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Sole Proprietorship - Overview

A sole proprietorship is a business type owned and operated by just one person. It is also referred to as proprietorship, solo entrepreneurship, or lone tradership.This is best suited for small business. In this business type, there is no legal distinction between the owner and the business entity. The sole trader can also employ other people to work in the sole proprietorship. All the profits generated through the sole proprietorship are subject to taxation with respect to the business. All the debt and assets of the business are the proprietor's liability. A sole proprietor can use trade names or business names other than their legal name.

Why Choose a Sole Proprietorship?

Why Choose a Sole Proprietorship?

A sole proprietorship offers an individual greater control over the business. It also has fewer laws ,compliances and regulations. It provides a greater display of organisational commitment among the employees. A sole proprietorship offers tax returns and is much simpler to establish compared to other forms of organisation.

Who Should Consider a Sole Proprietorship?

Anyone who wants to launch a firm in less time with significantly less capital may choose to register as a sole proprietorship. It can be launched in a few days and gives the owner complete control over the enterprise.

Advantages of Sole Proprietorship

Below are the main advantages of sole proprietorship registration in India:

Lesser Compliance

Very Simple to Start and Compliance

When compared to other business entities, establishing a sole proprietorship is much easier. It requires very little paperwork from the government end and can be set up easily. Post-registration compliance is also much simpler when compared to other business entities.

Better Tax Benefits

Better Tax Benefits

The income generated by the firm directly passes through a single layer of income tax. In some cases, it is also eligible for up to a 20% tax deduction. These deductions can help the owners save a lot of money.

Complete Control Over the Business

Complete Control Over the Business

Since all business handling is conducted by a sole owner, there will be no delays in taking quick Business decisions. The sole proprietor has 100% ownership of the business and will be responsible for the day's activities. There is a better rate of maintaining secrecy and decisions without needing to consult anyone. This is best suitable for small to medium enterprises, grocery stores and small traders.

Have a Direct Relationship With Customers and Clients

Have a Direct Relationship With Customers and Clients

In a sole proprietorship, the individual has better opportunities to directly interact with their clients. In case of any dissatisfaction, the clients can directly communicate with the proprietor, which improves personal relationships between the owners and the customers.

Can Easily Hire Employees

Can Easily Hire Employees

Sole proprietorships can easily hire individuals and employees to work as independent consultants,the contribution to the project or decision of a consultant is considered a recommendation as per the law.

Checklist for Sole Proprietorship Registration

Checklist for Sole Proprietorship Registration

The checklist for registering a sole proprietorship in India are:

  • Choose a perfect company name for your sole proprietorship business
  • Open a Business Bank account in the company name
  • Get Registered as an MSME
  • Procure required license including FSSAI license or shop and establishment Act license
  • GST Registration
  • Based on the business requirement you can register for ESIC or EPFO
  • Obtain all the required certification under Shop and Establishment Act of 1947 ( if applicable).
Eligibility Criteria for Sole Proprietorship Registration

Eligibility Criteria for Sole Proprietorship Registration

The eligibility criteria for sole proprietorship registration are :

  • The applicant should be above 18 years
  • The applicant should be an Indian Citizen
  • They should have the legal capacity to enter into a contract
  • The proprietor should not have any legal disabilities
  • Applicant should not be declared bankrupt or convicted for felony previously
  • The purpose of the business should be clearly outlined while starting a sole proprietorship
  • The business should be a lawful activity and should prevent selling illegal goods and services
  • The business should have a unique name that was not registered previously.
Required Documents for Sole Proprietorship Registration

Required Documents for Sole Proprietorship Firm Registration

The following documents required for Sole Proprietorship Registration:

  • Aadhaar card of the sole proprietor
  • Permanent Account Number (PAN) card or any other identity proof of the sole proprietor
  • Bank account details in the name of the proprietorship
  • Address proof of the business
  • Rental agreement of the registered office address
  • NOC from the landlord
  • Electricity bill, Utility bill or sale deed in case it is a self owned property
  • MSME registration certificate
  • Shop and establishment Act licence or Trade license (if applicable)
  • GST number or GST certificate
Note: The above mentioned necessary documents might differ from state to state. Make sure to reach out to our experts for clear inputs.

