A Sole Proprietorship Into A Partnership

A Sole Proprietorship is often the preferred choice of organisation for small businesses. A proprietorship is easy to start and operate. It is also not mandatory to register a proprietorship.

A Sole proprietorship may indeed be ideal for small businesses with limited operations and budget. It is also not difficult to manage. However, the simplistic design of sole proprietorship business also does not allow for higher growth and expansion. It would not be an ideal to bring in higher investment from third parties because ownership is legally limited to one person. There may not be restrictions in appointing outsiders as employees, but there would not be a higher degree of accountability that co-ownership alone can provide. Thus a proprietor may be inclined to explore other possibilities to bring in fresh ideas, approach and capital by changing the type of business into a partnership.

The profits arising from the business can be divided among the partners according to a previously agreed ratio based on the capital invested or equally. A partnership would better than a sole proprietorship in case the business is growing. It would be ideal to expand by introducing fresh capital and innovative ideas by new partners. Collective ownership also results in combined decision making which would be better than individual decisions. Execution of plans can also happen better with increased strengths and investments.

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. No partner can, without the consensus of other partners transfer his interest to any other person (except an existing partner) without unanimous consent of all other partners.

A partnership firm has a limited life span. Legally, the firm must be dissolved on retirement, lunacy, bankruptcy or death of any partner.

Procedure for Conversion of Sole Proprietorship to Partnership

Drafting of Partnership Deed

The conversion of a sole proprietorship into a partnership begins with the drafting of the partnership deed of your firm.

Declaration of Transfer

The deed, in this case, would be different from a regular partnership deed, as it would also make several references to the proprietorship business and declare that it has been transferred to the partnership firm.

Important Inclusions

The details that would need to be included are the date of formation of the sole proprietorship, the name of the proprietor, the type of business and any other details, such as GST registration, in which case the GST number would need to be disclosed..

Date of Starting

The deed would also include the date when you would be starting the partnership and induction of partner/partners into the firm.

Investment Details

The deed must state how much capital will be invested by each partner, how profits and losses will be split and state specifically what will happen in case of the retirement of a partner for whatever reason.

The deed must also state all the changes that will occur on account of the introduction of the new business partners. Even a change in the registration address of the firm should be included.

Registration

Registration is not a mandatory procedure. However, it is recommended, in certain cases, for the firm to register the deed. This enables the partnership to file suit and the partners to file suit against other partners.

Once the deed is signed by every partner on stamp paper, the sole proprietorship has been dissolved and the partnership deed comes into effect. Alternately, the deed could mention a date on which the partnership will commence.