Conversion of a proprietorship into a partnership
A proprietorship converts into a partnership when at least one more person agrees to share the profits, and a deed transfers the business to the firm. Company Suggestion drafts that deed and can file it with the Registrar of Firms.
How do you convert a proprietorship to a partnership?
The Indian Partnership Act, 1932 treats a partnership as the relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all.
The proprietor cannot stay the only owner. At least one other person becomes a partner. The deed is written on stamp paper under the Indian Stamp Act, 1899.
The deed states that the proprietorship business moves to the firm. It records the date the proprietorship began, the proprietor’s name, the nature of the business, the capital each partner brings, and the profit share.
Registration with the Registrar of Firms is optional. Section 69 stops an unregistered firm from suing to enforce a right arising from a contract.
Who should take a partner into a proprietorship?
Two plans fit this conversion:
- An owner who is adding a working partner and will share profits.
- Owners who accept personal liability and do not need a company or an LLP.
Partners who want liability limited to a contribution should incorporate an LLP instead of a partnership firm.
Which documents does the deed need?
The deed and the Registrar’s file use five papers.
- PAN and address proof of the proprietor and of each new partner
- Identity proof of each partner
- A statement of the proprietorship’s assets and liabilities
- Proof of the place of business
- The partnership deed on stamp paper, signed by every partner
What are the steps?
Company Suggestion completes the change in four steps.
- The proprietor and the new partner agree the capital, the profit share and the date the firm takes over.
- The deed is printed on stamp paper and signed. It records the transfer of the proprietorship business.
- If the partners choose registration, the application goes to the Registrar of Firms of that state.
- The firm applies for its own PAN and opens a bank account in the firm’s name.
Frequently asked questions
4 questions cover the rules that decide this registration.
Is registration of the new firm compulsory?
No. The Indian Partnership Act, 1932 makes registration with the Registrar of Firms optional. An unregistered firm cannot sue to enforce a right arising from a contract.
Do the partners have limited liability?
No. Each partner is personally liable for the debts of the firm. An LLP is the structure that limits liability to the agreed contribution.
What must the deed say about the old business?
The deed records the date the proprietorship started, the proprietor’s name, the business, and the date the partnership takes that business over.
Does the firm need its own PAN?
Yes. The firm applies for a PAN. That application is separate from registration with the Registrar of Firms.