Friday, July 31, 2020

How to convert Proprietorship to a Private Limited Company

Many small business owners start out as sole proprietors of their firms. Sole proprietorship is the most common and simplest form of business structure. This form of business has its own advantages: easy formation, limited paperwork, small capital requirement, and minimum compliance requirements.

As the business starts spreading its roots, the next logical move would be to expand operations to accommodate large business needs. The experience acquired as a sole proprietor helps the entrepreneur to build a stronger foundation for his business when he chooses to transform it into a Private Limited Company.

Private Limited Company Registration - Ventureasy.com

convert Proprietorship to a Private Limited Company

Choosing to Register a Private Limited Company

As the revenues increase, many sole proprietors perceive the need to differentiate their personal accounts and tax filings from that of the business. There are several reasons why converting your sole proprietorship into a private limited company is a good idea.

The conversion allows you to enjoy the double benefits of keeping your goodwill and brand value intact while enjoying a legal existence. You are not only exempted from paying any stamp duty, but also from any capital gains tax on the property thus transferred.

Other key benefits include:

Business expansion
Better financing options
Greater public visibility and acceptance
Asset protection
Managing risks
Corporate tax benefits

The conversion process

The first step to converting your sole proprietorship firm into a private limited company is to incorporate a new private limited company.

At the time of the new Private Limited Company, it is appropriate to mention in the Memorandum of Association (MOA) that the company is a “takeover of a sole proprietorship concern.”

After the Company Formation, an agreement needs to be executed between the Company and the Proprietor for the takeover of the assets and liabilities of the proprietorship by the Company. The details of assets, liabilities and the consideration in exchange of such assets need to be specified in the agreement.

The agreement should be executed in a Stamp Paper of requisite value to make it a valid legal document.

As per the Income Tax Act, 1961, capital gains on such transfers are exempted if:

All the assets and liabilities of the sole proprietorship, immediately before the conversion, are transferred to the company
The proprietor’s shareholding is more than 50% of the total voting rights of the new company for a continuous period of not less than 5 years from the date of succession
The proprietor receives shares in the Company only in exchange of the net assets of the business.
In case any of these conditions are not complied with, the profits or transfer of assets shall attract capital gains tax.

Once the new private limited company comes into existence, the sole proprietorship can be duly terminated. The bank accounts in the name of the proprietary firm need to be formally closed and a new corporate account is to be opened for the Company.

Any contracts/ leases/ agreements signed by the proprietor need to be re-signed under the name of the newly incorporated company.

All tax and other registrations in the name of the Proprietorship need to be surrendered and new registrations should be obtained in the name of the Private Limited Company.

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Nikita Bhatia

Nikita Bhatia is the co-founder of VenturEasy, an online platform for Company registration, book-keeping, accounting, tax consultancy and legal compliances in India. A Chartered Accountant and company secretary by profession, she has wide experience in the fields of audit, accountancy, taxation and corporate governance.

For any queries/ discussions, email at hello@ventureasy.com

Certificate of Commencement of Business

The Companies (Amendment) Ordinance 2018 has reintroduced the concept of Certificate of Commencement of Business with effect from 2 November 2018. Under the new Ordinance, no company will be entitled to commence its operations or exercise any borrowing powers unless it has filed within 180 days from its Incorporation a “declaration” stating:

That the Subscribers to the Memorandum of the company have paid the value of shares agreed to be taken;
That the Company has filed a verification of its registered office address with the Registrar of Companies.

Procedure:

The declaration shall be in Form No INC 20A and mention that all the subscribers to the memorandum have remitted the total value of the shares agreed to be taken by them in the Companies Bank Account.
Note: One has to attach the Bank Account statement of Company having all credit entries for receipt of subscription money received from all subscribers to the Memorandum. If the Bank Statement is not available, then valid payment proof like NEFT/IMPS receipt shall be accepted.
The Form shall be filed with the Registrar of Companies within 180 days from the date of Incorporation and shall be certified by a Company Secretary or Chartered Accountant, Cost Accountant, in practice.
In case the Company is pursuing such objects which require approval from any sectoral regulators such as Reserve Bank of India, Securities & Exchange Board of India etc, then such approval should also be obtained at the time of making the declaration.

Consequences of non-compliance:

If the Certificate of Commencement of Business is not filed within the stipulated time, then:

Company cannot commence its business and cannot borrow money
Penalties will be imposed by the concerned Registrar for non-compliance
Registrar may initiate action for the removal of the name of Company

Penal Provisions:

If any default is made in complying with the above, the company shall be liable to a penalty which may extend to five thousand rupees and every officer who is in default shall be punishable with fine which may extend to one thousand rupees for every day during which the default continues.

