Conversion or closure of business

Winding Up of Company: Brief

A private limited company necessitates to be closed, or windup, meanwhile there are no changes or the Directors of the company, is not willing to continue its services. Any private limited company usually can be shut by both ‘voluntary’ and ‘compulsory elements’. Winding up of a company is a pursuit which involves bargaining all the assets, paying off the bankers and administering the remaining assets to the shareholders of the company. It is always challenging to start a business/ company.

The Ministry of Corporate Affairs has notified rules 2020, for winding up small businesses without having to go to a tribunal, under a provision in the Companies Act that offers an alternative to the commonly used liquidation procedure under India’s bankruptcy code. The scope of Company Law in India is unrestricted and extensive; it carries into account the depth of winding up of a business and liquidation of its assets. While ‘winding up of a company’ if its representatives fail to comply with the laws and regulation, they can get held civilly or criminally liable.

Key Obligations

  • Fill an ordinary resolution in the Board of Directors conference.
  • There should be no marketing project in action from the day when the resolution is passed.
  • Constitution by members stating there is no debt pending on company and the required forms are filed.


  • Released From Duties/Debts After Liquidation: Once the liquidation method is over, the administrators and all company leaders are free from all lender accounts and pressure.
  • Withdrawing Legal Action Upon The Company: If the recommendation is passed deliberately by directors, they will ignore legal action brought by the court or the tribunal, and provide a program to company directors to focus on other business possibilities.
  • The Low Cost Required For Liquidation: The price or duties expected in the liquidation method is relatively small, as rates will apply to the sale of assets.
  • Lease Agreements Will Be Cancelled: If any company or entity has entered into a lease for a prescribed time, during the liquidation process, it will eliminate all the terms and conditions of the contract.
  • Protection For Creditors: Following a continued struggle, creditors will benefit from the liquidation method as they will be available for a failed payment, concerning the statement of credits given by all creditors.

Documents required while filing appeal

    • Ultimately ITR and Returns Filed with ROC
    • Winding up petition: Form Comp 1
    • Declaration of truth: Form Comp 2
    • Certification of service: Form Comp 3
    • Announcement of winding up petition
    • A list of people auditing the hearing: Form Comp 4
    • Preparation of Preliminary Report by IP
    • Submission of Proof of Claim in Form B, in Form C, Form D, Form E, Form F, by post or by Electronic means.
    • PAN Card of the corporation
    • Declaration of the termination of the company’s bank account with NIL contracts.
    • An indemnity bond, which should be notarized by the directors
    • Latest statement of company accounts.
    • Statement of reports related to all assets and liabilities of the company, audited by Chartered Accountant (CA)
    • Application for extracting the name of the company.
    • Indemnity Bond from all the Directors

Conversion of Sole Proprietorship into Private Company

As a company grows, the requests of business and the downsides of a control firm could necessitate a business person to begin the method for converting sole proprietorship into private limited company. A private limited company offers significant advantages over the sole proprietorship type of business, including that of limited liability, the potential to draw equity capital, a constant presence, and so on.

Proprietorship vs Private Limited Company

  • A sole proprietor would sustain with unlimited liabilities for any losses incurred. In simple terms, proprietor is liable to personally pay for any loss bear by the firm. On the other hand, the rules and regulations of a private limited company consider owner and the company a separate legal entity, thereby making liabilities of the owner limited.
  • Often sole proprietors do not have adequate fund-raising options where as private limited company enjoys the benefit of fund raising options.
  • Demise of the proprietor may end the tenure of the firm, on the other hand, private limited company rightfully appoints the legal heir to take over the affairs of the business.

Opportunities and Obstacles

These effects are important to consider for managers who need to change over from sole proprietorship to a Private Limited Company:

