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Proprietorship into Partnership[f]

PARTNERSHIP

A partnership is a type of business where two or more people establish and run a business together. There are three main types of partnerships: general partnerships (GP), limited partnerships (LP), and limited liability partnerships (LLP).

One of the biggest benefits of this business arrangement is that it is a flow-through entity. Therefore, any income generated in a partnership is treated as the personal income of the partners. This means it is only taxed once. In contrast, owners of a corporation face double-taxation. This is because the corporation’s income is taxed once, and then the owner’s personal income is taxed again.

Partnerships are one of many business types. Other business types include sole proprietorshipslimited liability companies (LLC), and corporations.

Shared Liabilities

The term Partnership, itself describes two or more individuals coming together for fulfilling some common objective. The partnerships referred here are of pure business nature. Therefore, the partners share the responsibility to work and manage the business. Partners share rights and liabilities in the business, dividing the burden of responsibilities among them. Not just money but resources, knowledge and judgment are also pooled in for improving the business.

Partner net worth is Increased

There is a distribution of Post-Tax profits among the partners with no additional tax liability. No Capital Gains tax shall be charged on transfer of property from Proprietorship to Partnership firm. The reduction of tax liabilities indirectly increases the amount of money earned which results in an increase of net worth of all the partners.

1. The business has no independent legal status

2. Unlimited liability

3. Perceived lack of prestige

4. Limited access to capital

5.  Potential for differences and conflict

6.   Slower, more difficult decision making

7.   Profits must be shared

As the legal forms of both type of entities are different, so, PAN number, GST Number, Bank Accounts of both entities will always be different from each other. PAN of individual person owing proprietorship firm serves itself as PAN of such firm. However, for partnership, PAN is different from the PAN of partners.

So to convert the proprietorship firm into a Partnership firm, firstly, it is required to incorporate a partnership firm and then arrange for PAN, GST number, Bank accounts of the Partnership firm.

All about Partnership

PARTNERSHIP

A partnership is a type of business where two or more people establish and run a business together. There are three main types of partnerships: general partnerships (GP), limited partnerships (LP), and limited liability partnerships (LLP).

One of the biggest benefits of this business arrangement is that it is a flow-through entity. Therefore, any income generated in a partnership is treated as the personal income of the partners. This means it is only taxed once. In contrast, owners of a corporation face double-taxation. This is because the corporation’s income is taxed once, and then the owner’s personal income is taxed again.

Types of partners

There are two different types of partners that exist in these business arrangements: general partners and limited partners.

 

General Partner: a partner that holds management responsibility. They are responsible for the operations of the business. Furthermore, general partners face unlimited liability – they are fully liable for the debts of the business. This means that their personal assets can be seized to settle debt obligations or lawsuits.

Limited Partner: a partner with a financial stake in the business but no management responsibilities. Therefore, limited partners cannot be held personally liable for the debts of the business, as they do not actively manage it. The most a limited partner can lose is their investment in the business. Essentially, limited partners are most like shareholders of a corporation.

Disadvantages of a business partnership

While there are lots of benefits of a partnership business, this model also carries a number of important disadvantages.

1The business has no independent legal status

A business partnership has no independent legal existence distinct from the partners. By default, unless a partnership agreement with alternative provisions is put in place, it will be dissolved upon the resignation or death of one of the partners. This possibility can cause insecurity and instability, divert attention from developing the business and will often not be the preferred outcome of the remaining partners.

Even if a partnership agreement is in place, the remaining partners may not be in a position to purchase the outgoing partner’s share of the business. In that case, the business will likely still need to be dissolved.

2Unlimited liability

Again because the business does not have a separate legal personality, the partners are personally liable for debts and losses incurred. So if the business runs into trouble your personal assets may be at risk of being seized by creditors, which would generally not be the case if the business was a limited company.

The partners are jointly and severally liable. As one partner can bind the partnership, you can effectively find yourself paying for the actions of the other partners. If your partners are unable to settle debts, you’ll be responsible for doing so. In an extreme example where you only own 10% of the partnership, if your partners have no assets you might end up having to settle 100% of the debts of the partnership and need to sell your possessions in order to do so.

Perceived lack of prestige

Like a sole trader, the partnership business model often appears to lack the sense of prestige more associated with a limited company. Especially given their lack of independent existence aside from the partners themselves, partnerships can appear to be temporary enterprises, although many partnerships are in fact very long-lasting.

This appearance of impermanence, and the fact that the partnership’s financials cannot be independently checked at Companies House, can appear to present more risk. Because of this, some clients (more so in certain industries) will prefer to deal with a limited company and even refuse to transact with a partnership business.

Basic

INR 1,500/-

One Time Fee

  • GST Registration
  • MSME Registration
  • Bank A/c.

Service Provide Within 7 Days

Standard

INR 11,999/-

One Time Fee

  • GST Registration
  • Shop & Establishment Registration
  • MSME Registration
  • Trade Mark Registration
  • Logo Design
  • Opening Bank A/c.

Service Provide Within 15 Days

Premium

INR 11,999/-

Yearly Fee

  • Yearly GST Compliances
  • Income Tax Return

Services Provided Before the Due Date

Frequently Asked Questions

It is not mandatory but highly recommended. If it is not registered, the firm cannot file a suit against any partner or third party. The partners also cannot sue the partnership firm for his/her claim. However, third parties can sue the firm to enforce their dues or claims. Due to non-registration, the rights of parties are not affected. Also, the partnership can be registered at any time after the formation to remove said effects.

In a proprietorship firm, there is no legal distinction between you and the business; leaving you personally liable for any debts or obligations the business may incur. Also, there are no limitations and no protection for your personal assets. In case of partnership firm, it is divided amongst the partners.

The application for Partnership Firm Registration in India is submitted with the Registrar of Firms (ROF) under whose jurisdiction the Place of Business of Partnership Firm falls. The application of Registration is made in required form along with submitting the Partnership Deed. At the end of the registration procedure, the Certificate of Registration is issued by respective ROF. The process and time of registration may differ for each ROF.

A partner can nominate a successor to take his/her place in the event of death or retirement of the partner. The mode of introducing a new partner or successor is based on provisions in the partnership deed. A new partnership deed is required once the new partner is admitted into the firm.

In case of conversion, existing firm should cease to be a taxable person. There should not be any activity in converted proprietorship after transfer of stock into a new entity. In case, there are unutilized input tax credits lying at the time of such conversion, these credits are allowed to transfer into a new entity.

For confirming the validity of a partnership deed, the partners must pay stamp duty required as per the capital of the firm. The amount of stamp duty payable depends on the amount of capital contribution by partners. The rate of duty is prescribed under the State Stamp Act that differs for every State. Amount of ₹ 500 is included in our package.

The partnership firm shall also have to apply for registration under other statutes such as GST, Shop and Establishments Act and the likes; depending on the nature of the business. In case the sole proprietorship firm owns a trademark, the change regarding the inclusion of partner needs to be added in the trademark registry