Convert Proprietorship to Partnership

Are you a sole proprietor looking to expand your business? Converting to a partnership may be the next step for you. While the process may seem daunting, it can provide extended benefits such as sharing responsibilities, resources, and profits. It also comes with tax benefits and the ease of not having to start a new business from scratch. In this blog post, we will explore the steps and requirements for converting a proprietorship to a partnership in India. Let’s dive in!

I. Introduction

Definition of proprietorship and partnership firms

In India, a Proprietorship firm is a type of business entity where one individual holds complete ownership of the business. On the other hand, a Partnership firm comprises two or more individuals who agree to share profits and losses of the business. Each partner has an equal say in the decision-making process. It is necessary to draft a partnership deed that outlines the terms and conditions of the partnership. The deed must state the capital investment of each partner, the shares of profits and losses, and the distribution of assets and liabilities in case of dissolution. While registering a Partnership firm is not mandatory, the government recommends it for legal protection. The firm has a maximum of 20 partners who act as agents or principals of each other. When converting a Proprietorship firm to a Partnership firm, it is crucial to incorporate a new Partnership firm and arrange for PAN, GST, and bank accounts for the new entity. The transfer of unutilized input tax credits under GST to the new entity is allowed. [1][2]

Need for conversion from proprietorship to partnership

Converting from proprietorship to partnership is a vital step for taking your business to the next level. It can help you expand your business and bring in more people to join your venture. Partnerships give you access to a larger pool of capital, networking opportunities, and help share the workload, leading to faster growth. Additionally, partnerships are more resilient to internal conflicts and are better equipped to handle day-to-day business operations. Obtaining GST registration for partnerships is mandatory, and transferring assets, balance in cash ledger, and unutilized ITC to the partnership is an easy process. During the conversion process, transferring stock or other assets is exempted from GST, making it hassle-free. However, ensure that all pending GST returns are filed by the proprietorship before registering the partnership. Converting your proprietorship to a partnership is a crucial move for growing your business and can help you reach greater heights.

II. Applying for GST registration for partnership

Documents required for application

To convert a proprietorship firm into a partnership entity, several documents are required for application, which include Aadhar Card, Voter ID, Passport or Driving License of all partners. These documents serve as an address proof, and the address must match with the one given in the Partnership Deed. Along with that, an authorization letter in the name of any one partner must be submitted to make him/her an authorized signatory for GST registration. The document evidencing address proof for the business place(s) of the firm is also needed, such as a utility bill, property tax receipt or Fard (latest of two months). Additionally, the partnership firm must provide a copy of the certificate of registration under any other act. Once all these documents are compiled, the firm can proceed to register under GST. This process involves applying for PAN and TAN number with the Income Tax department, generating a GST number, and opening a current account of the firm. The partnership deed must include capital contribution, % of all partners, and other terms and conditions agreed mutually.

Process of obtaining GST registration for partnership

To GST registration for a partnership, the following steps need to be completed:

1. Write a partnership deed: This must include the capital contribution, percentage of all partners, and other terms and conditions mutually agreed upon.

2. Obtain PAN and TAN number: This is a mandatory requirement to apply for registration under GST.

3. Apply for registration under GST: The following documents are required: Aadhar Card/Voter ID/Passport/Driving Licence of all partners on which address is correct and matches with address given in partnership deed, authorisation letter in the name of any one partner to make him/her authorised signatory for GST registration, document evidencing address proof for business place(s) of the firm, copy of certificate of registration under any other act.

4. Open a current account and seed bank details: Once the GST number is generated, it is required to open a current account of the firm and complete the process of seeding such bank account details to the GST registration.

5. File GST returns and pay pending taxes: Finally, file all GST returns and pay pending taxes before applying for cancellation of GST registration for the proprietorship firm and transfer all assets and liabilities into the partnership firm as sale of business by proprietor to partnership firm.

III. Filing returns by proprietorship and partnership

Cancellation of GST registration for proprietorship

Cancellation of GST registration for proprietorship is a crucial step in the process of converting to a partnership firm. It involves submitting an application for cancellation in Form GST REG 16, citing reasons as ‘changing the company’s legal framework’. It is mandatory to file all the pending GST returns and pay all the outstanding taxes before proceeding with the cancellation of registration. The taxpayer has to provide the date from which the registration is to be canceled, ensuring that it is the same as the date on which liability to register arose for the new partnership firm. Once the cancellation is approved, the proprietorship entity ceases to be a taxable person, and all the assets and liabilities of the business can be transferred to the partnership firm without paying any GST on such transfers. It is essential to ensure that no activities take place on the proprietorship firm after the transfer of assets to the new entity.

