TAXAJ

Proprietorship to Partnership Firm Conversion

Where most of the businesses start as a proprietorship firm, one can always change the business structure by exploring the benefits of partnership by adding a partner. Especially when the operations reach certain esteemed levels, a partner may be required to increase the efficiency and act as a catalyst for the faster growth of the present business. With the increase in the number of partner(s) in the business, the efforts and capital both would increase propelling the business growth. For conversion from an unorganized business structure to a partnership firm, the business is likely to pass through procedural requirements. Once the business is converted to the partnership, all the assets, liabilities and rights accompanied to proprietorship will be passed on to the partnership firm; subject to the consent of partners.

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About This Plan

Get your proprietorship firm converted into partnership in the fastest possible manner.

Created by potrace 1.15, written by Peter Selinger 2001-2017

Timeline

It usually takes 7 to 10 working days.

Buy Now
Services Covered
Who Should Buy
How It's Done
Documents Required
Services Covered

  • Issue of Incorporation Certificate along with PAN and TAN
  • Includes Govt Fees & Stamp duty for Authorised Capital upto Rs. 1 Lakh
  • Excludes foreign national / Body Corporate as director or business needing RBI/SEBI approval
  • Assistance in Opening Bank Account
Who Should Buy

  • Businesses looking to expand or scale operations on higher level
  • Businesses looking to convert their existing proprietorship firm into partnership
  • Businesses aiming to work globally or with reputed clients
How It's Done

  1. Preparation of Incorporation Documents

  2. Getting those docs signed by the respective stakeholders

  3. Filing of e-Forms with ROF

  4. Receipt of Incorporation Certificate with PAN, TAN, GST, EPF, ESI & Bank Account.

Documents Required

  1. Name, Contact Number and Email Id of all the Stakeholders.

  2. Directors Identification Number, if already.

  3. Self Attested PAN, Aadhar & Passport size photo of all the Stakeholders.

  4. Apostilled Passport, Mobile Bill and other KYC docs in case of NRI Stakeholder.

  5. Latest Month Personal Bank statement of all the Stakeholders.

  6. Specimen Signatures of all Stakeholders.

  7. Few Proposed Business Names along with Objects.

  8. Latest Electricity Bill/Landline Bill of Registered Office.

  9. NOC from owner of registered office, If Owned. (Download Template)

  10. Rent Agreement from Landlord, If Rented/Leased. (Download Template)

  11. Brief description of main business activities of the proposed Company.

  12. Shareholding pattern (50:50 or 60:40) between the Stakeholders.

  13.  Authorised & Paid Up Share Capital of the Company.

Fill up this Form to Convert Your Company into Another

How to Convert a Sole Proprietorship to a Partnership?

Drafting of Partnership Deed:

The first step in converting a sole proprietorship into a partnership is the drafting of the firm’s partnership deed. This will lay down the framework of the business and the relationship between the partners.

The deed must include the partnership starting or induction date. I.e, partners induction details.

Declaration of Transfer:

The deed for declaring transfer is different from a regular partnership deed. It will make several references to the proprietorship business and will declare the transfer to a partnership firm.

There are a few mandatory inclusions in deeds such as date of sole proprietorship formation, proprietor’s name, business type and other details, like Service Tax registration and VAT. In this case, the TIN and Service Tax number must be disclosed.

Choosing Name:

The partners are eligible to choose any name for their partnership firm. The government has no pre-enforced set of rules for naming the firm. The only thing is to keep in mind that the name given must not resemble the name of another business and it must not indicate any relations to the central or state government body.

Mutual Agency Between Partners:

According to this, each partner will be bound by the actions of the other partners. Hence, with a mutual agency the partners act as the agents or the principals of the other partners.

Minor:  A minor cannot be added to a contract or made into a lawful business partner. However, a minor, if needed, is included in the partnership to share the profits and be free of liabilities during a loss.

Investment Details:

This is one of the key things that have to be decided with care. The deed must state how much capital will each partner invest, how the profits and losses are split and what happens after retirement to one or more partners.

The deed must also state the details of all the changes expected to occur with the introduction of the new business partners. It includes any change in the firm’s registered address details as well.

Registration:

Registration is not a mandatory procedure. However, the government recommends that the deed be registered. Registering the deed will enable the partners to file suits between them or on the behalf of the partnership firm. The sole proprietorship gets dissolved after the deed is attested and accepted by all the partners. Also, the partnership deed becomes effective.

