Convert Proprietorship to Private Limited Company
No single form turns a proprietorship into a company. You incorporate a new private limited company through SPICe+ and transfer the running business to it, with every asset and liability, in exchange for shares. Meet three conditions under the Income-tax Act and the transfer carries no capital gains tax.
What it is
A sole proprietorship has no separate legal identity. Even after registering a proprietorship firm under GST or Udyam, the business and the owner are one person in law. There is nothing to convert. So when owners ask us how to convert proprietorship to private limited company form, our answer is simple: set up a new company, then move the running business into it.
Section 366 of the Companies Act, 2013 lets only partnership firms, LLPs, co-operative societies, societies and other entities formed under a law register as companies. A proprietorship is none of these. Instead, the company is incorporated fresh through SPICe+ (Form INC-32) on the MCA V3 portal, and a business transfer agreement passes the business to it as a going concern.
Who it applies to
Taking on bigger contracts and loans
In a proprietorship, every business debt is your personal debt. One bad contract can reach your home and savings.
Bringing in a partner or investor
A proprietorship cannot issue shares. A company can, so family or investors can take a defined stake while you keep control.
Building a business that outlives you
A company has perpetual succession under Section 9 of the Companies Act. Shareholders change; the company carries on.
Why it matters
Ring-fence your personal assets
Members of a company limited by shares are liable only for any amount unpaid on their shares (Section 2(22)). Personal guarantees you sign for bank loans still bind you.
Move the business without capital gains tax
When the three conditions are met, moving the business into the company is not treated as a transfer for capital gains.
Carry your GST credit across
Unused input tax credit moves to the company through Form GST ITC-02, so it is not lost when your old GSTIN closes.
Proprietorship vs private limited
What changes when you convert:
| Proprietorship | Private limited company | |
|---|---|---|
| Legal identity | Same person as the owner | Separate body corporate with perpetual succession (Section 9) |
| Liability | Unlimited; personal assets at risk | Limited to any amount unpaid on shares (Section 2(22)) |
| Owners | One person | At least two shareholders and two directors (Sections 3(1)(b) and 149(1)) |
| Income tax | Taxed in the owner’s own return at slab rates | Taxed separately at company rates |
| Compliance | Income tax return and GST returns | Statutory audit (Section 139), AOC-4, MGT-7 or MGT-7A, board meetings |
In practice, the extra compliance is what you pay for limited liability and access to capital. A late AOC-4 or MGT-7 costs ₹100 per day in additional fee.
Capital gains exemption: three conditions
Moving a business to a company is a transfer, which normally means capital gains tax. The Income-tax Act exempts it when a company succeeds a sole proprietary concern.
Which Act applies depends on the date of succession. For a transfer up to 31 March 2026, it is Section 47(xiv) of the Income-tax Act, 1961. The Income-tax Act, 2025 came into force on 1 April 2026, so a transfer in tax year 2026-27 or later falls under its Section 70(1). The conditions are the same:
- All the assets and liabilities of the business, immediately before the succession, become the company’s.
- Your shareholding is at least 50% of the company’s total voting power, and stays there for five years from the date of succession.
- You receive no consideration or benefit, directly or indirectly, other than the allotment of shares.
Here is the catch: small slips break the exemption. Say a Gurugram consultancy moves into a company and the owner takes part of the value in cash, or as a credit to a personal loan account. Or a business loan stays behind in the owner’s name. Either way a condition fails, and a lump-sum transfer is taxed as a slump sale (Section 50B of the 1961 Act, Section 77 of the 2025 Act), as long-term capital gains if the business was held for more than 36 months.
Documents required
From you, the proprietor
- PAN, Aadhaar, address proof and photograph
- GST certificate, Udyam certificate and IEC, if any
- Recent income tax returns and financial statements
For the new company
- Two or more proposed names
- Registered office proof, owner’s NOC and a recent utility bill
- KYC of the second director and shareholder
For the transfer
- Statement of assets and liabilities on the transfer date
- Lists of fixed assets, stock, debtors and creditors
- Registered valuer’s report
- Stamped business transfer agreement
- CA or CMA certificate for Form GST ITC-02
How it works
Fix your 50% stake and the transfer date
We fix the shareholding so you keep at least 50% of the voting power for five years, and pick a transfer date that suits your books.
Incorporate through SPICe+ and file INC-20A
Our private limited company registration team files SPICe+ with an object clause covering the takeover. The company then files Form INC-20A before it starts trading.
Value the business and sign the transfer agreement
A registered valuer values the net assets. The business transfer agreement moves every asset and liability as a going concern, for shares only. It is stamped under state law.
Allot shares to you and file PAS-3
Members approve the allotment by special resolution. Form PAS-3 goes to the ROC within 30 days of allotment, with the stamped agreement and the valuer’s report.
