Saving Mantra Blogs

Step-by-Step Process for Conversion from Proprietorship to Private Limited Company

Written by

Financial Analyst

in

Step 1: Finalize Two Directors & Obtain DSC

A private limited company requires minimum two directors.

Steps:

  • Obtain Digital Signature Certificate (DSC) for proposed directors
  • Apply for DIN (Director Identification Number) via SPICe+ form

The proprietor may continue as one of the directors.

Step 2: Choose Name & Apply for Approval

Name approval is done via SPICe+ Part A.

Guidelines:

  • Must include “Private Limited”
  • Should reflect business continuity
  • Avoid trademark conflicts

SavingMantra Tip: Keep the proprietorship name similar to the new company (optional but recommended for brand continuity).

Step 3: Draft MOA & AOA with Conversion Clause

The Memorandum of Association (MOA) should include:

  • A clause stating that the new company is taking over the existing proprietorship business.

The Articles of Association (AOA) must define company rules and management structure.

Step 4: File Incorporation Forms (SPICe+ Part B)

To register the new private limited company, file the following on MCA:

✔ SPICe+ Form
✔ MOA (INC-33)
✔ AOA (INC-34)
✔ AGILE-PRO (for GST, EPFO, ESIC registration)
✔ Proof of directors
✔ Proof of registered office

Once approved, the MCA issues the Certificate of Incorporation (COI).

Step 5: Execute Business Transfer Agreement (BTA) / Slump Sale Agreement

This is the most crucial step of conversion.

The newly formed company must enter into a Business Transfer Agreement with the proprietor outlining:

  • Transfer of assets & liabilities
  • Transfer of contracts, licenses, GST, employees
  • Consideration for transfer
  • Effective conversion date

This ensures legal continuity of the business.

Step 6: Issue Shares to Proprietor

In return for the transfer of business, the new company issues shares to the proprietor.

Two options:

  1. Issue shares equal to the value of the business
  2. Issue shares + cash consideration

This creates a legal link between the old and new business structures.

Step 7: Update Registrations & Licenses

After incorporation, update the following:

✔ GST migration to new company
✔ Shop & Establishment registration
✔ Professional tax registration
✔ MSME / UDYAM registration
✔ FSSAI / Trade licenses (if applicable)

SavingMantra Tip: Apply for GST Amendment within 30 days to avoid penalties.

Step 8: Inform Banks & Open New Current Account

A new company bank account must be opened.

Steps:

  • Share COI, MOA, AOA
  • Board Resolution
  • PAN of the company

Transfer funds, close old accounts or keep them for settlement purposes.

Step 9: Transfer Assets, Employees & Contracts to the Company

The following must be transferred formally:

  • Inventory
  • Machinery
  • Trademarks
  • Employees
  • Vendor contracts
  • Client agreements

A handover statement should be prepared for records.

Step 10: File Post-Incorporation Compliance Forms

Depending on the business structure:

  • First board meeting
  • Appointment of auditor (ADT-1)
  • Share certificates
  • Register of members
  • Statutory books
  • PAN/TAN activation

Documents Required for Conversion

From Proprietorship

  • GST certificate
  • Shop Act license
  • Bank statements
  • Asset list
  • Liabilities list

For Company Incorporation

  • PAN, Aadhaar of directors
  • Address proof
  • Photographs
  • Office address proof
  • NOC from property owner

For Takeover

  • Business Transfer Agreement
  • Asset valuation report
  • Capital account details

Compliance Checklist After Conversion

✔ New company PAN & bank account
✔ GST migration
✔ Transfer of employees (if any)
✔ Contracts migrated
✔ Share certificates issued
✔ Statutory registers updated

Common Mistakes to Avoid

❌ Not drafting a proper BTA/Slump Sale Agreement
❌ Missing GST transfer timeline
❌ Not issuing shares to proprietor
❌ Operating both entities simultaneously (leads to tax confusion)
❌ Incorrect valuation of assets

Benefits of Converting Proprietorship to Private Limited

✔ Limited liability protection
✔ Easier loans & funding
✔ Better tax planning
✔ Professional image
✔ Perpetual succession
✔ Scalable operations

Conclusion

Converting a proprietorship into a private limited company provides tremendous growth opportunities and long-term business stability.
However, it requires careful planning, documentation, and compliance steps to ensure a smooth transition.

SavingMantra can help you with:

✔ Company incorporation
✔ Business transfer agreements
✔ Tax & GST migration
✔ End-to-end conversion compliance

The information provided in this blog is for general informational and educational purposes only and should not be construed as legal, tax, or professional advice. While every effort has been made to ensure accuracy and compliance with the applicable provisions of the Companies Act, 2013 and related rules, laws and regulations may change over time and interpretations may vary based on specific facts and circumstances.

All services are subject to applicable laws, rules, and government approvals prevailing at the time of execution.

More posts