandum of Association. If it does not contain the same in its object, the MoA has to be amended to insert the object.
2. The Board of Director of the Private Company is required to take Board approval for taking up the Sole proprietorship and later on required to pass Ordinary resolution at EGM for approving the acquisition of Sole proprietorship.
3. Takeover Agreement/Sale agreement or deed of assignment is required to be executed between Sole proprietorship and Private company to transfer all its assets and liabilities. The Agreement shall specify details of all the assets whether tangible or intangible which are required to be transferred to the Company, it is up-to Owner of Sole proprietorship to decide the category of assets it requires to sell and category of assets it requires to keep for its personal use.
4. Debt of Sole proprietorship cannot be transferred, so the owner can either settle all the debts or it can take the consent of creditors to transfer the Sole proprietorship to another Company.
5. Transfer of Sole proprietorship to Company attracts Capital gain tax in the hands of Owner of Sole proprietorship. Capital gain tax is required to be paid by the Proprietor for transfer of assets. There are certain provision under section 47(xiv) in income tax act to avail the benefit of tax exemption on transfer of assets from Sole proprietor to Company.
6. The takeover is then done by submitting the agreement also known as contract and other few documents like the company’s PAN card and certificate of incorporation and return of allotment of shares if shares have been allotted to the sole proprietor in consideration. These documents are submitted to the Registrar of the Companies within 30 days of the completion of sale and allotment of shares in consideration with prescribed fees. By completing this process of taking over, all the assets and liabilities concerning the sole proprietorship becomes the assets and liabilities of the company.
7. Further attachments to this conversion would be the following;
· Affidavit by the Sole Proprietor
· Statement of Assets & Liabilities as on date by Chartered Accountant if the proprietorship is doing business from long
· Income Tax Returns Acknowledgement
· PAN Card of the Sole Proprietor
· Sales Tax Registration Number, if you have
· Any other Proof showing the name of the Proprietorship firm
PROCEEDURE TO BE FOLLOWED BY SOLE PROPRIETER
1. There are certain procedure which has to be followed by Sole proprietor on transferring the business to other Company. Owner has to inform the VAT authorities and all the other authorities where it has been registered and has to surrender all the registration certificate.
2. Final income tax return till the date of transfer with previous return is required to be submitted with clearing all the dues.
3. Acknowledgment from VAT Authority and all other authorities wherever it has been registered shall be taken.
4. All the assets and liabilities shall be transferred to private company and all the agreements and contracts in the name of Sole proprietorship shall be either re-entered or rectified in the name of Company.
5. As Debt and Liabilities of Sole proprietor is not transferred to other company, so all the loans or debt has to be settled before it has been transferred to private limited company or consent from creditors shall be taken and no new bill is to be raised in the name of Sole Proprietorship.
6. The Company cannot work with the bank account of Sole proprietorship so, it has to close all the accounts in the name of Sole proprietorship and new account shall be opened in the name of Company.
7. Further TIN number and PAN number these are not transferred, so proprietor has to surrender all the TIN and PAN etc. identity and has to apply for fresh TIN and PAN and other registration in the name of Company.
8. Finally, the proprietorship will then be needed to shut down officially. Use of any licenses or tax registrations by the proprietorship can then be discontinued or they can be surrendered to the authorities. That is the government should be informed of the closing.
The process involves registering a whole company in case of new company and then furnishing more documents in order to complete the takeover and finally terminating the proprietorship.
Exemption under the Income Tax Act:
Conversion of a sole proprietorship into a private limited company entails a “transfer” within the meaning of the Income Tax Act, 1961, as amended (Income Tax Act). That is, the assets of the sole proprietorship concern are considered transferred to the newly formed company, which makes the sole proprietor liable to pay tax for any capital gains calculated on such transfer. However, there is a provision under section 47(xiv) of the income Tax Act, which lays down certain conditions for exemption from any capital gains.
The conditions are:
· All the assets and liabilities of the sole proprietary concern relating to the business immediately before the succession become the assets and liabilities of the company;
· The shareholding of the sole proprietor in the company is not less than fifty per cent (50%) of the total voting rights in the company and such shareholding continues to so remain as such for a period of five years from the date of the succession; and
· The sole proprietor does not receive any consideration or benefit, directly or indirectly, in any form or manner, other than by way of allotment of shares in the company;
If any of the conditions laid down above are not complied with (say the sole proprietor sells his share in two years instead of holding on to the shareholding for five years), the amount of profits or gains arising from the transfer of such capital assets or intangible assets not charged earlier by virtue of these conditions, shall be deemed to be the profits and gains chargeable to tax of the successor company for the previous year in which the requirements are not complied with.
If you are a sole proprietor who intends to convert his sole proprietorship into a private limited company, and also allot shares to yourself, then it is imperative that an agreement is entered into for such allotment and one of the conditions in the agreement should state that your shareholding / voting rights will not fall below fifty per cent (50%) in the next five years.
Facts related to debt-
Debts of a sole proprietorship are actually debts of the individual owner and are not transferable to a new owner. If the business has debts that will not be paid in full prior to the transfer, discuss with the creditor whether the new owner may assume the debt before agreeing to the sale or transfer.