A sole proprietorship is a type of business where an individual, a company or a limited liability partnership can run the business. The company doesn't have any partners. Do you want to take your business to next level? Convert your sole proprietorship to a partnership to get more people on board and expand your business.
A sole proprietorship is easy to start but not great when planning to grow. After all, building a big business as a single person is challenging. If you want to grow and add partners to your business without any hassle or hindrance, then a partnership is the best way to move forward.
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 drafting 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 a 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. You need to disclose the TIN and Service Tax number in this case.
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, if needed, a minor is included in the partnership to share the profits and be free of liabilities during a loss.
Investment Details:
You need to decide this with care as it is one of the most important processes. The deed must state how much capital will each partner invest, how the profits and losses will be spit 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:
Partnership firm 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 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 Vakilsearch 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 lifespan. Legally, the government will dissolve a firm on retirement, lunacy, bankruptcy, or death of any partner.
FAQ
Why should I consider converting my sole proprietorship to a partnership?
Converting a sole proprietorship to partnership can provide access to additional capital, shared management responsibilities and a broader skill set. It can also help in spreading the risk and expanding the business
What legal steps are involved in transitioning from a sole proprietorship to a partnership?
The legal steps involved in conversion of proprietorship into partnership include drafting a partnership agreement, obtaining a new employer identification number (EIN), and updating business licenses and permits. It is also important to dissolve the sole proprietorship and transfer assets and liabilities to the new partnership.
Wish to learn more about how to convert proprietorship to partnership? Get in touch with the experts at Vakilsearch right away and convert proprietorship to partnership, in no time!
Are there specific tax implications when converting a sole proprietorship to a partnership?
Yes, there are specific tax implications when converting a sole proprietorship to a partnership. The business will need to file a final tax return as a sole proprietorship and a new tax return as a partnership.
It is advisable to consult with a tax professional to understand the tax implications of the transition.
What factors should I weigh when choosing the right type of partnership for my business?
When choosing the right type of partnership for your business, it is important to consider the level of control, liability and decision-making authority that each partner will have.
You should also consider the capital contributions, management structure and profit-sharing arrangements.
Is there a timeline or specific process for completing the conversion from a sole proprietorship to a partnership?
The timeline and specific process for completing the conversion from a sole proprietorship to a partnership may vary based on the specific circumstances of the business. It is advisable to consult with a legal and financial advisor to understand how to convert proprietorship into partnership firm.
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