A sole proprietorship cannot legally convert by itself, because it is not a separate entity. Instead, you incorporate a private limited company and transfer the proprietorship's business, assets and liabilities to it through a business transfer agreement. The transfer can be tax-neutral under Section 47(xiv) of the Income Tax Act if conditions such as the proprietor holding at least 50% of voting power for five years are met.
Why convert
- Limited liability
- Access to equity funding
- Better credibility and continuity
Steps
- Incorporate a private limited company with the proprietor as a shareholder and director.
- Value the business and execute a business transfer agreement.
- Issue shares to the proprietor as consideration.
- Transfer bank accounts, contracts, licences and GST.
- Close the proprietorship's registrations.
Tax conditions
For capital gains exemption, all assets and liabilities must pass to the company, the proprietor must hold at least 50% of the voting power for five years, and consideration must be only shares.
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Get expert help →Practical tips
Plan GST transfer of input credit, inform customers and vendors, and update trademarks and domain ownership.
Frequently asked questions
Is there an ROC form for converting a proprietorship?
There is no direct conversion form. You incorporate a company and the company takes over the business through a transfer agreement.
Can GST credit be transferred?
Yes. Unutilised input tax credit can be transferred to the company on transfer of business by filing the prescribed form on the GST portal.
Will my trademark move to the company?
Assign the trademark to the company through an assignment deed and record it with the Trade Marks Registry.
Is stamp duty payable on business transfer?
Stamp duty may apply on the transfer agreement and on transfer of immovable property, depending on state law.
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