Application for new GST registration for partnership

After incorporating the partnership firm, the next step is to obtain GST registration. The partners must apply for GST registration by submitting the necessary documents, such as Aadhaar card, utility bill, authorization letter, registration certificate, and PAN of the firm. To apply for GST registration, they must fill out Form REG-01. Once the partnership firm’s PAN is obtained, the partners must apply for GST registration immediately. However, it is mandatory to provide a partnership deed, which specifies the terms and conditions of the partnership, before applying for GST registration. Additionally, a person can be appointed as an authorized signatory by submitting an authorization letter on behalf of the partnership firm. Lastly, it’s noteworthy that the partner’s GST registration start date is the date when the liability to register arises. Therefore, make sure all GST returns are filed for the proprietorship entity until the new GST registration date is declared for the partnership firm.

Transfer of business to partnership firm

When converting a proprietorship to a partnership in India, transferring the existing business to the new partnership firm is a crucial step. Fortunately, this process is exempted from GST. According to Schedule II of the CGST Act, transferring stocks or assets to the partnership firm is considered a continuation of the same business and is not taxable. This benefit is applicable when the existing firm ceases to be a taxable person after the conversion.

To transfer the unutilized Input Tax Credit (ITC) to the partnership firm, Form GST ITC-02 has to be filed, and a certificate issued by a Chartered Accountant or Cost Accountant should be included. The partnership firm must accept the information provided by the proprietorship and credit the unutilized ITC to its electronic credit ledger. The inputs and capital goods transferred must be accounted for in the partnership firm’s books of account.

Therefore, transferring the business to the new partnership is a smooth process that isn’t subject to any GST taxes. By taking care of transfer formalities and registration requirements, you can efficiently manage your business’s transition and continue growing it with your trusted partners.

Transfer of un-utilised ITC to partnership

After the proprietorship is converted into a partnership firm, the unutilised Input Tax Credit (ITC) can be transferred to the partnership firm. The process of transferring unutilised ITC to partnership is done by filing Form GST ITC-02 by the proprietorship business. Additionally, a copy of the certificate issued by a practising Chartered Accountant or Cost Accountant certifying that the business has been transferred with a specific provision for the transfer of liabilities has to be included. Once all the information is provided, the partnership firm has to accept the information on the GST portal, and the unutilised ITC specified in Form GST ITC-02 shall be credited to its electronic credit ledger. The inputs and capital goods that are transferred shall be accounted for in the books of account by the partnership firm. It is important to duly complete filing of all returns and pay all dues before initiating the process of transferring unutilised ITC to partnership.

Transfer of balance in electronic cash ledger

When converting from a proprietorship to a partnership under GST, it is important to note that there is no provision for transferring the balance in the electronic cash ledger from one entity to another. This means that a taxpayer must file a Form RFD-01 with a refund type of “Refund on Account of Any Other Reasons” to obtain a refund of the balance in the electronic cash ledger. It is essential to complete all the regulatory requirements, including filing of pending returns and payment of all tax dues, before submitting the cancellation request of the GST registration of the proprietorship firm. Once the proprietorship firm has filed all pending returns, the unutilized input tax credit can be transferred to the partnership firm. The transfer of assets and liabilities while converting a proprietorship firm to a partnership firm is exempted under GST. The inputs and capital goods transferred must be adequately accounted for in the books of account of the partnership firm. It is important to ensure that all legal and procedural requirements are met to ensure a smooth transfer of balance in electronic cash ledger.

IV. Procedure for conversion of proprietorship to partnership

Incorporating partnership firm

Inporating a partnership firm can help take your business to the next level. It allows you to add more people to your team and expand your business more easily. A partnership firm is easy to operate and has a maximum limit of 20 partners. Each partner has equal control over the business activities and shares profits equally. When incorporating a partnership firm, the first step is to draft a partnership deed. This deed lays down the framework of the business and the relationship between the partners. It must include the details of each partner’s induction and other important information about the business, including the capital each partner will invest. Additionally, you can engage experts to provide assistance in drafting the partnership deed. It’s important to note that registering the deed isn’t mandatory but recommended. Registering it enables you to file suits between partners or on behalf of the partnership firm. With the conversion from sole proprietorship to partnership, you do not need to start a new business, as all the assets, liabilities, and rights of the proprietorship business will be passed on to the partnership firm with partners’ consent.

