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.
Why Partnership and what is the procedure of conversion?
Why 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.
Procedure For Conversion Of Proprietorship Into A Partnership
Partnership Deed
Drafting of the Partnership Deed would be the first step in the 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.
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.