Steps to Register a Sole Proprietorship in India

There are four steps to register your Sole proprietorship in India

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Day 1-2

Document submission & verification

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Day 3-5

Application filing

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Day 5 - 7

Successful company registration

1: Register your Business Name

Consult our legal experts and choose a proper name for your sole proprietorship. Our team will assist you in registering your business name.

2. Get your PAN, GST, and MSME Registration Done

Our team will help you get your Udyam registration certificate and GST registration done in one go!

3. Filing for Sole Proprietorship Registration

Submit all the required documentation, and we will file the registration form for your sole proprietorship.

4. Open a Current Account

After business registration we will assist you in opening an instant zero-balance current account. Our team also provides GST, ITR annual filing, and trademark registration support.

Legal Status of Sole Proprietorship

According to the law, an individual owns a sole proprietorship, which is an unincorporated business structure. The legal status of a registered sole proprietorship form in India is outlined below:

It Is Not a Separate Legal Entity From the Business Owner

Unlike other business structures, a sole proprietorship doesn't have the power to function as a separate legal entity. As a result, you cannot register any assets under the name of the sole proprietorship.

It Can Sue, or Get Sued Only by the Owners Name

The owner or sole proprietor has the power to run a sole proprietorship. The company cannot be sued; only the owner can be sued in case of any litigation

No Legal Formalities to Create Sole Proprietorship

Apart from the required licensing to conduct the business, there are no complex legal formalities to register a sole proprietorship.

It Is Not a Taxable Entity

Since a sole proprietorship doesn't have any legal identity, it cannot be treated as a taxable entity. The funds generated by the sole proprietorship will be taxed under the proprietor's name.

Post-Registration Compliances on Sole Proprietorship Registration

After the registration of a sole proprietorship, the proprietor should make sure to follow the compliance requirements from time-to-time. Here is a set of post-registration compliances for sole proprietorships in India:

Tax Audit

If the sole proprietor has a turnover or conducts business exceeding ₹1 crore in a financial year it is mandatory to have a tax audit before tax filing. Vakilsearch has a team of experienced chartered accountants who can guide you when it comes to regulatory compliances , tax advantages, and return filing. Book a slot to consult today.

Bookkeeping and Accounting

As per law the sole proprietor is required to maintain a book of accounts if they cross the threshold of₹25,00,000 or more than ₹2,50,000 in any of the three preceding years.

Filing GST Returns

As per the GST Act the proprietor has to file GST returns if the aggregate business turnover is more than ₹20 lakhs.

Comply with Labour Laws

If the proprietor decides to hire employees, then they will have to follow the other labour laws of India. The proprietor should agree to the minimum wage requirements, working regulations, and other employee benefits.

File TDS Returns

The TDS returns have to be filed on time by the proprietor to avoid fines. Based on the purpose of deduction the following TDS return forms should be filed:Form 24Q for TDS on salaries
Form 27Q for TDS deducted for a non resident or foreign company
Form 26QB for TDS on payment for transfer of immovable properties
Form 26Q for TDS in any other case

Professional Tax Registration

Owners of sole proprietorships, corporations, and partnership firms must pay tax on their trade and profession if their income exceeds the threshold. Employers are required to register for professional tax and obtain the professional tax registration certificate.

Sole Proprietorship vs. Other Business Structures

Here is a detailed comparison between sole proprietorship and other business structures. Before registering your entity, it is crucial to consider the various business structures, their advantages, and how they suit your business activities in detail:

Establishment

It is easy to register doesn't require any complex paper works

Name of the business

The business can function under the owners name or formally registered business name

Liability

There is no legal protection for the firm. The owner has 100% liability for debt.

Taxation

The income generated is filed under the owners personal taxes.