Removal of company name from Register of Companies:

Where Certificate of Commencement of Business has not been filed with the Registrar within a period of 180 days from the date of incorporation of the company and the Registrar has reasonable cause to believe that the company is not carrying on any business or operations, he may, initiate action for the removal of the name of the company from the register of companies under Chapter XVIII.

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Nikita Bhatia

For any queries/ discussions, email at hello@ventureasy.com

Submitting Tax Saving Proofs to Employer

Why Employers Ask for Tax Saving Investment Proofs?
Employers are responsible to deduct income tax (TDS – Tax deduction at source) from salary paid to its employees and deposit the same to income tax department. But income tax is complicated and the final tax depends on the tax saving investments a person makes or if the person lives on rent or if he has a house. So to compute your taxes correctly your employer asks for a declaration at the start of financial year (in April). The TDS is deducted based on this declaration.

What if you do not Submit the Proofs?
In case you do not submit the proofs, employer would not be able to give you tax benefit on your tax saving investments. This would lead to higher deduction of taxes.

What investment proofs to be Submitted
Indian income tax laws are complicated and have multiple exemptions and investment options. Below is the list of documents that needs to be submitted to your employer to get relevant tax deductions.

House Rent Allowance (HRA) u/s 10(13A)
Following documents need to be submitted to claim tax benefit on HRA:

Rent receipt for starting and the end month and of intermediate month in case there has been change in rent or rented accommodation. So you need to submit rent receipt for April and Dec/Jan if there is no rent change.
The rent receipt must have One rupee revenue stamp on it (ideally a revenue stamp is required for receipts if the rent is paid by cash and is over Rs.5,000 but most employers still ask for it).
No rent receipt is required if the monthly rent paid is below Rs.3,000
Copy of rent agreement.
If the annual rent paid exceeds Rs 1 lakh you also need to give PAN number of the landlord.

Home Loan Interest u/s 24

Copy of Provisional Interest certification from Bank/Financial Institution stating the amount of principle and interest separately.
The certificate should also have the loan sanction date & PAN Number of Bank/financial institution
Copy of Possession Certificate
Copy of Sale Deed (In case possession letter in not available)
Copy of Lease deed, in case of let out property
In case of Joint Home Loan, self-declaration of the ownership proportion needs to be furnished

Medical Insurance Premium u/s 80D

Copy of Insurance Premium receipt paid
Copy of receipt for Preventive Health Checkup for self, spouse, dependent children or parents

Interest on Repayment of Education Loan u/s 80E

Copy of Provisional Interest certification from Bank/Financial Institution showing the interest and principle separately.

Rajiv Gandhi Equity Saving Scheme (RGESS) u/s 80CCG

Demat Account Statement
Self declaration stating RGESS enabled investments

Handicapped dependent u/s 80DD

Amount paid or deposited under any scheme framed in this behalf by the LIC or UTI or any other insurer and approved by the Board for the maintenance of the handicapped dependent
Physical disability certificate from a physician, a surgeon, or a psychiatrist, as the case may be, working in a Govt. hospital. The certificate should contain the employee’s name and percentage of Disability clearly.
Form 10-IA.

Medical Treatment Expenses u/s 80DDB

Medical Bills / expenditure incurred by way of medical treatment for a specified disease along with a certificate from a hospital in the prescribed form.
Form 10-I

National Pension Scheme u/s 80CCD(1B)

Photo copy of deposit receipt or account statement of NPS (Read: Should you Invest Rs 50,000 in NPS to Save Tax u/s 80CCD (1B)?)

Section 80C Deductions:
The table below gives the list of documents to be submitted to get tax benefit u/s 80C

S.No.	Investment Type	Documents as Investment Proof
1	Life Insurance Premium	Copy of Premium Receipt. Late payment fees will not be included as premium paid For the premium falling due after submission deadline, attach previous year’s receipt with declaration
2	Public Provident Fund (PPF)	Copy of passbook/statement along with the cover page showing investor’s name OR Copy of the deposit challan duly acknowledged by the Bank
3	Senior Citizens’ Savings Scheme	Copy of passbook/statement along with the cover page showing investor’s name OR Copy of the deposit challan duly acknowledged by the Bank
4	NSC	Copy of the NSC Passbook purchased during the financial year For accrued Interest on NSC – Copy of Certificates/Passbook to be enclosed with date of purchase and the amount
5	ELSS (Tax Saving Mutual Fund)	Copy of Account Statement
6	Children’s Tuition Fees	Copy of receipts for Tuition Fees and Exam Fees (excluding Donations & Development fees, Bus / Transportation charges, Text Books, Private Tuitions or Tutorial Fees) paid to any University/College/School or Other Educational Institution in India during the current year for a maximum of 2 children.
7	Sukanya Samriddhi Yojana	Copy of passbook/statement along with the cover page showing investor’s name OR Copy of the deposit challan duly acknowledged by the Bank
8	Pension Plan from Insurance Companies	Copy of Premium receipt For premium falling due after Jan ’16. Please attach previous year’s receipt with declaration
9	Post Office Tax Saving Term Deposit	Copy of deposit receipt
10	Tax Saving Bank Fixed Deposits	Copy of Deposit Receipt OR Account Statement

