Proprietorship firm means a firm/entity which is owned by a one natural person only. In this form of business entity, only one person is the owner of such business. All capital investment, risks, rewards, profits, losses, assets, liabilities pertains to such individual person only.
Whereas, in Partnership firm, there are minimum two persons who may or may not be natural persons and where the share of each person (commonly called partner) capital investment, risks, rewards, profits, losses, assets, liabilities is pre-determined through an oral or written agreement. Where, it is determined through written agreement, it is called “Partnership deed”. (Maximum number of partners in the partnership firm can be fifty only.)
Conversion of Proprietor to Partnership
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.
To incorporate such partnership firm, following are the steps required to be completed :-
Firstly, it is required to write an agreement called “Partnership Deed” which shall describe all the terms and conditions on which such partnership comes into existence. Partnership deed must have following components:-
- Name of Partners
- Address of Partners
- Name of Partnership Firm
- Address of Partnership Firm
- Objects of such firm
- Capital Contribution % of all partners
- Profit % of all partners
- Other Terms and Conditions as mutually agreed.
After this, apply for PAN and TAN number with Income Tax department because PAN number is a mandatory requirement to apply for registration under GST.
Once PAN of partnership firm received, apply for registration under GST. Followings are the set of documents required for application under GST:-
- PAN card of Firm
- Partnership Deed
- PAN card of all partners
- Aadhar Card/Voter ID/Passport/Driving Licence of all partners on which address is correct and matches with address given in Partnership Deed.
- Snap of all Partners
- 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 firm.
- Utility bill/Fard/Property Tax Receipt (latest of two months) of such business place
- Copy of certificate of registration under any other act.
Once all above documents compiled, get registration number under GST for this Partnership firm.
Once GST number successfully generated, it is required to open a current account of the firm. After this, complete the process of seeding such Bank account details to GST registration.
Final Conversion process
Now finally, in proprietary firm, file all GST Returns and pay pending taxes.
Once all tax dues paid off, apply for cancellation of GST number giving reasons as ‘Change in legal Structure of firm’. It will also ask to enter GST number of new Partnership firm.
After this, transfer all assets and liabilities into partnership firm as sale of business by proprietor to partnership firm. Under GST laws, it has been provided that in case of such conversion, there is no need to pay GST on such transfer of assets from one entity to another.
However, it is also provided that, in case of conversion, existing firm should cease to be a taxable person at all. There should not be any activity in existing firm after transfer of all assets including stock into new entity.
As per Schedule-2 of CGST/SGST Act, sale of stock or other assets where such stock/other assets moved from existing firm to new firm (in case of re-structuring of business) shall not be deemed as supply of goods in the course or furtherance of business subject to the condition that existing firm ceases to be a taxable person after such re-structuring.
CGST Exemption Schedule for services as set out in CGST Rate Notification-12/2017 has provided an entry for exemption of Services by way of transfer of a going concern, as a whole or an independent part thereof.
By combined reading of both the provisions, it is inferred that transfer of a going concern as a whole or an independent thereof shall not be taxable under GST.
Further, if there are unutilized input tax credits under GST lying at the time of such conversion of proprietorship firm, these credits are allowed to transfer into new entity.
Following is the procedure to transfer unutilized input tax credits into Partnership firm:-
(1) Proprietorship firm shall file in FORM GST ITC-02, along with a request for transfer of unutilized input tax credit lying in his 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 sale, merger, de-merger, amalgamation, lease or transfer of business has been done with a specific provision for the transfer of liabilities.
(3) The Partnership firm shall, on the common portal, accept the details so furnished by the proprietorship firm and, upon such acceptance, the un-utilized credit specified in FORM GST ITC-02 shall be credited to his electronic credit ledger.
(4) The inputs and capital goods so transferred shall be duly accounted for by the partnership firm in his books of account.
This is the whole process to be followed to convert a proprietorship firm into partnership firm.
It is further to note that above-said procedure is applicable in every case where entity of one legal form wants to convert into another legal form, e.g. partnership firm into proprietorship firm, conversion into private limited/ OPC/ public limited or vice versa.