There comes a time when the sole proprietor would want to share the burden, risk, and reward of the venture with a business associate. One of the nicest things that can happen to a sole proprietorship is its conversion into a partnership, and it is, however, an action that has to be artfully planned and executed. Conversion of a proprietorship into a partnership is quite an elaborate and technical process. In this paper, we shall take you through steps and considerations you may want to look into when converting your sole proprietorship into a partnership.
Step 1: Consider Partnership
The following are some of the things you should consider before you convert your sole proprietorship:
- Define purpose, mission, and form of partnership
- Identify a compatible business partner
- Determine ownership percentage among partners and the definition of each partner’s role
- Make out the partnership
Step 2: Partnership Registration
To convert the sole proprietorship to a partnership, file and register the new business entity:
- If you will be using a company name other than the last names of the owners for the partnership, file a fictitious business name (DBA) statement
- Obtain all other necessary licenses and permits
- Have the business registered with the federal and state governments for tax purposes, including applying for an Employer Identification Number.
- Open a business bank account in the partnership’s name.
Step 3: Business Records
The records of business should be changed too with respect to the business forms:
- Changing license and permit of the business.
- Notifying the insurance company.
- Accounting and bookkeeping updating.
- Notifications to customers and vendors for such change.
Step 4: Transfer of Assets and Liabilities
The assets and liabilities of the sole proprietorship shall be transferred to the partnership:
- Assignment of contracts, agreements, and intellectual property
- Transfer business assets, including equipment and property
- Taking over business liabilities include debts and loans.
Step 5: Write Agreements
Write all necessary agreements for partnership
- Partnership Agreement: Who the owners are; what are their roles and responsibilities?
- Buy-Sell Agreement: How one partner buys out another partner.
- Non-Disclosure Agreement: This is to protect confidential and sensitive information in the business.
Step 6: Notify the IRS
To notify IRS that the structure of business has changed:
- File Form 1065, Partnership Return of Income.
- File Schedule K-1, Partner’s Share of Income, Deductions, Credits, etc.
- Change the amended tax liabilities and pay
- Conclusion
Conversion of a Sole Proprietorship into Partnership:
The conversion should be well-planned as well as applied by strictly adhering to the different legal as well as taxation requirements. These steps would facilitate you with a successfully converted business, and you can enjoy the facilities provided by the partnership form of organization. That will be highly recommendable where one may obtain advice from a legal or business expert; then it will make either the conversion or registration process easy and sort out the needs and concerns. Q: If you want to register your sole proprietorship or turn it into a partnership, what should you think about how it is registered, and what does such registration require?
Moreover, you require any kind of guidance related to Company formation. Please feel free to contact us at 8881-069-069.
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