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Nikita Bhatia

For any queries/ discussions, email at hello@ventureasy.com

New Filing Requirements

New Filing Requirements

Nikita Bhatia

For any queries/ discussions, email at hello@ventureasy.com

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What is Statutory Audit

Statutory Audit is primarily aimed at protecting a company’s shareholders. They help investors gain confidence in a company and reflect the company’s true business health and performance.

A fast-paced business environment combined with the need to be in sync with the global standards has raised the performance bar for companies and brought in high-quality statutory audit requirements in the country.

The demand for accurately audited accounts has put more weight on the shoulders of a statutory auditor, usually a chartered accountant. As a result, in recent times, statutory audit has magnified in terms of complexity.

Statutory: Let’s understand the word Statutory means anything regulated by laws of the state. Statutory audit is the official inspection of a company’s accounts typically by an independent body. More elaborately put, it is the audit of books of accounts of a company, according to the requirements of a statute, to ensure fair and accurate representation of its financial records. There are many types of audits in India prescribed by different regulatory bodies. However, commonly, the term ‘statutory audit’ deals with the requirements of the Companies Act, 2013.

The right approach

Even though it happens year after year, the microanalysis and the constant questioning can take a toll on a company and its employees. No matter what the business is, or how big it is, the audit process essentially remains the same. Here is a step-by-step guide to help you understand and prepare for this complex annual routine.

Step 1: Plan it well: This is the most important part that most people forget. It is important to understand how well the auditor knows your company and business. A detailed study can help you deal with potential issues and problems early. The more the auditor understands your company, the easier it gets for you. So, to help the auditor know you better, you may have to provide the following details. – The corporate structure including the history, locations, and the market share of your company. – Operations comprising services, products, marketing, and processing – Financial statements, accounts, liquidity, stocks and shares, etc.

Step 2: Draw up a schedule: Keep a checklist of the tasks and the assignments along with names of the people who are responsible. Working around a timetable makes it easy to review paperwork and identify any misses, and decide on actions to be taken. The auditors too, usually, obtain the management representation letters beforehand.

Step 3: The Audit: The whole audit process works around four main areas. a) Cash b) Stocks c) Receivables d) Payables, e) Statutory requirements and records. The audit analysis may be clubbed under broad subheadings based on statutory requirements and records.

Balance sheet	Profit and Loss account
Share capital Secured and unsecured loans Current liabilities and provisions Statutory payments and returns Fixed assets Inventories Investments Current assets: sundry, cash and bank balance, deposit	Sales and other income Purchase and other direct expenses Manufacturing expenses Administrative expenses Charges

A good auditor will compile previous years’ (PY) working papers for reference. The team will thoroughly examine the company’s accounting systems and financial statements. The depth of inspection depends on the internal control assessment. If the control report is satisfactory, further testing is limited and if not, a more in-depth analysis is carried out. In the initial phase, auditors examine the Previous year’s copy of audited balance sheet, P&L statements, schedules, and the audit report.

Step 4: Verification of various registers and files:The auditors will also physically verify the stock-in trade, if any. The important files to be presented include:- Purchase bill – Sales Register – VAT payments and returns – Salary and wages – Fixed assets purchased – Trade license – Property Tax paid challans – E S I paid challan outstanding – Payment of advance tax – TDS certificates – Investment papers – Bank reconciliation statement. The audit team may put a company’s controls to test not only to see their effectiveness but also to verify that everything is actually present and not just on paper. Effectively, every asset and transaction will go through an audit trail to prove its legitimacy.

Step 5: Discussion and feedback: Ideally, there is a discussion at the end of each step of the audit. These informal dialogues offer an opportunity for mutual feedback regarding the analysis of the controls, the documents, and the areas that require improvement or prompt action.

Step 6: The Audit report: The final audit report is made after complete analysis and understanding of the financial statements and after all areas of concern have been satisfactorily addressed. The audit team then presents its report to the company’s board or audit committee.

The arrival of the annual statutory audit should not serve as a warning signal. It should rather become a part and parcel of a company’s systematic function. Scientologists use the term ‘auditing’ synonymously with counselling. A hassle-free audit can be ensured with knowledge of the process, proper organization, and preparedness.

VenturEasy can support companies with Statutory Audit through Registered Auditors on panel. Get in touch with us at hello@ventureasy.com

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Nikita Bhatia

For any queries/ discussions, email at hello@ventureasy.com