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How to convert a sole proprietorship firm into a partnership

Page no : 2

V (Sr. Analyst)     07 February 2011

Dear Mr. Vishal.


During such conversion of Proprietorship into a Partnership Firm, is there any stamp duty payable on the immoveable property held by the sole propritorship?


carry12 (Web Developer)     11 February 2011

Hello Friends..........

Apply for an LLC. It's easy fast, and will make sure that you are not liable. You can check out information about partnerships.



Vivek Kumar Singh (Proprietor)     17 February 2011

Partnership Firm needs to be registered at the nearest (appropriate) firm registrar authority.

Details of Partners like-Name ,Age,D.O.B.,Father's Name,Profit Sharing Ratio,Capital Sharing Ratio.And also the name of the Partnership Firm and address of Firm are required.Affidavits by all partners declaring truthfullness of information.All this is to be written in fair in stamp papers and deed has to be registered in office of firm registrar.


Adv Vivek.

pramod yadav (Assistant Company Secretary)     18 February 2011

Effect of Registration under part IX of the Companies Act 1956[the Act]

[Section 565 to 581 of the Act]


All property, movable as well as immovable, including actionable claims belonging

to or vested in the firm at the time of registration shall, on such registration, pass

to and vest in the company as incorporated under Part IX. [Section 575]

The registration of a company under Part IX shall not in any manner affect its rights

or liabilities in respect of any debt or obligation incurred or any contract entered

into, by, to, with or on behalf of the firm before registration. [Section 576]

All suits and other legal proceedings taken by or against the company or any public

officer or member thereof which were pending at the time of registration may be

continued in the same manner as if registration had not taken place. However, no

execution can be done against the property or person of any individual member of

the company on any decree or order obtained in

such suit or proceeding. If the property of the company is inadequate to satisfy the

decree or order, an order for winding up the company may be obtained. [Section


All provisions of any Indian law or other instrument constituting or regulating the

company shall apply to the registered company in the same manner as if the

company had been formed under the Companies Act, 1956 and those conditions

were required to be contained and were contained in its Memorandum and Articles

of Association. [Section 578]


As per section 45(1), profits and gains arising from the transfer of a capital asset

effected in the previous year is chargeable to tax. The term “effected” as used in

section 45(1) has a special meaning. Existence of the party (transferor) and the

Counter party (transferee) is necessary for the applicability of section 45(1).

A decision of the Bombay High Court in CIT v Texspin Engineering and

Manufacturing Co. (2003) 263 ITR 345 (Bom) has held that such conversion of firm

into company by following the route under Part-IX of the Companies Act, 1956,

does not occasion capital gains, since there is no transfer involved in such a case.

The High Court after considering the provisions of Companies Act, provisions of

income tax relating to capital gains and relying on the ratio of

Malbar Fisheries Company v CIT (1979) 120 ITR 49 (SC), CIT Vs. George Henderson & Co Ltd

(1967) 66 ITR 622 (SC), CIT Vs. Gillanders Arbuthnot & Co (1973) 87 ITR 407

(SC), held that, when a firm is registered as a company, as per the procedure

prescribed under Part IX of the Companies Act, no capital gains arise to the firm.

When a partnership firm is treated as limited company, under Part IX of the

Companies Act, the properties of the erstwhile firm vests in the limited company as

they exist. There is no dissolution of the firm. Hence section 45 (1) of the Income

Tax Act is not applicable. When shares of the Company are allotted to partners in

consideration of capital standing in their accounts in the firm, there is no transfer of

capital assets as contemplated under section 2(47)(iii) of the Income Tax Act (i.e.

compulsory acquisition, thereof under any law), as partners are getting their own

right to share Capital.

In Well Pack Packaging Vs. Dy. CIT (2003) 78 TTJ (Ahd.) 448, also the same view

was taken that, corporatisation of the firm under the part IX route did not attract

liability to Capital Gains in the hands of the firm. In Vali Pattabhiram Roa v Shri

Ramanuja Ginnning & Rice Factory (P) Ltd. (1986) 60 Comp case 568 (AP),

the Court has held that there is no transfer under general law if the constitution of

the firm is changed to that of a company by registering it under Part IX of the

Companies Act, as there shall be statutory vesting of title of all the properties of the

firm in the newly incorporated company without any need for a separate


EXEMPTION UNDER SECTION 47(xiii) of the Income Tax Act:

The Finance (No 2) Act, 1998, inserted section 47(xiii) with effect from assessment

year 1999-2000. Clause (xiii) of section 47 provides that section 45 of the Income

Tax Act would not apply to transfer of any building, machinery, plant, furniture or

intangible asset (ie capital assets) to the company where a firm is succeeded by the

company in the business carried on by it subject to certain conditions. These

conditions are:

(i) that the transfer should be of business as a going concern with all assets and


(ii) that the consideration for the transfer should be solely by issue of shares to the

extent of partners' capital in the firm,

(iii) the partners of the firm do not receive any consideration or benefit, directly or

indirectly, in any form or manner, other than by way of allotment of shares in the

company and

(iv) the interest of the partners in the paid-up capital of the company should

continue and be retained at least to a minimum extent of 50 percent for the next

five years.

