Why Sole Proprietorship is a Common and a Popular Business Model?

Last Updated at: Dec 02, 2020
In an order dated 25th February, 2020, the NCLAT reaffirmed that a Sole Proprietorship Firm is eligible to file Application Under Section 7 and Section 9 of Insolvency and Bankruptcy Code(IBC).  In the same order, the NCLAT said that Section 2 of the IBC is applicable for  Sole Proprietorship Firm . Further, the definition of “person” in Section 3(23) of IBC also applies to a Sole Proprietorship Firm. 


In Character, in manner, in style, in all things, the supreme excellence is simplicity

This quote by Henry Wadsworth Longfellow fits perfectly when we think about the ease, the accessibility and simplicity of a sole proprietorship business structure. If you’re someone who’s been thinking of a business idea for long, a sole proprietorship style of business may be the easiest way to test your idea out without putting too much on stake.

Why prefer sole proprietorship?

    1. It’s easy: Setting up a sole proprietorship concern is the easiest form of a business structure. All you need to possess is a bank account, in the name of your business. This is important as it will help you keep your personal finances separate from business funds and help you keep a tab on earnings and outflow.
    2. Saves you legal costs and time: While a company and a partnership concern are loaded with legal formalities which included annual compliances, filing documents with the Registrar and maintaining accounts, a sole proprietorship owner is spared from all of these hassles.
    3. When you want family and friends involved: A sole proprietorship is also ideally suited when you want a family member on board, and the two of you may set up single sole proprietorship businesses that choose to work together. The advantage that this offers is two separate business structures, reducing the possibilities of friction that often lead to an ugly dissolution of partnership firms. Also, this way you may be able to work together while still keeping your assets and finances separate.
    4. One Man Army: A sole proprietorship style of business is best suited to professionals and artists who are their own business. They work hard for themselves and create value and goodwill associated with their personality. In such a scenario, it’s imprudent to establish a firm/company where the identity of the individual may be vulnerable to being shadowed under a larger banner of the business.

You take it all: While you may have a separate bank account for the business, the tax liability and its onus is on you. This means that you file returns on your own name, and take all the remaining surplus home. Through this structure, the problem of double taxation associated with a partnership is avoided, as partners have to pay tax again on their take-home salary after the firm’s tax obligations are settled.

Here you go for the benefits of sole proprietorship?
Benefits of a Sole Proprietorship 2

register your sole proprietorship

Legal documents required:

Unlike a company or a partnership, there is no law in the country that governs a sole proprietorship business. However, there are different provisions and regulations that prescribe the formalities that need to be finished before you can start your business.

  1. Bank account
  2. Shops and Establishments Registration: This simple license may be obtained from the Labour department of your state. It is mandatory for those who operate from an ‘establishment’ which includes even your home. This license basically acts as a proof of your business and may often be required while filing other forms/tenders.
  3. If you’re dealing with import or export of goods, you may need an IEC number which stands for an Importer Exporter Code and is issued by the DGFT.
  4. Registrations and licenses peculiar to your industry or business such as an FSSAI number, Micro or MSME registration (for availing certain benefits promised by state/central government)
  5. Utility bills such as water/electricity issued in your name
  6. GST Registration, if you come under the required threshold or supply to other businesses which may require you to have a valid GSTN. It has also become mandatory now to possess a GSTN for being enlisted on any e-commerce platform as a seller.

Things you need to be careful about:

  1. Since there is no ring fencing of the liabilities of the firm and your personal assets, virtually all of your property, including assets, jewellery and house may be vulnerable in case of an outstanding debt. So be very careful when you take on additional loan that may be highly risky.
  2. Sole proprietors that want to have a broader business base often struggle due to lack of a diverse ownership. You may only possess the technical skills in your field, so anyone you hire on a salary may not contribute as much as someone in partnership with you may have. Also, expanding to a different geographical base may be particularly challenging as you may find it difficult to manage multiple business locations

However, with prudent financial planning, networking with the right stakeholders (suppliers, creditors, customers) and knowing your strengths and weaknesses, the inherent disadvantages of this form of business can be managed intelligently.

To know more about Sole Proprietorship: Click here

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