A sole proprietorship is taxed as an extension of the owner, and as a business expands, it may be legally reorganised to become a partnership or corporation. India has a large number of unregistered companies, many of which are run as sole proprietorship firms. Let's get into more in detail.
A sole proprietorship is one of the simplest and most straightforward types of business entity to set up and maintain in India. One can be set up and operational in as little as 15 days, which makes it very well-liked by the unorganised sector, tiny traders, and merchants. Only the PAN number for the proprietor, a few licenses, and capital are needed to start a proprietorship; no formal or strict sole proprietorship registration is necessary. Other registrations, such as a sales tax registration or a service tax registration, recognise proprietorships. But as you might expect from a company that’s so simple to set up, it has serious flaws: the owner’s liability is unbounded, and the business does not exist continuously.
A sole proprietorship, also known as a sole trader or a proprietorship, is an unincorporated business with one owner who pays personal income tax on the business’s profits. Many sole proprietors conduct business under their own names because it is unnecessary to register a distinct business or trade name.
What You Must Understand?
A sole proprietorship is taxed as an extension of the owner. As a business expands, it may be legally reorganised to become a partnership or corporation. When deciding whether to operate your company as a sole proprietorship, bear the following facts in mind:
- Even though an owner may use a unique business name, the owner is solely responsible for all losses and debts and receives all profits. The IRS permits the spouse of a sole proprietor to work in the business without being regarded as a partner, which is another significant exception to the sole proprietorship rule. Including this requirement makes it possible to maintain a second employee while maintaining your sole proprietorship status.
- A sole proprietorship is easy to register. A business name must be chosen, and a “doing business as” (DBA) form must be filed with the local tax authorities. Since there is no separation between the business and the owner, a sole proprietorship is not regarded as a “legal entity.” Both the company and the owner are viewed as being identical.
- As a sole proprietor, the owner is free to hire staff members and independent contractors and delegate decision-making authority to them.
- Irrespective of the aforementioned point, the proprietor of a sole proprietorship is entirely liable for any debts and/or losses incurred as a result of business operations. The owner, in turn, is entitled to all the earnings from running the business.
- Some other significant advantage of a sole proprietorship is that the owner has complete control over how the brand is run during the business formation and after that. This means the owner is free from having to worry about what the business’s partners, board of directors, or anyone else might have in mind. The business’s maintenance and operations are entirely the results of the owner’s rights.
No government registrations are needed to start a sole proprietorship business in India. Nor are you required to go to an online registration portal and then fill up a form, or are you required to submit any documents? Nevertheless, you must open a current account with any bank in the business’s name.
A current account, in turn, necessitates that one has a specified location from which they are doing the business. The bank asks you to submit at least two documents as proof of the business location in government registrations, like the shop act license, service tax, CST/VAT, etc.In this article, let us look at the process that goes into the formation of a sole proprietorship in India.
Sole Proprietorship Registration
A sole proprietorship in India is considered an extension of the proprietor. Hence there is no formal procedure to register it. There is only a requirement of opening a bank account in the name of the proprietorship firm or obtaining the licenses required for conducting the business. To open a bank account for a sole proprietorship, the RBI’s KYC norms dictate that any of the two of the following document must be submitted to the bank:
A certificate/license issued by Municipal authorities under the Shop & Establishment Act,The license issued by Registering authority like the Certificate of Practice issued by the Institute of Chartered Accountants of India, the Institute of Cost Accountants of India, Institute of Company Secretaries of India, the Indian Medical Council, Food and Drug Control Authorities,The registration/licensing document issued in the name of the proprietary concern by the Central Government or the State Government Authority/ Department, etc.,The banks may also accept the IEC (Importer Exporter Code) issued to the proprietary concern by the office of the DGFT as an identity document for opening the bank account etc.,Complete Income Tax return: https://www.incometax.gov.in/iec/foportal/ (not just the acknowledgment) in the name of the sole proprietor where the firm’s income is reflected, duly authenticated, and acknowledged by the Income Tax Authorities,The utility bills such as the electricity, water, and landline telephone bills in the name of the proprietary concern, GST Registration/Certificate.
Features of a Sole Proprietorship
There is no separate law or statute to govern a sole proprietorship. Therefore, not many rules and regulations are applicable. The biggest plus point is that it does not require incorporation or registration. All you need to have for a sole proprietorship running is a license. Just like incorporation, even in the case of closure or termination of the business, no legal technicalities are involved. Therefore, a sole proprietorship business is sure to be hassle-free.
Advantages & Disadvantages of a Proprietorship
Minimal Compliance
Sole Proprietorships are only recognised via their government and tax registrations, so the extent of their compliance is limited to the annual filing of their service, professional, or sales taxes.
Easy to Start
Proprietorship needs only minimal registration. Hence, it is one of the easiest forms of business entity to start. A sole proprietorship could take 15 days to start if all you need is a Service Tax Registration, but this would stretch to even 45 days if you need a Sales Tax Registration. Either way, the process is uncomplicated. PAN card and identity and address proofs are enough to get them done.
Relatively Inexpensive
A Sole Proprietorship is inexpensive compared to a Person Company (OPC) and, thanks to the minimal compliance requirements, is inexpensive even over the long term. You would not need to hire an auditor, for example. This is why small merchants and traders opt for it despite its severe shortcoming (unlimited liability).
Business Name
Since the name of a proprietorship is not registered, a proprietorship can choose to have any name until it does not infringe on a registered trademark. Conversely, since the name is not registered, other people can use the same business name unless trademark registration is obtained.
Lower Taxes
A proprietorship with less than Rs. 3 lakh of income isn’t required to pay any income tax, as the proprietorships are taxed as the individual owing the business. Nevertheless, unlike in a company or LLP, a proprietorship cannot have some tax deductions, which may increase the tax liability.
Single Promoter
A proprietorship is the only type of business entity that can be registered and operated by one person. All one needs to register a one person company as a nominee Director, while for all other types of entities like a company, LLP, or a partnership firm, two or more promoters are required.
Easy to Close
The proprietor and the proprietorship are the same for all legal requirements and purposes. Hence, no formality is needed for winding up or closing a proprietorship. In most cases, to close a proprietorship, there is only a requirement to cancel the tax registrations obtained in the proprietor’s name.
Why is Sole Proprietorship Popular?
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 finances separate from business funds and help you keep a tab on earnings and outflow. While a company and a partnership concern are loaded with legal formalities, including annual compliances, filing documents with the Registrar, and maintaining accounts, a sole proprietorship owner is spared from these hassles.
How to Pay for a Sole Proprietorship
There are several options available to the sole proprietor for securing business financing. This includes loans from the SBA, a government agency with a vested interest in the success of small businesses. Although the SBA does not originate these loans, it does provide insurance for loans made to small businesses by unaffiliated lending organisations. Government grants and stipends are just a couple of the alternative financing options that the SBA can help with. But in these situations, sole proprietors must be aware that several requirements must be satisfied, including employee diversity, business size, and minimum income requirements. Grants are also awarded by local government organisations and economic development organisations based on a company’s capacity to boost the regional economy in which it operates.
Conclusion
If you’re considering starting a sole proprietorship, it’s important to understand that its benefits and drawbacks are similar to those of any other type of business. Carefully consider the business’s requirements, risks, and goals before deciding which business entity is best for you. For expert assistance with company registration and other paperwork, connect with Vakilsearch, India’s number one legal service provider. Their legal experts will help you handle this process easily and effectively.
