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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.

As the name suggests, a sole proprietorship has a single owner. All incomes and profits of the business belong to that one person. It also has unlimited liability. In the event of losses, the proprietor would be liable to settle it out of his/her personal assets as well.

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.

Why Partnership?

A Partnership firm is formed under the Partnership Act, 1932. It begins with an agreement called as partnership deed signed between two or more partners. The partners may manage the new business together or by a few of them on behalf of all.

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.

Procedure For Conversion Of Proprietorship Into A Partnership

Partnership Deed

Drafting of the Partnership Deed would be the first step in conversion of a sole proprietorship into a partnership firm. The most important inclusion in the deed should be the declaration about the sole proprietorship which is being converted into a partnership by adding more partners and bringing in investment. Care should be taken to include the details of the capital invested by each partner, salaries and shares in profits to be paid to partners, rate of interest on capital, profit sharing mechanism and responsibilities in case of losses. The procedure for further admission and removal of partners should be given along with the procedure to dissolve the partnership. There should be no reason for ambiguity that may lead to future disputes.

The deed shall mention the  proposed date for starting the operations of the  partnership.

All changes that will occur on account of the introduction of the new partners should be recorded. If there is a change in the registered address of the business, the same should be included.

Details To Be Included About The Sole Proprietorship

The following details details may be included, like date of formation of the sole proprietorship, the identity of the proprietor, the address where the business exists, the type of business and other relevant details such as VAT and Service Tax registration.

Registration

Registration of a Partnership is not a mandatory procedure. However, it is recommended because of the enhanced legal protection it offers. It would be easier for a registered firm to file a lawsuit against third parties in dispute. The rights of the partners also would be safeguarded better by empowering suits against any partner who acts against the interests of the firm.

The partnership can be signed by every partner on stamp paper and registered at the registrar of firms. Form A under the Partnership Act, 1932, should be filed with the Registrar of Firm. The Form A contains all details to be provided about the partnership.

This brings an end to the sole proprietorship and partnership deed comes into effect either from the date of registration or from a date from which the partnership will commence as mentioned in the partnership deed.

Other Formalities

If your sole proprietorship is licensed under Sales Tax, Service Tax laws, forms need to be submitted to the concerned departments for change of status of your business. PAN number has to be obtained from the Income Tax Department separately since a new type of entity would require a new category of PAN.

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