    • Separate Legal Existence: Even though you have the advantage of more self-governance over the market, you are monetarily and legitimately in charge of all risk against the market, for example, for commitments and in claims.
    • Liability: As recorded Private limited company under The Companies Act 1956, a business has a different legal status from the proprietor; the organisation members have limited liability. For sole proprietorship, loan providers may take legal action against you for debts brought about and experiment into your assets and business. Therefore, a single owner is more at risk of complete individual budgetary ruin as compared to a CEO of a Private Limited Organization.
    • Limited Capital: Sole proprietorship regularly has reduced subsidising raising choices, regardless of whether as far as making advances from monetary establishing or as far as equity fundraising from commercial specialists – which means your roots of working capital are compelled to your cash and the moving over of any profits you make from the business.
    • Perpetual Succession: A sole ownership’s legal presence is conditioned upon your reality. Hence your retirement or end will simultaneously mean the end of your business, in this way, your relatives and companions who are keen on proceeding with the business would certainly do not be able to do so without the managerial problem of joining the industry- which is not the case with a Private Limited Company.
    • Administrative Burden: The density provisions of a Private Limited Company are a lot more valuable than those of sole ownership be it in the constant consistence but the issues to be dealt under sole proprietorship becomes more intricate for sole owner. Likewise, the ‘Private Limited Company’ is recognised by the laws, principles, and guidelines under the Indian Companies Act.


  • An agreement must be gone into between the sole proprietor and the private limited company for the exchange.
  • The Memorandum of Association (MOA) of the Private Limited Company ought to include an entity that declares – “The takeover of a sole ownership interest”.
  • All the privileges and liabilities of the sole proprietorship firm should be converted to the private limited company.

The sole owner ought to be a feature of the organisation’s directorial board with a voting rule which comprises to in any event share of that of the organisation. It might be noticed that a private limited company need to have at least two directors.

Benefits associated with Conversion of Sole Proprietorship into Private Company

  • A certified company makes it accurate and enhances the authenticity of your company.
  • Protects from personal responsibility and secure from other risks and cons
  • Draws more Clients
  • Provides bank credits and excellent investment from adequate investors
  • Protect your company’s Property
  • More exceptional capital contribution
  • Increases the capability to grow big and evolve
  • Stockholders have a right to appoint the directors to act on behalf of him.
  • Even after the death of directors/ stockholder company will exist without any discrepancies.
  • The stockholders and the directors will get complete immunity from being sued by the third party except for personal issues.
  • It involves lower tax rates and subsidies under the Income Tax Act, 1961.
  • The interest profit of the private limited company is objected to the tax rate of 30% + surcharge & cesses as applicable.

What are the basic requirements of Converting Sole Proprietorship into Private Company in India?

As per the commands and regulations of Company Act, 2013, in order to incorporate any company to be certified in India, the below options have to be met

    • Number Of DirectorsA private limited business should have at least two directors and at most, there can be 15.
    • Different NameThe title of your business must be unique. The proposed name should not resemble with any existing companies or trademarks in India.
    • Minimum Capital ShareThere is no least capital amount for a company.
    • Designated OfficeThe registered office of a company does not have to be a commercial space. Even a rented home can be the registered office, if NoC is obtained from the landlord.
    • Memorandum Of AssociationIn the material clause of Memorandum of Association (MOA), there should be an expression present “the takeover or acquisition of a sole proprietorship concern”.
    • Yearly ReturnsThe private limited company should file an annual economic accounts statement and annual returns with the registrar of the company every year.

Documents Required to Attach for submitting the SPICe+ forms

    • The Articles of Association
    • Memorandum of Association
    • Declaration by the subscribers and by the directors.
    • A confirmation for the address of the office
    • Two Months Utility Bills copy
    • Certificate of incorporation of the Outer Country body corporate
    • A resolution passed by the global Company
    • A recommendation declared by the promotional Company
    • The interest of the directors in from other entities
    • Nominee’s assent
    • Identity proof and residential address of the subscribers and the nominees
    • Identity proof and residential address of Applicant 1,2 and 3
    • The Declaration/Resolution of the unregistered companies
    • Declaration in Form ‘INC-14’ and Form ‘INC-15’

Conditions to be followed prior converting a sole proprietorship to private limited company

  • After incorporating a new private limited company, all the assets and liabilities of the old sole proprietorship will be completely transferred to the company.
  • Even after the conversion takes place, the old sole proprietorship will hold 50% of shares in a new private limited company. i.e 50% of the voting rights will be held by a sole proprietorship.
  • The old sole proprietor will hold shares for a minimum period of 5 years from the date of incorporation of a new private limited company.
  • Similarly, there will not be any monetary consideration between a sole proprietorship and private limited company as it is a mere conversion, not sale.

Conversion of LLP to Private Company

There are businesses in India who begin their journey as a Limited Liability Partnership (LLP), but now are keen on converting into a private limited company for more growth and prosperity in business. Provision mentioned in the Section 366 of the Companies Act, 2013 and Company (Authorised to Register) Rules, 2014, says that an LLP can be converted into a Private limited Company.