Section 47(xiii) confers an exemption to encourage business reorganization and,

therefore, should be interpreted in a manner that promotes the objective to be

achieved and not frustrated. (Bajaj Tempo Ltd. v CIT, 196 ITR 188)


Step 1: Hold a meeting of the partners to transact the following:

Assent of majority of its members as are present in person or where proxies are

allowed, by proxy, at a general meeting summoned for the purpose of registering

the firm under Part IX of the Companies Act, 1956. The majority required to assent

as aforesaid shall consist of not less than ¾ of the members as are present in

person or where proxies are allowed, by proxy.

To execute a supplementary Partnership Deed to align it with the

requirements as under:

There must be atleast 7 partners in the partnership firm;

The firm may be registered with the Registrar of Firms[in some cases ROC

insists that the First should be registered with the Registrar of Firms];

There must be a fixed capital divided into units;

There must be provision of converting a firm into company;

There must be an agreement by the partners to convert the partnership to a


This can be done by a contract in writing to this effect to which the partner's

resolution for conversion can be attached as annexure.

Execute a settlement deed.

Step 2: Application for Director’s Identification Number for all the

proposed directors and Digital Signatures Certificate for atleast one

director who will sign the documents/forms digitally.

Step 3: Name approval:

Under the Part IX route, one of the major advantages is that the business can be

run under the same name as that of the firm except that in addition to the name of

\ the firm the words ‘limited’ or ‘private limited’ has to be added. However, if there

is a company already in existence, the name would not be available.

The following steps need to be taken.

An application in e-Form No. 1A needs to be filed with the Registrar of Companies

(ROC) with necessary documents related to partnership firm.

Step 4: Registration of Company:

After obtaining the approval of name, following e-Forms are required to be filed

with the Registrar of Companies within 60 days from the date of name approval:

Form No. 1 – Along with Memorandum and Articles of Association of the proposed

company and Power of Attorney signed by all the subscribers of the Memorandum

of Association authorizing one of the subscribers or any other person to act on their

behalf for the purpose of incorporation and accepting the certificate of


Form No. 18 - This is a form to be filed by one of the directors of the company

informing the ROC the registered office of the proposed company.

Form No. 32 - This is a form stating the fact of appointment of the proposed

directors on the board of directors from the date of incorporation of the proposed

company and is signed by one of the proposed directors. Consent letters from

the proposed directors are required to be attached if the proposed

company is a Public Limited Company.

Form No. 37 Along with a copy of the instrument constituting or regulating the


Form No. 39 Along with a copy of resolution passed at the general meeting

assenting to registration with limited liability and a List of equity or preference


Steps after incorporation of company under Chapter IX of the Act :

Once the new company is formed, the takeover agreement would be entered

between the Partnership Firm and the newly incorporated company and to be

adopted in the Board Meeting.

In such a situation, the entire business of the firm along with all its assets and

liabilities is transferred to the company.

The company may issue shares or other securities to the Partner of the firm.

Ankur Chaturvedi (Owner)     25 June 2012

is there any capital gain or any other tax liabilty arise due to above transcation?????????

Ankur Chaturvedi (Owner)     25 June 2012

if any WIP is showing in B/S,then transfer of such WIP is taxable??????

shama (Manager)     22 April 2013


A person X is running a profitable business under his Proprietorship.He want a person Y (Relative or Outsider) to join his business as a Partner.  During convesion, whether such transactions are liable income tax under capital gain or such transactions are exempted.  If exempted please share the Section/Rule/Notification/Cirular Or any case laws.




Subhankar Das (Partner)     13 September 2013



Right now I am working with Mahalaxmi Power Transformer company this company is a manufacturer and servicing provider of electrical. 

My one partner Mr. Vishal started this company last one year ago, he invest everything for this company, company name sales tax pan card every thing have name of Mr. Vishal, and I am looking marketing all over India, and I am given him very good business. Now Mr. Vishal and me want to make it partnership company and he is ready to agreement between us. 

Now please suggest me:

1) which way we will transfer proprietorship to partnership?

2) which point I will flow for transfer it.

3) In bank a/c have authority of Mr. Vishal and now we want authority will have to both partner.


Please if any other point I will flow please tell me.


I am waiting for your reply.



Subhankar Das



milesmaxx (Employee)     14 September 2013


I think the best method to convert sole prorietorship firm into a partnership firm are-discuss the arrangement with the other proposed owner of your business in detail.Contact your state or county business bureau office to apply for a fictitious name for a business.Draw up a partnership agreement containing all of the details that you agreed on in your initial meeting with the new partner. Apply for an employer identification number (EIN) to use in business transactions.Provide the new partner with a copy of the partnership agreement and keep a copy for yourself as well to guide your future business relationship.


Miami Beach Real Estate

Rishi (MD)     20 September 2013

hi sir

My father is the proprietor of a firm dealing with public works contract in civil works. Now I have an electrical license which will enable to take electrical engineering projects.The electrical license is on my name.Now how can I partner with my father in his proprietor firm so that he can take work on electrical projects?

joy (manager)     12 May 2014

i have entered into a development agreement and CPA with a land owner as a propwriter. if i now convert propwriter firm to partnership will i need to make new devolopment agreement and Construction Power Attorney?

anand (legal advisor)     17 May 2014

hi Joy,

No need to go for the new execution of the agreement as I deem that it must have been written in ur Partnership deed that all the liability, responsibility and the prior agreement executed by the proprietor will be honoured and adhered with its commitments.....

anand (legal advisor)     17 May 2014

Hi Rishi

You can form the partnership with the same name of the proprietorship concern and then in which you part of the share will include the electrical license too and then you may file the Form A for the registration of the Partnership firm, thus now the firm can use electrical as well as civil contracts both.....

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