# Convert Proprietorship to Private Limited Company

> A proprietorship can't be converted by a single MCA form, because it has no separate legal existence. Instead, you incorporate a private limited company (or OPC) and transfer the whole business to it under a business transfer agreement in exchange for shares. Under Section 47(xiv) the transfer is not taxed if all assets and liabilities move to the company, the proprietor gets only shares as consideration, and keeps at least 50% of the voting power for five years.

Practice: Conversions, Changes & Closure — https://www.industax.com/services/business-changes/

The tax exemption is conditional for five years. If the proprietor's voting power drops below 50% or any consideration other than shares is paid, the exempted gain becomes taxable in the company's hands under Section 47A(3). We structure fundraising plans around this before the conversion, not after.

On the GST side, a transfer of a business as a going concern is exempt, and the unutilised input tax credit can move to the company by filing Form GST ITC-02. Bank accounts, licences, contracts and customer invoices then shift to the company's name, and the proprietor's GST registration is cancelled.

## Key facts

| Item | Detail |
| --- | --- |
| Route | Incorporate company + business transfer agreement |
| Tax exemption | Section 47(xiv), subject to conditions for 5 years |
| Voting condition | Proprietor holds ≥ 50% voting power for 5 years |
| GST | Going-concern transfer exempt; ITC moved via GST ITC-02 |
| Consequence of breach | Gain taxed in the company's hands (Section 47A(3)) |

## Who needs this

- Proprietors raising equity or bringing in co-founders
- Growing businesses wanting limited liability
- Proprietors whose clients or lenders prefer a company

## What's included

- Company incorporation (private limited or OPC)
- Business transfer agreement and valuation of net assets
- Share allotment and ROC filings
- GST ITC-02, new registrations and cancellation of old GSTIN

## Documents

- Proprietorship balance sheet on the transfer date
- List of assets, liabilities, contracts and licences
- Proprietor's KYC and proposed directors' KYC

## Process

1. **Incorporate** — Company formed with the proprietor as majority shareholder.
2. **Transfer** — Business transferred for shares under a BTA.
3. **Migrate** — GST, bank, licences and contracts moved to the company.

## Also covers

- **Proprietorship to OPC** — Same route, with a one person company as the transferee.
- **Business transfer agreement** — Slump transfer of the running business for shares.

## FAQs

### Can I convert my proprietorship into an LLP tax-free?

The Income-tax Act has a specific exemption for proprietorship-to-company (Section 47(xiv)) and company-to-LLP (Section 47(xiiib)), but not for proprietorship-to-LLP. Transferring a proprietorship to an LLP can therefore trigger capital gains, so it needs to be structured carefully.

### Will the company get the proprietorship's carried-forward losses?

Yes, if the Section 47(xiv) conditions are met. Section 72A(6) allows the company to carry forward and set off the proprietorship's accumulated business loss and unabsorbed depreciation, which is lost if the conditions are breached.

### Does the GST registration transfer to the company?

No. The company takes a new GST registration in its own name. The proprietor's unutilised input tax credit is transferred by filing GST ITC-02, and the old registration is then cancelled.

## Official sources

- Ministry of Corporate Affairs — MCA21 portal: https://www.mca.gov.in/
- Income Tax e-Filing portal: https://www.incometax.gov.in/
- GST portal: https://www.gst.gov.in/

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This is general information, not advice for your specific facts.