Proprietorship to Private Limited Company Conversion

A sole proprietorship has no separate legal existence, so it cannot "convert" in the way a firm or LLP can. Instead, a new private limited company is incorporated with the proprietor as a shareholder and director, and the proprietorship's business is transferred to the company under a business transfer agreement, usually as a going concern in exchange for shares.

The steps are: incorporate the company through SPICe+, value the business being transferred, sign a business transfer agreement setting out assets, liabilities, employees and contracts, issue shares to the proprietor as consideration, and then move bank accounts, GST, licences and customer contracts into the company's name.

Section 70 of the Income-tax Act, 2025 (formerly section 47(xiv)) can exempt the transfer from capital gains where all the assets and liabilities of the proprietorship become the company's, the proprietor holds a specified minimum share of the company's voting power for a set number of years, and the proprietor receives no consideration other than shares. Missing any condition, for example by selling down shares too early, can bring the gain back to tax.

Figures and timelines above reflect our understanding at the time of writing; confirm against the latest Act, Rules and notifications before relying on them.

• The company needs its own PAN, TAN and GST registration; input tax credit can be transferred on a transfer of business, using the prescribed GST form.
• Employees move under fresh appointment letters, with PF and ESI registrations in the company's name.
• The company must hold board meetings, an AGM and a statutory audit every year. Our Pvt Ltd annual compliance service covers this.

If you only want limited liability without full company compliance, compare proprietorship to LLP first.