Register for GST and move credit through ITC-02
The company applies for its own GST registration within 30 days of the transfer. We file Form GST ITC-02 from your old GSTIN with a CA certificate. Once the company accepts it on the GST portal, the credit lands in its electronic credit ledger.
Cancel the old GSTIN and move Udyam, IEC and bank
Your GSTIN is cancelled through Form GST REG-16, and the final return GSTR-10 follows within three months. The company opens its own bank account, applies afresh for Udyam and IEC, and takes trademarks by assignment in Form TM-P.
Timelines
File INC-20A within 180 days of incorporation
Until it is filed, the company cannot commence business or borrow (Section 10A).
Apply for GST within 30 days of transfer
The company is liable to register from the transfer date (Sections 22(3) and 25(1) of the CGST Act).
File PAS-3 within 30 days of allotment
Attach the contract and the valuer’s report, since the shares are issued for consideration other than cash.
File GSTR-10 within three months
The final return for the old GSTIN, counted from the cancellation date or order, whichever is later (Section 45, CGST Act).
Hold 50% for five years
Counted from the date of succession, on the company’s total voting power.
What happens if a condition breaks
The exempt gain turns taxable
Fail any condition and the exempted gain is taxed as the company’s income for that year (Section 47A(3), 1961 Act; Section 71, 2025 Act). A Faridabad auto-parts trader keeping 60% is fine. Let a nephew reach 51% in year three, and the exemption is lost.
Carried-over losses get clawed back
The proprietorship’s unabsorbed losses and depreciation pass to the company only while the conditions hold. Break one, and the set-off already allowed is taxed in that year (Section 116 of the 2025 Act).
Late fees and old GST dues follow you
A late PAS-3 costs a multiple of the normal fee: 2× up to 30 days late, rising to 12× beyond 180 days. Under Section 85 of the CGST Act, you and the company are jointly and severally liable for GST dues up to the transfer.
Frequently asked questions
Can a proprietorship be converted directly into a private limited company?
No. Section 366 of the Companies Act, 2013 lets partnership firms, LLPs, co-operative societies, societies and entities formed under a law register as companies, but a proprietorship has no separate legal identity. You incorporate a new private limited company through SPICe+ and transfer the business to it under a business transfer agreement. Done in the right order, customers and suppliers barely notice.
Will I pay capital gains tax when my business moves to the company?
Not if three conditions are met: every business asset and liability passes to the company, you hold at least 50% of the voting power for five years, and you receive nothing except shares. Section 70(1) of the Income-tax Act, 2025 sets these for transfers from 1 April 2026; Section 47(xiv) of the 1961 Act covers earlier ones. We draft the agreement around all three.
Can the company keep my existing GST number?
No. Section 25(6) of the CGST Act ties GST registration to a PAN, and the company has its own PAN. Under Section 22(3), it is liable to register from the date of transfer and must apply within 30 days. Your old GSTIN is then cancelled in Form GST REG-16. We line up the dates so invoicing never stops.
What happens to the input tax credit in my old GSTIN?
It moves to the company through Form GST ITC-02, under Section 18(3) of the CGST Act and Rule 41 of the CGST Rules. A practising chartered accountant or cost accountant certifies that the transfer was made with a specific provision for the transfer of liabilities. Once the company accepts the form on the GST portal, the credit sits in its electronic credit ledger.
Is GST payable on the transfer of the business itself?
No, if the business moves as a going concern. Serial No. 2 of Notification No. 12/2017-Central Tax (Rate) exempts services by way of transfer of a going concern, as a whole or an independent part. Selling only some assets, such as stock or a vehicle, is taxed like any other supply. A well-drafted agreement keeps you inside the exemption.
Do Udyam, IEC and the bank account move to the company?
No, the company applies for each in its own name. Udyam registration is free and uses the company’s PAN and GSTIN. The company gets its own IEC on the DGFT portal and opens a new current account. Trademarks are assigned in Form TM-P, and licences such as FSSAI are applied for afresh. Our checklist makes sure nothing is missed.
How long does the whole conversion take?
Incorporation through SPICe+ typically takes about 7–15 working days once documents are ready. Then the statutory clocks run: GST registration within 30 days of the transfer, PAS-3 within 30 days of allotment, INC-20A within 180 days of incorporation and GSTR-10 within three months of cancellation. You get a dated plan from us at the start.
What happens to my proprietorship’s losses and unabsorbed depreciation?
They pass to the company if the three conditions are met. Section 116 of the Income-tax Act, 2025 treats them as the company’s for the tax year of succession; Section 72A(6) did the same under the 1961 Act. If a condition breaks later, the same section taxes the set-off already allowed. Planned well, past losses keep their value.
What it costs
Our fee plus the government fee that applies to your case, quoted before you commit. Tell us the situation and we will price it exactly.
Related services
Ready to begin?
Tell us what your proprietorship owns and owes today. We will plan a transfer that keeps the capital gains exemption and your GST credit intact.