Obtaining PAN and GST number for partnership

To convert a proprietorship firm into a partnership firm, one of the foremost requirements is to establish a partnership firm and arrange for its PAN, GST number, and bank accounts. Partners need to execute a partnership deed that specifies the terms and conditions under which the partnership comes into force. Once the partnership deed is ready, partners can apply for obtaining the PAN with the income tax department, which is a mandatory requirement to apply for GST registration. After obtaining the partnership firm’s PAN, apply for GST registration via form REG-01 by providing the necessary documents and information like PAN card of the firm and all partners, partnership deed, Aadhaar card, authorized signatory letter, address proof, copy of registration under any other act if any, and utility bills. Once GST registration is obtained, open a current account for the partnership firm and seed its details to GST registration. It is essential to file all pending GST returns and pay off taxes before requesting cancellation of GST registration of the proprietorship firm in Form GST REG 16, stating the reason as a change in legal structure of the Firm.

Opening current account and seeding bank details

After obtaining the GST registration for the partnership firm, the next step is to open a current account for the firm. This is essential as all the transactions for the firm will be managed through this account. The current account is a type of bank account specifically designed for businesses and allows unlimited withdrawals and deposits. Once the account is open, it is necessary to seed the bank details to the GST registration in order to ensure smooth transactions. Seeding bank details with GST registration helps in the easy processing of refunds, faster payment of taxes, and efficient utilization of input tax credits. It is important to note that one needs to have the proper documentation for opening a current account, such as partnership deed, PAN card, address proof, and identity proofs of the partners. Keeping an active and updated current account is a must for the smooth functioning of a partnership firm and helps in maintaining financial transparency.

Filing GST returns and paying pending taxes

Once proprietorship entity has applied for new GST registration for the partnership firm, it is essential to file all GST returns and pay pending taxes. The taxpayer needs to ensure that the dates for cancellation of GST registration of proprietorship and liability to register for partnership are the same. This effective date will be the date of new GST registration for the partnership firm. The partnership firm has to start filing GST returns from this date. It is important to note that the transfer of stock or other assets during the conversion of an existing proprietorship entity into a partnership firm is exempted under GST. This is because such goods/assets are transferred for the continuance of the same business. The transfer of a going concern is also exempted under GST laws. The transfer of unutilized Input Tax Credits (ITC) to the partnership firm can be done by filing Form GST ITC-02. The inputs and capital goods thus transferred should be accounted for in the books of account of the partnership firm.

Cancellation of GST number for proprietorship

Once all tax dues have been paid and the transfer of assets and liabilities has been completed, the proprietorship entity can apply for cancellation of its GST registration. It is important to note that the cancellation request should specify the date from which the registration is to be cancelled. This date should be the same as the date on which liability to register arises for the new partnership firm. This will be the effective date for GST registration of the partnership. Until this date, the proprietorship entity must continue to file all GST returns. Once the effective date arrives, the partnership firm must start filing GST returns. The process for cancelling the GST number for the proprietorship firm involves filing Form GST REG-16, citing the change in legal structure of the firm as the reason. The form will also require the GST number of the new partnership firm. With these steps completed, the proprietorship firm can be dissolved, and the partnership firm can begin operating with its own GST registration number.

V. Transfer of assets and liabilities

Exemptions for transfer of assets and liabilities under GST laws

Under GST laws, the transfer of assets and liabilities during the conversion of a proprietorship firm into a partnership firm is exempted. This exemption is applicable when the existing firm ceases to be a taxable person after the conversion. Such transfer of goods/assets is done for the continuance of the same business. The transfer of a going concern is also exempted under the CGST (Rate) notification 1/2017. This means that the transfer of a going concern will not be taxable under GST. After completing the filing of pending returns, the unutilized Input Tax Credit (ITC) can be transferred to the partnership firm by filing GST Form ITC-02. The inputs and capital goods transferred must be properly accounted for in the books of the partnership firm. However, there is no provision for transfer of the balance in electronic cash ledger from one entity to another entity under GST laws. In case of refund of balance in electronic cash ledger, the taxpayer can file Form GST RFD-01 under the refund type of “Refund on Account of Any Other Reasons”.