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Conversion of Sole Proprietorship into Partnership

Narendra Kumar

| Updated: Mar 06, 2018 | Category: Company Conversion

Proprietorship

A sole proprietorship business can be defined as an unregistered business that is owned, managed and controlled by one person and that individual owner retains the full authority and responsibility with respect to the business. Sole proprietorship business is one of the most common form/type of business in India.

The responsibility and the obligation to manage the business lie with the proprietor of the business. Thus proprietorship is not a distinct entity unto itself; rather business and its owner are clubbed together. In this type of Business, the person operating will only be the director and shareholder himself.

Partnership

The Partnership can be defined as the person who has entered into a partnership to carry on the business with the same objective are individually called as partners and collectively as a Partnership Firm and the name under which they carry on their business is Partnership Firm.

A Partnership firm is not a separate legal entity distinct from its member. A partnership firm cannot hold any property, employ any staff or sue anyone or cannot be sued by a person in its name.

The Partnership Act is governed by the Indian Partnership Act, 1932. As per Section 4 of the Indian Partnership Act Partnership Firm can be defined as follows:

“Partnership is the relationship between two or more persons who have agreed to share the profits of the business carried on by all or any of them acting for all.”

What is the Procedure for Conversion of Sole Proprietorship to Partnership?

  1. Drafting of Partnership Deed:

The first step for converting any sole proprietorship into a partnership begins with the drafting of the partnership deed for your firm. The partnership deed shall contain full details of all the partners, the name under which the partnership firm shall be carried on and the profit and loss sharing ratio.

  1. Declaration of Transfer:

The deed will be different from regular partnership deed as it will contain various information regarding the proprietorship business and will also contain a declaration that the proprietorship business has been transferred to the partnership firm.

Important Inclusions:  the information that will be included in the deed is the date of formation of the sole proprietorship business, the name of the proprietor, type of business which is carried on, or any other detail such as GST registration number, Bank Account Details.

  • Date of Starting: The deed shall also include the date when the partnership firm shall be started and also the details of all the partners of the firm.
  • Investment Details: Deed should also include the capital investment by each partner, and the profit and loss sharing ratio, should also contain detailed information regarding the procedure to be followed in case of retirement of any partner.

It should also state regarding the changes that will take place on account of the introduction of a new partner in the business. If there is a change in the registered address of the firm that should also be included.

Is Partnership Registration Mandatory?

It is not mandatory a partnership firm Registration should be registered; however, there are various advantages of a registered partnership firm so it is recommended that a partnership firm should be registered. A registered firm can file a suit against the partner or a third party or can recover its dues.

Once the deed is signed by each partner on a stamp paper and has been notarized the sole proprietorship firm is being dissolved and the partnership firm comes into effect.

It is not necessary for the partnership deed to get registered. The deed can be registered at any point of time by making an application with the Registrar of Firms who is having jurisdiction where the registered office of the firm is proposed to be situated.

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Narendra Kumar

Experienced Finance and Legal Professional with 12+ Years of Experience in Legal, Finance, Fintech, Blockchain, and Revenue Management.

Business Plan Consultant


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