When is the right time to change your Sole Proprietorship to a Companies?

Have a growing and thriving sole proprietorship? Want to get it converted into a Corporation? Thinking on when is the right time?

To understand this lets know, what is a sole proprietorship? A sole proprietorship, from the term we can understand that a single person doing business. In this type of business there is only one person running the whole show. Basically, in a sole proprietorship the company and the individual are the same. There is no separate legal entity and all activities are undertaken in the name of that person. A sole proprietorship is the easiest form of doing business, and initially a person who wants to get into the business shall begin by this process.

Whereas, a company is a body corporate usually registered under the companies Act, 2013. This is when there exists a distinction between the person and the entity and the entity becomes a legal entity. The owner or the shareholder of the company shall have reduced a lot of his burden as his own assets and liabilities shall be distinguished from the assets and liabilities of the company.

Sole Proprietorship to Companies

What would be the right time to get register Sole Proprietor Companies ?

The Companies Act 2013 has brought in the new concept of One Person Company, the minimum authorized capital required for incorporating a one person company is Rs. 1 Lakh. In this type of company there only needs to be one director who can be the shareholder himself. Apart from that the shareholder or the director or the owner of the company shall nominate a nominee so that in case of the disability of the sole owner/ director/ shareholder he may conduct the company’s business.

Hence when you have a sole proprietorship and you want to incorporate it you can start initially by registering it as a One-Person Company and you would get a status of a Private Company.

If you are planning to expand your business, expect private funding from individuals or corporate and are willing to share the responsibilities then you may incorporate is as a Private Company, where is there shall be a minimum of two directors with a maximum of 15 directors and a minimum of 2 shareholders with a maximum of 200 shareholders. The minimum authorized capital requirement for incorporating a private limited company is same as a one-person company which is Rs. 1 Lakh.

And later on, when your company does well and you need more funding. And you may want to raise public fund then you may convert the company from a private company to a public company. Or you may incorporate it as a public company in can you are willing to raise funds from the public and in that case the minimum capital requirement is Rs. 5 Lakhs. But the minimum number of directors shall increase from 2 in a private company to 3 in a public company, and the minimum number of members or shareholders shall be 7.

Advantages of incorporating your company:

  1. Separate legal entity.

The first and foremost advantage available to the sole proprietor while incorporating a company is that the company has its own separate legal entity. It can sue and be sued. There is no more the existence of the owner though he stills runs the company.

  1. Separate assets and liabilities:

Once the sole proprietorship is registered as private company then all the assets of the sole proprietorship shall be transferred to the company and while transferring the sole proprietor may decide as to what assets to be transferred to the company and what should not be transferred.

  1. Perpetual Existence.

When a sole proprietorship is incorporated as a company then we ensure that the business shall go on even if the owner or shareholder becomes incapable of running the business. As it may happen in the cases of sole proprietorship that the company may cease to exist after the proprietor becomes incapable but when it is registered as a company it shall live longer.

  1. Management Efficiency

When there are professional directors existing and the decision making process gets more expertise then the management becomes efficient and tasks are done faster. In a sole proprietorship all the tasks and decisions are taken by one person, while in a company the decision making is divided.

  1. Growth Aspects are more

As compared to a sole proprietorship the company or a corporate body has more growth opportunity, as the capability of raising funds increases, the people investing will trust a company more than a sole proprietor.

Hence if we see the above advantages then we can be sure that converting a sole proprietorship at the right time shall be more wise instead of continuing it as a sole proprietorship.

Hence hope the above article helped you in making a right decision! Happy incorporating!

Author Biography

I am Surbhi, in my twenties and a writer based in Hyderabad, India, with interests across industries. Writing for me, I believe, relieves stress, helps me concentrate better, and let me reinvent myself. Over the past decade, I have written for big publications such as ElephantJournal, BeautyandgroomingTipsetc. Since completing my higher education, I am exploring more in business-related topics. Diversity across various categories helps broadens my vision.

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