A sole proprietorship business includes an unregistered entity that is owned, operated and managed by one person. That individual proprietor keeps the complete authority and responsibility regarding the business. Sole proprietorship business is one of the most widespread types of business in India.
The requirement and responsibility for managing the business are involved with the proprietor of the business. Therefore proprietorship is not a dissimilar unit itself as compared to business and its proprietor is associated together. In this kind of Business, the individual operating will only be the director and shareholder himself.
The Partnership can be classified as the individual who is involved into a partnership to run the business with the same goal are independently known as partners and together as a Partnership Firm under which they run their business.
A Partnership firm is not a distinct legal entity from its member. It cannot hold any property, appoint any staff or charge anyone or cannot be charged by an individual in its name.
The Partnership Act is managed by the Indian Partnership Act, 1932. According to Section 4 of the Indian Partnership Act, definition of Partnership Firm can be as follows :
"Partnership is known as the relationship between two or more individuals who are agreed to share the profits of the business run by all or any of them acting for all."
Since the legal forms of both kinds of entities are different, so, GST Number, PAN number, Bank Accounts of both units will be different from each other. PAN of individual possessing proprietorship firm works itself as PAN of the business. Still, for partnership business, PAN includes difference from the PAN of partners.
So in order to convert the proprietorship firm into a Partnership firm, it is necessary to incorporate a partnership firm and then arrange for GST number, PAN and Bank accounts of the Partnership firm.
Preparation of Partnership Deed - The first step to convert any sole proprietorship into a partnership starts with making the partnership deed for your firm. The partnership deed must hold complete details of all the partners, the profit and loss sharing ratio and the name under which the partnership firm shall be carried on.
Declaration of Transfer - The deed includes a bit of difference from regular partnership deed since it will incorporate a variety of information about the proprietorship business and will also include a declaration that the proprietorship business is transferred to the partnership firm.
Note - The information that will be added in the deed should contain the date of creation of the sole proprietorship business, type of business, name of the proprietor of the business which is operated or any other detail like Bank Account Details and GST registration number.
Date of Starting - The deed should include the date when the partnership firm will start and also the details of all the partners of the business.
It should also mention about the changes that will be effective due to the introduction of a new partner in the business. If there is a change in the registered address of the firm then that should also be updated.
Details of Investment - Deed should consist of the capital investment by each partner, and the profit and loss sharing ratio must include detailed information about the process to be followed in the case of retirement of any partner.
Firstly, it is important to make an agreement called "Partnership Deed" describing all the terms and conditions depending on which such partnership comes into reality. Partnership deed should include the following contents :
Name of Partners
Address of Partners
Name of Partnership Firm
Address of Partnership Firm
Objects of the firm
Capital Contribution ration of all partners
Profit ratio of all partners
Other associated terms and conditions that are mutually agreed.
Afterwards, it is suggested to apply for PAN and TAN number with Income Tax department as PAN number is a compulsory requisite for applying for registration under GST.
As soon as PAN of partnership firm is obtained, it is recommended to apply for registration under GST. Followings are the set of documents needed for application under GST :
PAN card of all partners
PAN card of Firm
Voter ID/Aadhar Card/ Passport/Driving Licence of all partners on which accurate address is given and goes with address provided in Partnership Deed.
Authorisation Letter in the name of any 1 partner to create him/her authorised signatory for GST registration
Authorisation Letter in the name of any 1 partner in order to make him/her authorised signatory for GST registration
Photo of all Partners
Document as address proof regarding business place(s) of firm
Last 2 months' utility bill like property tax receipt, electricity bill, telephone bill of the business place
Copy of certificate of registration according to any other act
Once compiling of aforementioned documents is done, you need to get registration number under GST for this Partnership firm.
Once GST number generated successfully, it is compulsory to open a current account of the firm. Then you need to complete the procedure to seed the details of such Bank account to GST registration.
Now finally, in proprietary firm, it is recommended to file all GST returns and pay unpaid taxes.
Once all unpaid taxes are paid off, it is important to apply for deletion of GST number offering grounds as 'Change in legal Structure of firm'. Here you need to enter GST number of new Partnership firm.
Afterwards, all assets and liabilities must be transferred into partnership firm like sale of business by proprietor to partnership firm. As par GST laws, such conversion does not need to pay GST on such transfer of assets from one unit to another.
Though, it is also stated that, in case of conversion, existing firm must stop to be a taxable individual. Any activity in existing firm should not take place after transferring of all assets that includes stock into new unit.
According to Schedule-2 of CGST/SGST Act, sale of stock or other assets where such stock/other assets removed from active firm to new firm (in the case of re-structuring of business) shall not be taken as supply of goods in the course or continuance of business depending on the condition that existing firm stops to be a taxable individual after such re-structuring.
As par CGST Exemption Schedule for services in CGST Rate Notification-12/2017 has offered an entry for exemption of services by means of transferring a running concern, as a whole or a part thereof.
According to both the provisions, it is described that transfer of a going concern as a full or a part thereof shall not be taxable under GST.
Besides, if there are unused input tax credits under GST at the time of conversion of proprietorship, these credits are allowed to transfer into new unit.
1. Proprietorship firm must file in FORM GST ITC-02, with a request for transferring unused input tax credit in its electronic credit ledger to the partnership firm.
2. The proprietorship firm shall also submit a copy of a certificate issued by a practicing chartered accountant or cost accountant certifying that the merger, sale, de-merger, lease, amalgamation, or transfer of business has been completed with a particular provision to transfer the liabilities.
3. On the common portal, the Partnership firm should accept the details accepted by the proprietorship firm and upon such acceptance, the unused credit mentioned in FORM GST ITC-02 must be credited to its electronic credit ledger.
4. The inputs and capital goods so transferred should be accordingly accounted for by the partnership firm in its books of account.
It is not obligatory to register a partnership firm. However there are different advantages of a registered partnership firm hence it is suggested that a partnership firm should be registered. A suit can be filed by a registered firm against the partner or a third party or it can recover its dues.
As soon as the deed is signed by every partner on a stamp paper and has been notarized that the sole proprietorship business is being dissolved and the partnership firm comes into effect.
It is not essential for the partnership deed to be registered. It is important to register the deed at any point of time by creating an application with the Registrar of Firms who have jurisdiction where the registered office of the firm is planned to be located.
A maximum of 20 partners can be possessed by a partnership firm. If you're running a banking firm, maximum 10 partners can be there. Each partner has equal and helpful control over the actions of the business and equally shares profits, unless there is any agreement against this in the partnership agreement. No partner can transfer his interest to any other individual (except an active partner) without the agreement of other partners and without common approval of all other partners.
Limited life span is included into a partnership firm.
Lawfully, the firm must be dissolved on retirement, bankruptcy, mental illness, or death of any partner.