Step-by-Step Guide to Convert Proprietorship to Partnership
The primary objective behind the strategy to convert proprietorship to partnership is to add value to the business by bringing in more capital or expertise. In a sole proprietorship, the owner responsible for all the losses or liabilities incurred by the firm. Such a firm has its disadvantages, and that is why converting it into a partnership is beneficial.
When a firm converts to the partnership, it also allows both partners to think and distribute work amongst each other. It, therefore, brings more business and profit along with business expansion in quick turnaround time.
Advantages of a Partnership Firm
Before deciding to convert proprietorship to the partnership, it is essential to understand the features and benefits of a partnership firm thoroughly. In a partnership, the debts and liabilities are shared between the partners. A Partnership Deed is done which states the rights and responsibilities of each partner. It helps to solve disputes arising over each partner’s role in the business.
Points to Remember While You Convert Proprietorship to Partnership
- Declaring that the proprietorship is dissolved: The only method to dissolve the proprietorship is to enter into a new partnership. Then, you have to add a clause in the partnership deed stating that the firm’s assets, liabilities, dues, debtors, and creditors are transferred at book value to the partnership. Then the sole proprietorship would be dissolved automatically, and the partnership would take over the business.
- Stating the Partnership duration: In several instances, a partnership is formed for a specific purpose. After it is completed partnership is dissolved. The deed should clearly state the reason why the partnership is being formed. Then, the duration for which it will function.
- The partnership deed: It is an essential document stating how the partnership will run its business. Also, it will mention each partner’s responsibilities and how the profits are to be shared.
- Main details: It should contain details like the name under which the firm is to operate, a brief outline of the business that is to be carried out, and the address of the main place of business
- Investment details: It should mention the capital amount invested by each partner, the ownership shares to be acquired by each partner for his investment, the way of distributing the business income, and the salaries to be received by each partner
- Proprietorship details: The details of assets, liabilities, credits that are being transferred to the partnership are to be mentioned. Tax registrations acquired in the proprietorship are also to be stated. If the partner, formerly the proprietor, is to be paid off for the business brought into partnership, then how he will be paid off is to be mentioned. If he has already been paid, then details need to be stated. In case the proprietor is not to be paid off, the business value needs to be stated, together with the fact that the partner is considering it as the capital
- Accounting method: It should mention the accounting method to be employed for cash flow, assets and liabilities, profit and loss and how funds will be raised.
- Expulsion and withdrawal: A partnership is terminated if any of the partners voluntarily withdraws or dies. The deed should mention the way how the withdrawals will take place, under which circumstances an expulsion can happen, and how a partner can be expelled. It ensures everything is conducted smoothly.
- Partnership dissolution: When the dissolution terms are included in the deed, costly litigation procedures can be avoided, and issues can be resolved smoothly. The partnership deed should state clearly how the partnership will be dissolved. It will also show how the accounts will be settled among the partners. It should also state the method by which any dispute that may arise would be resolved.
- Registration: It is not compulsory to register a partnership though it is recommended in specific cases. By registration, a partnership firm can file a suit or the partners can file lawsuits against other partners, or it can help to claim set off during dispute with a third party. The proprietorship will be deemed to be dissolved once all partners have signed the deed. From that day, the partnership will be sufficient. Otherwise, the act may also mention the date of commencement of the partnership.
For registration, the application for Partnership Firm Registration has to be submitted to the Registrar of Firms (RoF) under whose jurisdiction the firm falls. The partnership deed is submitted along with the application. The RoF will hand over the Certificate of Registration after completion of the procedure.
It is advantageous to convert proprietorship to a partnership. Partnerships are easily manageable and do not have excessive compliance, which other business structures may have. In partnerships, liabilities and responsibilities are also equally shared.
3E Accounting has been providing customized and straightforward business solutions to several companies over many years. We are eager to offer assistance for business structure conversion and will complete the process in a smooth and stress-free manner. You can speak to our customer executives, who can help you understand the entire conversion process.