How To Change Your Company’s Legal Status From Proprietorship To Partnership

A proprietorship is the single ownership of a business that can be governed by a single individual or by a group of owners. Such a structure is suitable for small businesses and startups where the finances and the functioning of an organization can be easily managed. However, for an expanding company or to share the ownership rights with other business partners, you need to change the proprietorship status to a partnership one. Let’s look at the steps and procedures you need to follow for such a transfer.

Discuss with the Proposed Partner

Before carrying out any legal proceedings, it is crucial to discuss the terms of the collaboration with the proposed partner. There are different forms of partnership to choose from. Review and select the right kind of partnership for the company. Other details that must be considered are the ownership and profit percentage splits, types and distribution of responsibilities, handling of investments, taxes, risks and debts, and additional annual information regarding the finances. Special attention must be given to conditions in case of a dissolution of the partnership or the business.

Declare a Transfer Draft

The next step after establishing common ground on the partnership specifications is to declare a transfer draft. It refers to the details of the proprietorship business and states that it is ready to transfer to a partnership firm. The essentials this deed must have are:

  • Basic information about the company like the name of the owner/s, the official business name, the type of the business and the date when the business was established.
  • Registration numbers like the GST, VAT, and TIN, details of existing licenses and their permits, and the recorded bank account numbers.
  • Existing investment details of the company and new terms regarding the capital investments by the new partners, the ratio of their profit and loss shares, and specifically the conditions concerning the retirement of either one of the partners.

Draft a Partnership Deed

A partnership agreement must be drafted to officiate the transfer. It must specify the following details:

  • Names and personal details of the new partners
  • New name and address of the business, the category of the business
  • Type of partnership opted for with its terms like the tenure and legal rights
  • Financial information like capital contributions by the partners, profit-loss share ratios, ownership assets ratios, and banking and accounting details.
  • Decision making and dispute resolution power, procedures for changing the profit-loss ratios, admitting new partners or retirement, and other confidentiality considerations.

Finish the Necessary Registrations

Registration of a business, though not mandatory, is highly recommended. It assigns legal powers to the partners to file suit against a third party or other partners in case of commercial crime or fraud. The registration laws and rules vary according to the province your business is set up in. Free consultation by lawyers is available for advice on such permits, licenses, and specific registration laws.

This completes the entire process for converting the business into a partnership firm. Take legal opinions for a smooth transition. You can contact Prowse Chowne for a free consultation with one of our lawyers.