Sole Proprietorship Tax Implications

The tax rate for sole proprietorships is the same as that of the owner prior to the establishment of the business. Instead of filing a separate business tax return, as a corporation would, they disclose their income and costs on their personal income tax taxes. Here is a complete outline:

Filing Income Tax Returns

A sole proprietorship is often taxed on its net income. This is the total revenue earned after deducting all the allowable deductions. This income is directly reported by the owner on their personal income tax return. If the owner is a single person working, then self-employment tax should be filed.

The Self Employment Tax

It is the equivalent of social security and Medicare taxes for self-employed people.

Goods and Service Tax

If the business is involved in selling goods and services, then it is subject to filing GST returns or sales tax.

Employment tax or TDS returns

If the proprietor has multiple employees, then it is crucial to find TDS returns from time to time.

Financing Options for Sole Proprietorships

Irrespective of the business, financing is crucial for conducting the day's activities. Here are two major options for funding a sole proprietorship company:

Personal Savings and Investments

In most cases, sole proprietorship financing is done by self-funding. But this doesn't apply in all cases. You can also generate funds through family and relatives

Business Loans for Sole Proprietors

Bank loans are the best options for procuring funds to grow your business. Sole proprietorship business loans are available across India in both traditional and digital banks. This will help you meet the funding requirements. In general, a sole proprietor can apply for both secured and unsecured loans. It is crucial to analyse the loan tenure, line of credit, invoice discounting, and other factors.

How Vakilsearch Helps in Sole Proprietorship Registration?

How Vakilsearch Helps in Sole Proprietorship Registration?

We provide access to top incorporation experts who will guide you through the complexities of sole proprietorship registration. Our professionals will coordinate with you to fulfil all your legal requirements. You can also track the progress on our online platform at all times. Our team will handle all the paperwork and ensure a seamless, interactive process with the government. We provide clarity on the incorporation process to set realistic expectations. With a team of over 300 experienced business advisors and legal professionals, you are just a phone call away from the best in legal services.

    FAQs on Sole Proprietorship Registration

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    What is the cost of registering a sole proprietorship?

    The cost depends on various factors. You can get in touch with our experts for detailed input on the actual cost.

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    Can a sole proprietorship be converted into a private limited company?

    Yes a sole proprietorship can be converted into a private limited company. You will have to follow the standard procedure for the same. Get in touch with our experts for more information.

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    How long does it take to register a sole proprietorship?

    The registration process varies for each case. However at Vakilsearch we will make sure to file your sole proprietorship registration in 7 days.

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    What are 5 characteristics of a sole proprietorship?

    Characteristics of a sole proprietorship include
    Single ownership
    Simple to set up
    Direct control by the owner, personal liability, and taxation on owner's personal income.

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    What happens if a sole proprietorship fails?

    If a sole proprietorship fails, the owner is personally liable for debts, risking personal assets. Debts may lead to bankruptcy proceedings or financial loss.

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    Why is a registered company better than a sole proprietorship?

    Company registration offer limited liability protection, separate legal entity status, easier access to capital, potential for growth, and better credibility compared to sole proprietorships.

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    Can a sole proprietor own an LLP?

    A sole proprietor can't own an LLP alone; an LLP requires at least two partners. However, a sole proprietorship can be a partner in an LLP.

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    What is a real life example of a sole proprietorship?

    A real-life example of a sole proprietorship could be a local bakery owned and operated by a single individual.

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    Is GST required for sole proprietorship?

    GST registration is required for sole proprietorships if their annual turnover exceeds the threshold.

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    Can sole proprietorship have a PAN card?

    Yes, a sole proprietorship can have a PAN card, which is necessary for income tax purposes and financial transactions.

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    Can I use my personal bank account for sole proprietorship in India?

    Though it is possible. But having a separate business account is recommended for better financial management and clarity.

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    What is the difference between LLP and sole proprietorship?

    The key differences between an LLP and a sole proprietorship lie in liability, structure, and taxation. LLPs offer limited liability to partners, while sole proprietorships expose the owner to unlimited personal liability. LLPs are structured with partners, while sole proprietorships have a single owner.

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