How to convert a proprietorship into a private limited company

The process

1. 1.Incorporate the company through SPICe+, with the proprietor and at least one other person as directors and shareholders. See how to register a private limited company.
2. 2.Draft a business transfer agreement between the proprietor and the company, covering assets, liabilities, stock, contracts, employees and intellectual property.
3. 3.Decide the consideration: the company usually issues shares to the proprietor in exchange for the business, or pays in cash over time.
4. 4.Transfer licences and registrations. GST, shop licences, import-export codes and similar registrations are personal to the proprietor; the company applies afresh and the old ones are cancelled.
5. 5.Move bank accounts, customer contracts and vendor terms into the company's name.
6. 6.Transfer employees with continuity of service, and update PF and ESI registrations.
7. 7.Close the proprietorship's books and file its final returns.

Tax points to plan for

The Income-tax Act has provisions that let a proprietorship transfer to a company without capital gains tax, subject to conditions such as the proprietor holding at least 50% of the voting power for five years and the consideration being only shares. Unused GST input tax credit can be transferred to the company in form GST ITC-02.