anand das (service) 02 June 2011

Proprietor Vs Proprietary firm

What are the legal differences between a proprietor and his proprietory firm on following points-

1. Legal status (Whether both are treated separate or same as legal entity)

2. whether proprietory firm can be sued or proprietor is to be sued ?

* Whether proprietor and his firm have to have separate PAN cards?

4. Whether proprietor and his firm have to file separate IT returns returns ?

5. What happens if proprietory firm which has assets and liabilities is closed ?. Does it automatically transfer assets and liabilities of proprietory firm to the individual i.e. proprietor ?

6. What happens if proprietory firm's bank account is closed ? does money in the account becomes proprietor's?

pls guide.

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4 Replies

sanjay kumar (BE/ LLM in Corporate Laws) 02 June 2011

A firm is different from a company that the company is a separate "legal person" than its promoters/owners/ shareholders. This status is not available to a Firm.

The proprietor and the propritory firm are one and the same thing in the eyes of the law,IMHO.

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prabhakar singh (advocate) 02 June 2011

1)Only proprietor is a judicial person his firm is not. so is also true for a partnership.In either of these 2cases,name of a firm is notional concept for accounting purposes alone but in law they are 1 and not 2.

2)If a properietory firm is to be sued,it can be sued only through its proprietor.

3)No!Pan awarded to proprietor shall alone be used for his firm also.

4)No!

5)For legal purposes all assets and liabilities belongs to proprietor.

6) yeah!

anand das (service) 03 June 2011

Dear Sir,

Thanks for such a precise answer. I got the point. The query i have asked has some background. There is a case wherein - an entrepreneur starts a business through his proprietary firm. As he grows in business, he feels a need to go for a pvt ltd company. So the point was -how to go from proprietary firm to a pvt ltd company.

1. First option which was informed on this forum itself was to convert a proprietary firm to a pvt ltd company. This could be done by incorporating a new pvt ltd company and takeover of the business of the proprietary firm by the newly formed pvt ltd company by a sale or takeover or business purchase agreement. The help could be taken of Section 47(xiv) of IT act for exemption from capital gain tax. I am producing sec 47 (xiv) of IT act at the bottom. However in this option some opined that though by going with this method one can get away with capital gain tax, one can not avoid stamp duty on takeover agreement and some opined that this takeover agreement could be done on Rs 100/- stamp paper.

2. Second option :- Conversion of a Proprietorship Business into Private/Public Company –

1. While filing Form 1A, the latest balance sheet with other documents is to be attached. An affidavit on stamp paper from the prop. that the firm will shut down after this incorporation. 2. The first clause of the Moa will indicate the takeover of firm by the company. 3. File F-1A. 4. Get Name approval. 5. File F-1, 18, 32 6. Obtain Certificate of Incorporation. 7. Hold a Board meeting for transacting businesses required to be transacted in 1st Board Meeting in addition to take over the business of Proprietorship firm and proceed to allot shares.

3. Third option:- form a partnership firm first from proprietorship and then taking recourse of part IX of Companies act convert partnership firm to a pvt ltd company.

However, in my view, why a proprietary firm could not be closed by relinquishing all the licenses like service tax, trade license, shop license and by closing bank account and invest the money in a new pvt ltd company.

What is your opinion sir? Pls guide.

prabhakar singh (advocate) 03 June 2011

"However, in my view, why a proprietary firm could not be closed by relinquishing all the licenses like service tax, trade license, shop license and by closing bank account and invest the money in a new pvt ltd company.

What is your opinion sir? Pls guide."