Why Sole Proprietorship Is A Common And A Popular Business Model?

A Sole Proprietorship Firm can file an application under Section 7 and Section 9 of the Insolvency and Bankruptcy Code (IBC) according to the NCLAT's order of 25 February 2020. In the same order, the NCLAT said that Section 2 of the IBC applies to Sole Proprietorship Firms. Further, the definition of 'person' in Section 3(23) of IBC also applies to a Sole Proprietorship Firm.

Why Prefer Sole Proprietorship?

1. It’s easy: Setting up a sole proprietorship concern is the most accessible 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 save 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 include 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. 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, you can work together while keeping your assets and finances separate.
4. One Man Army: A sole proprietorship style best suits professionals and artists who own businesses. 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 individual’s identity may be vulnerable to being shadowed under an enormous business banner.

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 you file returns in 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 A Sole Proprietorship

Legal Documents Required:

Unlike a company or a partnership, no law in the country governs a sole proprietorship business. However, some different provisions and regulations 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 your state’s Labour department. It is mandatory for those who operate from an ‘establishment’, including your home. This license is proof of your business and may often be required while filing other forms/tenders.
3. If you’re dealing with the 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, may require you to have a valid GSTN. It has also become mandatory to possess a GSTN to be 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 firm’s liabilities and assets, virtually all of your property, including assets, jewellery and house, may be vulnerable in case of outstanding debt. So be very careful when you take on an additional loan that may be highly risky.
2. Sole proprietors who want a broader business base often need more diverse ownership. You may only possess the technical skills in your field, so anyone you hire on a salary may contribute less than someone in partnership with you may have. Also, expanding to a different geographical base may be particularly challenging as you may need help managing multiple business locations.

Conclusion 

However, if you plan carefully, network with the right stakeholders (suppliers, creditors, customers), and understand your strengths and weaknesses, the inherent disadvantages of this type of business can be managed.

Also Read,

• How to Operate a Sole Proprietorship in India?
• All You Need To Know About Sole Proprietorship