A sole proprietorship form of business is a common business structure in India. A sole proprietorship business is established and managed by a single person. This type of business form is best suitable for individuals wishing to start a business with less investment. Generally, it does not require any registration as such.
A sole proprietorship business can be started from home or on a premise with a minimum amount. The control of the business is solely in the hands of the single proprietor/owner who invests in the business. He bears all the losses of the business and enjoys all the profits. He can appoint persons for conducting the business, but the ownership will rest solely with him.
Many local businesses such as grocery stores, parlours, boutiques, retail stores, etc., can be established as a sole proprietorship firm. Even small traders and manufacturers can establish a sole proprietorship firm.
Sole proprietorship is one of the oldest and easiest Business Structure to start in India. A proprietorship is a type of business that is owned, managed, and controlled by one person – who is the proprietor. As the proprietorship and proprietor are one and the same, it is very easy to start and there are very minimal compliance requirements.
As the proprietor and the business are one and the same, a proprietorship cannot have other partners or shareholders. Further, there is no limited liability protection for the proprietor from the business activities conducted in the sole proprietorship. Hence, this type of business entity is best suited for every small businesses with no more than 5 employees.
Who can opt for Sole Proprietorship?
Any person who wants to start a business with less investment can opt for this type of business form. It can be started in a time span of 10-15 days. Also, the control in the business is solely in your hands.
Proprietorship Registration in India
Registering a proprietorship in India follows a unique approach, as there isn’t a dedicated government-established registration process for this business structure. Instead, a proprietorship gains recognition through tax registrations mandated by relevant laws and regulations.One pivotal tax registration is the GST (Goods and Services Tax) Registration, which must be secured under the proprietor’s name to formalize the business’s proprietorship status. This registration signifies that the proprietor is conducting business within the framework of a proprietorship.
Essential Licenses and Registrations for Proprietorships
To run a proprietorship in India, you need important licenses and registrations, including:
Advantages of Proprietorship
Easy registration: Sole proprietorship does not have any formal incorporation or dissolution process – as its the same as the Proprietor. However, to operate a business, the proprietor may have to obtain certain registrations and licenses to be compliant with the laws and regulations of India.
Lower compliance: As most proprietorship are only registered with government departments like Income Tax & GST, the compliance burden will be lower. On the other hand, entities like LLP or Company are registered with the Ministry of Corporate Affairs and have to file various statutory returns and be audited by a Chartered Accountant each year.
Simplicity: As there are no partners, shareholders, or directors, the proprietor can easily operate this business with minimal documents and consent requirements. Hence, this type of business structure is best suited for very small businesses.
Business decision: In a proprietorship, the business owner takes all business decisions. There is no consent or approval required from any other person. Hence, a proprietor can normally take quick decisions regarding his business affairs.
Complete control: As sole proprietorship is owned only by the proprietor. He/she has complete control over the assets, revenue, expenses and all business operations.
Disadvantages of Sole Proprietorship
Funding: This type of business structure relies solely on one persons savings, borrowings and credit history. As there are no other persons are involved in this type of business structure, raising funds from banks will be very hard. Raising equity funds will not be possible – as this type of business entity does not allow for profit sharing or shareholding.
Personal liability: If a proprietor is unable to pay business loans or taxes, in a proprietorship – the personal assets of the business owner can be attached or encumbered. Hence, in this type of business structure – the proprietor will be held personally liable until all the liabilities are extinguished.
Business continuity: In case of death or disability of the business owner, the sole proprietorship will be automatically dissolved. Hence, there is will be no business continuity.
Growth: A proprietorship has various restrictions in terms of fundraising, liability and business continuity. Hence, only very small businesses that are in the unorganized sector operate as proprietorship.
Unincorporated business: Sole proprietorship are unincorporated businesses. Hence, there is no centralized database available to see if a sole proprietorship is active or inactive. Thus, sole proprietorship entities are mostly classified as unorganized business.
Registration of Sole Proprietorship
The procedure for incorporating a sole proprietorship firm is-
- Applying for PAN card.
- After obtaining a PAN card, or if the proprietor already has a PAN card, the next step is to keep a name for the sole proprietorship business.
- The next step is to open a bank account in the name of the business. All the transactions of the business will be through this bank account.
- Though no specific registration is required for starting a sole proprietorship firm, certain basic registrations are required to be obtained by a sole proprietorship firm for doing business. The basic registrations required by a sole proprietorship are-
- The proprietor needs to obtain the Registration Certificate under the Shops and Establishment Act of the state in which the business is located.
- The sole proprietorship should also register for GST if the business turnover exceeds Rs.20 lakh.
- The sole proprietorship can also register as a Micro, Small and Medium Enterprise (MSME) under MSME Act, though it is not mandatory, it is beneficial to be registered under the same.
Documents Required for Sole Proprietorship
The documents required for registration of Sole Proprietorship are-
- Aadhaar card.
- PAN card.
- Registered office proof.
- Bank account.
Checklist required for Sole Proprietorship
- PAN card of the proprietor.
- Name and address of the business.
- Bank account in the name of the business.
- Registration under the Shop and Establishment Act of the respective state.
- Registration under GST, if the business turnover exceeds Rs.20 lakhs.
What are the Compliances required?
The following are some of the compliances that are applicable for a sole proprietorship:
Income Tax Filing: The business owner of a proprietorship will have to file personal income tax return using form ITR-3 or ITR-4.
Business Income: Only income tax forms ITR-3 and ITR-4 allow for declaring business income. Hence, all proprietorships will have to file form ITR-3 or ITR-4 to be compliant with the income tax regulations.
GST Return Filing: If a proprietorship has GST registration, GST return must be filed every month and quarter as per the scheme under which the business is registered.
TDS Returns: In case the proprietorship is having employees or purchasing goods/services beyond a certain threshold – tax must be deducted at source and TDS returns must be filed every quarter.
FAQs
Do I need to register my proprietorship business?
The registration requirements for proprietorship vary by country and locality. In some places, registration is not mandatory, while in others, it might be necessary for specific activities or benefits. Check the local regulations to determine if registration is required.
Why is proprietorship registration important?
While proprietorship doesn’t require formal registration in many places, registering it can provide legal recognition and certain benefits such as opening a bank account in the business name and obtaining licenses more easily.
Can a proprietorship be converted into another business structure later?
Yes, in many jurisdictions, a proprietorship can be converted into another business structure such as a partnership or a company if the business needs evolve.
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