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proprietary firm to private ltd company ?

anand (Administrative officer) (185 Points)

04 September 2010

A present running proprietary firm is to be closed and all it's movable and immovable properties, liabilities etc are to be given to a separately formed new private ltd company ? how to do this? What will be the steps.?

thanks and regards

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14 Replies

Jayant Suthar (FCS, CWA) (103 Points)
Replied 04 September 2010

Plz go through sec 47(xiv) of IT act.

1 Like

yatheendra (Article) (89 Points)
Replied 04 September 2010

Dear Mr. Anand

A proprietary firm cann't be converted into a pvt ltd company as it requires atleast two members to form a company,unlike the prop firm it requires single person. It is advisable to incorporate a new pvt ltd with similar objective of the prop firm and then take over all the assets and liabilities & buisiness of the prop firm (or) we can incorporate a new pvt ltd company with an objective to take over all the assets and liabilities & buisiness of prop firm. All provisons for incorporating a new private limited company will apply.

1 Like

vivek (CS) (751 Points)
Replied 04 September 2010

Steps for incorporation of company under part IX: 1. Hold a meeting of the partners to transact the following business • Assent of majority of its members as are present in person or where proxies are allowed, by proxy, at a general meeting summoned for the purpose of registering the firm under Part IX of the Companies Act, 1956. Since the liability of the members of the firm is unlimited, when a firm desires to register itself as a company under Part IX as a limited company, the majority required to assent as aforesaid shall consist of not less than ¾ of the members as are present in person or where proxies are allowed, by proxy, at a general meeting summoned for the purpose. • To authorize one or more partners to take all steps necessary and to execute all papers, deeds, documents etc. pursuant to registration of the firm as a Company. • To execute a supplementary Partnership Deed to align it with the requirements as under: • There must be at least 7 partners in the partnership firm; • The firm may be registered with the Registrar of Firms; • There must be a fixed capital divided into units ; • There must be provision of converting a firm into company. • There must be an agreement by the partners to convert the partnership to a company. This can be done by a contract in writing to this effect to which the partner’s resolution for conversion can be attached as annexure. • Execute a settlement deed. 2. APPLICATION FOR DIRECTOR’S IDENTIFICATION NUMBER AND DIGITAL SIGNATURERS CERTIFICATE 3. An application in Form No. 1A 4. File FOrm-1, 18 & 32 5. Form No. 37 along with Form No. 39. 6. Once the new company is formed, the takeover agreement would be entered between the Partnership Firm and the newly incorporated company. Convene a Board Meeting after giving notice to all the directors of the newly incorporated company immediately after incorporation as per section 286 of the Companies Act, 1956 to adopt the agreement entered into by the company and the partner of the firm for the acquisition of business of the firm. In such a situation, the entire business of the firm along with all its assets and liabilities is transferred to the company.

yatheendra (Article) (89 Points)
Replied 04 September 2010

Hi Mr. Vivek

The information you posted is all about how to convert a partnership firm to a pvt ltd company, but here is not that case. How can you hold a meeting for partners? It is a proprietary firm means a type of buisiness which is owned and run by one individual.

vivek (CS) (751 Points)
Replied 04 September 2010

Oh! i missed that:- Not an issue just incorporate a Pvt. Ltd. Company and after that aquire the business of Properitary firm by a Business Purchase agreement. Regards,

yatheendra (Article) (89 Points)
Replied 04 September 2010

yeah....... Mr Vivek, thats what my opinoin and i posted. Being CS you people have more clarity in this issue. Regards

1 Like

vivek (CS) (751 Points)
Replied 04 September 2010

Conversion of a Proprietorship Business into Private/Public Company 1. While filing Form 1A, the latest balance sheet with other documents is to be attached. An affidavit on stamp paper from the prop. that the firm will shut down after this incorporation. 2. The first clause of the Moa will indicate the takeover of firm by the company. 3. File F-1A. 4. Get Name approval 5. File F-1, 18, 32 6. Obtain Certificate of Incorporation. 7. Hold a Board meeting for transacting businesses required to be transacted in 1st Board Meeting in addition to take over the business of Proprietorship firm and proceed to allot shares.

