Conversion of Proprietorship to Private Limited Company: Compliance and Conditions

 

When a sole proprietorship is converted into a private limited company, several legal and tax implications arise.

To ensure a smooth transition, compliance with the Companies Act, Income Tax Act, and GST laws is crucial.

Key Provisions
Section 247, Companies Act 2013 – Requires a registered valuer to determine the fair market value (FMV) of assets transferred to the company in exchange for shares.

Section 47(xiv), Income Tax Act 1961 – Exempts capital gains if:
All assets and liabilities are transferred, Consideration is only equity shares, Proprietor’s shareholding gives at least 50 % voting power for five years.

GST Exemption – Schedule II of the CGST Act treats a transfer of business as a “going concern” as neither supply of goods nor services when the entire business is transferred and operations continue seamlessly.

Compliance Framework
Valuation Report – Engage a registered valuer and document FMV.
Business Transfer Agreement (BTA) – Execute BTA covering assets, liabilities, consideration, and effective date.

Share Allotment – Issue share certificates and file Form PAS‑3 with the ROC.

GST Compliance – File ITC‑02 to transfer input‑tax credit, cancel the old

GSTIN, and obtain a new GSTIN for the company.

Benefits
1. Capital‑gains exemption under Section 47(xiv).
2. GST‑free transfer of business as a going concern.
3. Transparent FMV through an independent valuer.
4. Continuity of operations within a corporate framework-unlocking limited liability, better fund‑raising, and scalability.
5. By following this framework and meeting all statutory conditions, entrepreneurs can achieve a seamless, tax‑efficient transition from proprietorship to private limited company in India.