Points Considered While Drafting a Partnership Deed

The partners need to consider the following points while drafting a partnership deed:

  • Details such as business name and the operating locations
  • Partnership duration
  • Details on profit and loss shares of each partnership within the business
  • The business management details
  • Agreed principles of partnership
  • Details of the total partners and employees employed by each partner
  • Provision and details on raising future capital
  • Partners and their distributed work within the business
  • Members and their obligations in the partnership firm
  • Bank account details
  • Partners withdrawal details (if any)
  • The business account system
  • Business premise ownership details
  • Details on goodwill division in case of partnership dissolution
  • Distribution of assets and liabilities amongst partners at the time of dissolution
  • Provisions for bringing in or admitting new partners
  • Details on the ownership transfer or the status of the partnership after the demise or withdrawal of one of the partners
  • Provision for partners dispute resolution within the business.

Alternatively, you can get a partnership deed drafted by an expert lawyer through TAXAJ at an affordable price.

Main Features of a Partnership

When you convert a sole proprietorship to a partnership, there will be a change in the structure. A partnership firm can have a maximum of 20 partners (unless you’re running a banking firm, in which case you have a maximum of 10 partners). Each partner has effective and equal control over the activities of the business and shares profits equally unless there is any agreement contrary to this in the partnership agreement. A partner must not transfer their interest to others without other existing partners’ consensus.

However, the partnership firm has a limited life span. Legally, the government will dissolve a firm on retirement, lunacy, bankruptcy or death of any partner.

Benefits of converting Proprietorship to Partnership

Shared Liability

The term Partnership, itself describes two or more individuals coming together for fulfilling some common objective. The partnerships referred here are of pure business nature. Therefore, the partners share the responsibility to work and manage the business. Partners share rights and liabilities in the business, dividing the burden of responsibilities among them. Not just money but resources, knowledge and judgment are also pooled in for improving the business.

With conversion, you do not need to start new business

With conversion, the accumulated loss and unabsorbed depreciation of Proprietorship is deemed adjusted as loss/ depreciation of the successor partnership firm. All the assets and liabilities of the firm immediately after the conversion are turned into the assets and liabilities of the partnership. All movable and immovable properties of the firm automatically vest in the partnership. Hence, the conversion is easy and hassle-free.

Partner Net Worth is Increased

There is a distribution of Post-Tax profits among the partners with no additional tax liability. No Capital Gains tax shall be charged on transfer of property from Proprietorship to Partnership firm. The reduction of tax liabilities indirectly increases the amount of money earned which results in an increase of net worth of all the partners.


No Fixed Capital Investment required

The partners can internally decide on their individual investment in the firm and then divide the stakes accordingly, which gives them the flexibility to make decisions in the business. Uneven capital contribution between partners is permissible. There is no predefined limit on partners’ capital contribution, allowing the partners for putting in preferable amounts as capital and make decisions about the withdrawals mutually.

Pre-Requisites for a GST Registration

It is essential to create a partnership firm to convert the proprietorship entity into a partnership firm and obtain the partnership firm’s PAN, GST registration and bank accounts. To start with, partners have to write an agreement called Partnership Deed, which specifies all the terms and conditions under which such partnership comes into force. Once the partnership deed is ready, the taxpayer has to apply for the PAN number with the income tax department as it is a mandatory prerequisite to apply for registration under GST.

Obtaining GST Registration for Partnership

Once the partnership firm’s PAN has been obtained, apply for GST Registration in form REG-01. The following list of documents needed to apply under GST:

  • PAN card of the firm
  • Partnership deed
  • PAN card of all partners
  • Aadhaar Card/passport/driving license/voter ID of all partners with the appropriate address which is given in partnership deed
  • Photos of all partners
  • Authorisation letter to make a partner as an approved signatory for GST registration on behalf of the partnership
  • A document evidencing the company’s business place(s) address
  • Utility bill/Property Tax Receipt (latest of two months) of such business place
  • Bank account statement/passbook
  • A copy of certificate of registration under any other act


After obtaining all of the above documents, apply for the GST registration for the partnership firm.

Filing of Returns by Proprietorship & Partnership

While submitting the cancellation for GST registration of proprietorship, the taxpayer has to give the date from which the registration is to be cancelled. Also, while applying for new GST registration of the partnership firm, the taxpayer has to submit the date on which liability to register arises. The taxpayer has to make sure that both the above dates are the same, and this will be the effective date for GST registration of partnership.

Therefore, the proprietorship entity has to file all GST returns till the new GST registration date is announced. The partnership firm has to start filing the GST returns from the date of new GST registration.

Transfer of Business to Partnership Firm

The transfer of stock or other assets while converting an existing proprietorship entity into a new partnership firm is exempted under GST, because such goods/assets are transferred for the continuance of the same business. This exemption has been specified in Schedule II of the CGST Act. This benefit is available when the existing firm ceases to be a taxable person after such conversion. Further, the transfer of a going concern is exempted as per the CGST (Rate) notification 1/2017. Hence, it is clear that the transfer of a going concern shall not be taxable under GST.

