How to Convert a Sole Proprietorship to a Partnership?

Last Updated at: May 21, 2020
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How to Convert a Sole Proprietorship to a Partnership?
There are no formal auditing requirements in respect of a partnership which can reduce costs somewhat, and it is relatively easy to convert a partnership into a private company if the need arises.

 

A Sole Proprietorship is easy to start but can hamper your growth. After all, it’s difficult to build a big business as a single person. If one is looking to add partners to their business without any hassle or hindrance, then it is recommended to switch to a partnership.

Procedure for Conversion of Sole Proprietorship to Partnership

Drafting of Partnership Deed: The first step in converting a sole proprietorship into a partnership is the drafting of the firm’s partnership.

register your sole proprietorship

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.

Important Inclusions: There are 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.

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 a name of another business and it must not indicate any relations to the central or state government body. 

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

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: The deed must state how much capital will each partner invests, 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 is 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. Alternatively, for delayed commencement of the partnership, the alternate date can be mentioned on the deed. 

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.

Main Features of a Partnership

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 his interest to others without other existing partners’ consensus. 

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

 

A lawyer with 14 years' experience, Vikram has worked with several well-known corporate law firms before joining Vakilsearch.