Before you step into the business of Private Limited Company, there are several requirements which you may need to fulfil for converting an LLP into a Private Limited Company, for instance, it is necessary for a LLP to have seven partners and approval from all partners is must needed. An advertisement is published in both local and national newspaper, No Objection Certificate (NOC) is obtained from the ROC where LLP is registered and then all the incorporation process begins.

Choice of LLP vs Private Limited Company

LLP is majorly suitable for small businesses that have annual sales turnover of fewer than Rs 40 lakhs and a capital contribution of fewer than Rs 25 lakhs. LLPs that satisfy these conditions do not have to go through the audit every year, on the other hand, it is necessary for a private limited company to conduct an audit of its financial statement each year. Though, in case, LLP has an annual turnover of Rs 40 lakhs or a capital contribution of more than 25 lakhs, the need for compliance become almost similar for both the private limited company and LLP, forcing the owners of LLP to convert into a Private Limited Company.

Corporatization has become the need of the current market situation. We live in a world where the ulterior goal of every market is to drift towards one global market removing the barriers between the countries. There are many start-ups and entrepreneurs who are eager to step into corporatization. Follow the below-mentioned steps to initiate the process:

Benefits of Conversion of LLP into Private Limited Company

  • Preservation Of Brand Value: Conversion of LLP into Private Limited Company facilitates business entities to continue the brand name without making any further efforts on brand advertisements.
  • Carry Forward Of Unabsorbed Losses And Depreciation: After the conversion, no expenditure will be incurred on bookkeeping, as the losses and depreciation incurred in LLP will be carried forward on the conversion of entity
  • Employee Stock Ownership Plan To Employees: Conversion of LLP to Private Company facilitates Companies to offer stock ownership and ESOP plans. Such plans help companies to attract efficient employees, as it offers incentive plans for them to work in the company.
  • Easy Fund Raising: If the company registration process is strict, it helps the company structure to be more credible among others. This leads to easy fundraising from external sources.
  • Separate Legal Existence: Conversion of company facilitates the separate ownership and management to pay attention to their potential work. The Shareholders assign responsibility to run and operate the company without losing control in form of voting.
  • Limited Liability Of Owners: Conversion prohibits the liability of the owners only to the capital subscribed and unpaid by them.
Reasons for LLP Registration
  • Making small businesses aware with the concept of LLP.
  • Easy to commence and control
  • Gives the advantage of limited liability and also provides flexibility to organize their firm internally.
  • Audit is not needed if an annual sale is more than Rs 40 lakhs and capital contribution does not cross the limit of Rs 25 lakhs.
  • LLP is not bound to pay Dividend Distribution Tax (DDT).
  • It is not necessary for a LLP to conduct Board meeting or annual meeting.
  • Registration process of LLP is simple as compared to Private Limited Company.
Reasons for Private Limited Company Registration
  • LLP does not entertain the concept of shareholders. All the owners in a LLP are considered as Partners in the LLP and are considered as unsuitable for investors such as Venture Capitalists and Private Equity investors who do not possess any desire to indulge in the management of the Company. Private Company is the best choice for investors. If the business is growing then the owners must convert it into a private limited company.
  • FDI is becoming popular in Indian market. A private limited company does not require any approval from the government authorities for FDI while government approval is much needed for FDI in LLP.
Documents Required for Conversion of LLP into a Private Limited Company
  • Address Proof of the applicant
  • Identity Proof of the applicant
  • Passport size photograph of the applicant
Documents required at the time of filing of Form URC-1
  • Details such as name, address and shares held by the members along with the member’s list.
  • Furnish the details such as Name, Address, DIN, passport number along with an expiry date of all the directors of the Private Limited Company.
  • Also, file all mandatory documents with the Registrar of Companies for the registration of the company
  • Copy of Limited Liability Partnership agreement with a list attached mentioning the name and address of the partners of LLP and a certified copy of registration which is duly verified by at least two designated partners of LPP is required.
  • The statement with the details of the nominal share capital of the firm and the number of shares separated the number of shares taken and the amount remitted for each share and the name of the firm with the word private limited to be provided.
  • No-objection certificate from all the creditors has to be provided.
  • Duly certified accounts statement of the company by the auditor, which should not be less than six days from the date of application and the copy of the newspaper advertisement is required.
Process of Conversion of LLP into a Private Limited Company