Transfer of Unutilised ITC to Partnership

After completing the filing of the pending returns, the taxpayer can transfer the unutilised ITC to the partnership firm. Following are the steps for transferring unutilised ITC to the partnership firm:

  • Form GST ITC-02 has to be filed by the proprietorship business to transfer the unutilised ITC to the electronic credit ledger of the partnership firm.
  • Proprietorship entity shall also file a copy of a certificate issued by a practising Chartered Accountant or Cost Accountant certifying that the business has been transferred with a specific provision for the transfer of liabilities.
  • The partnership shall accept the information so provided by the proprietorship company on the GST portal and, upon such approval, the unutilised ITC specified in Form GST ITC-02 shall be credited to its electronic credit ledger.
  • The inputs and capital goods, thus transferred, shall be adequately accounted for in its books of account by the partnership firm.

Transfer of Balance in Electronic Cash Ledger

There is no provision under the GST Act to transfer balance in electronic cash ledger from one entity to another entity. Hence, the taxpayer has to file the Form RFD-01 with a refund type of either “Refund of Excess Balance in Electronic Cash Ledger” or “Refund on Account of Any Other Reasons” to get the refund of balance in electronic cash ledger.

Cancellation of GST Registration of Proprietorship

Once the pending returns were filed, and all tax dues have been paid off, request for the cancellation of the GST registration in Form GST REG 16 citing reasons as ‘Changing the company’s legal framework’. It will also ask for the new partnership firm’s GST number.

This is the whole process of converting a proprietorship firm into a partnership business. It should also be noted that the same procedures mentioned above apply in other cases, where one legal entity converts into another legal form. Such as converting a partnership firm into a proprietorship firm, a private limited/OPC/public limited or vice versa.

Frequently Asked Questions

Whether the registration of partnership after conversion from proprietorship is mandatory?

It is not mandatory but highly recommended. If it is not registered, the firm cannot file a suit against any partner or third party. The partners also cannot sue the partnership firm for his/her claim. However, third parties can sue the firm to enforce their dues or claims. Due to non-registration, the rights of parties are not affected. Also, the partnership can be registered at any time after the formation to remove said effects.

What are the advantages of registering a partnership firm?

In a proprietorship firm, there is no legal distinction between you and the business; leaving you personally liable for any debts or obligations the business may incur. Also, there are no limitations and no protection for your personal assets. In case of partnership firm, it is divided amongst the partners.

Under which Government Authority, the application of Partnership Firm Registration is submitted?

The application for Partnership Firm Registration in India is submitted with the Registrar of Firms (RoF) under whose jurisdiction the Place of Business of Partnership Firm falls. The application of Registration is made in required form along with submitting the Partnership Deed. At the end of the registration procedure, the Certificate of Registration is issued by respective RoF. The process and time of registration may differ for each RoF.

To be eligible to be a partner, an individual must be a major (above the age of 18), should be sane and should not be disqualified by law from entering into a contract.

A partner can nominate a successor to take his/her place in the event of death or retirement of the partner. The mode of introducing a new partner or successor is based on provisions in the partnership deed. A new partnership deed is required once the new partner is admitted into the firm.

As per Schedule-2 of CGST/SGST Act, there is no need to pay tax on the sale of stock where it is moved from proprietorship to the new firm (in case of re-structuring of business) subject to the condition that the existing proprietorship ceases to be a taxable person after such re-structuring.

In case of conversion, existing firm should cease to be a taxable person . There should not be any activity in converted proprietorship after transfer of stock into a new entity. In case, there are unutilized input tax credits lying at the time of such conversion, these credits are allowed to transfer into a new entity.

For confirming the validity of a partnership deed, the partners must pay stamp duty required as per the capital of the firm. The amount of stamp duty payable depends on the amount of capital contribution by partners. The rate of duty is prescribed under the State Stamp Act that differs for every State. Amount of ₹ 500 is included in our package.

The partnership firm shall also have to apply for registration under other statutes such as GST, Shop and Establishments Act and the likes; depending on the nature of the business. In case the sole proprietorship firm owns a trademark, the change regarding the inclusion of partner needs to be added in the trademark registry.

Partnership firms do not need to prepare audited statements for each year. However, depending on the turnover and a few other criteria, a tax audit statement might be necessary.

Yes, you will have to apply for a new GST registration and then surrender the one taken in the name of proprietorship firm. You can get the GST registration done with TAXAJ at an additional cost.