vivek (CS) (751 Points)
Replied 04 September 2010

How To Save Tax On Conversion of Proprietorship firm into a Company? In this age of information technology, there are numerous self made entrepreneur who starts a web business himself or self. As the business grow, so is the chance of converting the proprietorship concern into a company so that others-Venture Capital firms or other people can bring in capital . The point every such entrepreneur must know that in the event that the proprietorship’s concern is converted into a company, there is transfer within the meaning of I T Ac .In other words, in case of such conversion, assets of proprietorship concern are considered transferred to the newly formed company . In such scenario, the proprietor is liable to tax for any capital gains computed on such transfer of assets. However, there is a provision under section 47(xiv) which lays down certain conditions which if fulfilled, shall exempt any capital gains arising out of transfer of assets from proprietorship firm to the newly created company. This has been inserted to facilitate the entrepreneurship . The conditions are 1. The proprietor must have at least 50 % voting power in newly formed company. 2. The minimum 50% voting power of the sole proprietor must be for next five years from the date of succession of proprietorship concern to company. 3. All the assets of the proprietorship firm should be transferred to newly formed company. 4. The sole proprietor does not receive any consideration or benefits directly or indirectly in any form other than the share of such company. For ready reference the provision under I T Act is given below 47(xiv) where a sole proprietary concern is succeeded by a company in the business carried on by it as a result of which the sole proprietary concern sells or otherwise transfers any capital asset or intangible asset to the company : Provided that— (a) 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; (b) the shareholding of the sole proprietor in the company is not less than fifty per cent of the total voting power in the company and his shareholding continues to remain as such for a period of five years from the date of the succession; and (c) 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; What happens if the conditions are not satisfied after some time? The provision states that the sole proprietor whose proprietorship concern was converted into a company must hold at least 50% voting power for next five years. Therefore , he sells his share after one or two years or within five years, it is the company which will have to pay the tax on the capital gains in the year when conditions were not satisfied on the amount of capitals gains on which no tax was imposed earlier because the conditions were satisfied. This provision is given under section 47A(3) of the I T Act which is given below Withdrawal of exemption in certain cases. 47A. (3) Where any of the conditions laid down in the proviso to clause (xiii) or the proviso to clause (xiv) of section 47 are not complied with, the amount of profits or gains arising from the transfer of such capital asset or intangible asset not charged under section 45 by virtue of conditions laid down in the proviso to clause (xiii) or the proviso to clause (xiv) of section 47 shall be deemed to be the profits and gains chargeable to tax of the successor company for the previous year in which the requirements of the proviso to clause (xiii) or the proviso to clause (xiv), as the case may be, are not complied with. Therefore, every entrepreneur needs to hold the shares for first five years and not to receive any benefits from such newly formed company out of proprietorship concern.

2 Like

vivek (CS) (751 Points)
Replied 04 September 2010

Source of above article: https://taxworry.com/how-to-save-tax-on-conversion-of-proprietorship-firm-into-a-company/

1 Like

anand (Administrative officer) (185 Points)
Replied 04 September 2010

Originally posted by : vivek
	Source of above article: https://taxworry.com/how-to-save-tax-on-conversion-of-proprietorship-firm-into-a-company/

thanks friends. You have done a great job for me and done favor on me. i was looking for this since long.

three queries on this.--

1. An agreement of take over of bussiness has to be executed for this. Correct ? bussiness of a proprietary firm can not be transfered just by making balnce sheet of proprietary firm to zero and showing the assets and liabilities of proprietary firm into the balance sheet of private limited company.

In my view ' take over agreement' must be executed with details of all assets and liabilities. right ?

2. What shall be the stamp duty on this take over agreement ? i think section 47 (xiv) of IT act clearly states that this take over agreement shall not require stamp duty required for ordinary transfer of movable and immovable properties and it can easily be executed on Rs 100/- stamp paper . right ?

3. If the proprietor still continues to do the bussiness through previous firm, how to stop this ?

thanks and regards

Hitesh Khemchandani (Practicing Consultant) (43 Points)
Replied 07 November 2010

Dear Vivek,

I understood the various aspects for conversion of Proprietorship to Private limited company. Can you tell what intimations and process needs to be followed for ROC for takeover of the proprietorship firm. Also do we have to send any initimation to the IT department

Regards

Hitesh

anand (Administrative officer) (185 Points)
Replied 03 June 2011

Originally posted by : khemhitesh
	Dear Vivek, I understood the various aspects for conversion of Proprietorship to Private limited company. Can you tell what intimations and process needs to be followed for ROC for takeover of the proprietorship firm. Also do we have to send any initimation to the IT department Regards Hitesh

Can proprietary firm be converted to a pvt ltd company by following way-

'Close the proprietary firm by relinquishing officially it's licenses like service tax, trade license, shop act license etc and close the bank account. And then form a new pvt ltd company. Is this possible ? I think only problem involved in this could be the bussiness might suffer after formalities of cancelling licenses till incorporation of a new pvt ltd company.

Whats your opinion on this friends?

anand

Kartikeya Goyal (Employment) (35 Points)
Replied 05 March 2012

Thanks for your valuable information, I really appreciate it.

I need your help further :

in my clients case
- the company is an existing closely held company (with son and daughter-in-law as directors), a trading entity of products manufactured by proprietary concern,
which wants to take over the proprietary concern owned by the father, which is a manufacturing entity.
and they are planning to take manufacturing license in the Company as succession

So, in this case, can this be termed as succession under IT Act and Can they enjoy the Capital Gains exemption.

Please reply at the earliest as they wish to acquire on 31st March and also would appreciate if you can check and advise over the following process / steps as to whether they are in order or needs some amendments:

Steps for Acquiring:

1. Hold a Board meeting for moving proposal for takeover of business and to do the needful activities

2. Execute an MOU between the parties for acquiring / takeover. ALso obtain an affidavit on stamp paper from the prop. that the firm will shut down after this incorporation.
3. The first clause of the Moa will be amended to indicate the takeover of firm by the company.
4. File revised F-2 (allotment of shares), 18, 32 in addition to take over the business of Proprietorship firm and proceed to allot shares.

Regards,