Sole Proprietorship

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What is a Sole Proprietorship? It’s Meaning

A sole proprietorship firm is a business entity that is owned, managed and controlled by one person. Proprietorship firms are very easy to start and have very minimal regulatory/statutory compliance. This form of entity is preferred by the majority of small and medium businesses. It simply allows starting a business even with a small amount of capital and within a very short span of time.

A Sole Proprietorship firm can be easily established by getting a statutory registration based on the nature of the business and there is NO specific registration required for the ‘Proprietorship firm’ itself.

Statutory registrations like – GST Registration or Professional Tax Registration or a Shops and Establishments License (in the name of the firm) will be sufficient to open a current bank account to get started with the Proprietorship Business.

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Characteristics or Features of a Sole Proprietorship Business Firm

One Man Show

Sole Proprietorship form of a business entity requires only one person and it is completely a One-Man Show. The business is fully owned and operated by a single person.

Ease of Starting or Winding

Due to the complete involvement and operation by one single person, and the required legal compliances being minimum, it is much easier to start and dissolve or wind up the firm.

Separate PAN not required

PAN (Permanent Account Number) issued by the Income Tax department, to the proprietor is enough to get started. No separate PAN in the name of Trade or Business is required.

Relatively Inexpensive

Since the compliance requirements are very minimal, sole proprietorship firms are inexpensive to maintain until the turnover of the company reaches a certain turnover in business

Minimal Compliance

Compliance requirement in a proprietorship firm is very minimal as there is no mandatory audit requirement or any requirement to file forms with MCA or any other authorities.

No Minimum Capital Requirement

Essentially there is no minimum capital requirement to start the business as a Sole Proprietor. One can start doing business with any amount of money.

Business/Trade Name

Proprietorship firms have no restriction in terms of choosing the name for the firm as long as there is no violation of someone else’s intellectual property and does not require approval from any authorities.

Slab based Tax Rates

Taxation in a proprietorship firm is as per the individual’s taxation rules. It is slab based and is taxed in the name of the proprietor itself. Business income is also taxed at personal tax rates.

Independent Separate Legal Entity

An LLP is a Separate Independent Legal Person established under the LLP Act 2008. As such, the business is separate from its partners.

Limited Liability

Limited liability partnership protects your personal assets with the “Limited Liability” feature. Maximum Liability of the partners is limited to the extent of their contribution.

No Minimum Capital Requirement

There is no minimum Capital contribution required to start a Limited liability Partnership.

No Share Capital

LLP does not have the concept of shares like a private limited company or one person company.

Uninterrupted Existence or Perpetual Succession

An LLP has perpetual existence. Which means, they continue to do business even if the partners / directors changed or died (which is not the case of Sole Proprietorship or Partnership Firms).

Minimum Two Designated Partners

The minimum number of designated partners required to incorporate an LLP is two.
There is no upper limit on the maximum number of designated partners.
Among the partners, there should be two designated partners and at least one of them should be an Indian resident.

Lesser compliance requirements

Post incorporation compliance in an LLP is lesser when compared to a Private Limited Company, like board meetings, etc are not mandatory and Statutory Audit by a Chartered Accountant (CA) is not mandatory.

The annual filings of an LLP: Form 8 and Form 11

Form 8 (Statement of Account and Solvency):

It is a document specifying details of the Partners, their contributions, etc. The same needs to be filed within 60 days of the closure of the financial year.

When to consider Registering a Private Limited Company

Firstly, it is NOT at all mandatory to register a Private Limited Company for starting a business in India. There are many other ways to start a business. So, consider the below points before deciding to choose the Private Limited Company as your choice of entity to do business.

Opt for a Private Limited Company only:

If you are planning to get investments or funding from Angel, Seed or Venture Capital Investors
If you want to Limit your Liability
If you have or are considering expansion plans for your business
If you are considering for Employee Stock Options or ESOPs
When you need a separate “Legal Identity” for your business
Where you don’t want to use your personal assets as collateral

Note: Do not get carried away by several online low-cost offers for registration of a company. Private Limited Company form is not a one-time-affair. There is a significant recurring costs involved and several Legal Compliances need to be fulfilled regularly (regular Board Meetings, AGM, Compulsory Audit, RoC filing, etc). Failing / delay to meet the legal compliances will attract additional penalty.

Also, understand that all those Legal Compliances are a bit complex for common people and hence you would need the help of a company registration consultant.

If you are unsure of choosing the right form of entity for your business, feel free to get in touch with us. Our Business Expert will guide you with the proper form of entity, suitable for your needs.

When to Consider a Proprietorship firm?

One can opt for starting a Proprietorship firm:

If you are planning to start a business alone
If the business you plan to conduct does not carry any substantial risk
If you are a freelancer or an individual consultant
If you want to start the business quickly and do not want any legal compliance burden
If you want to test the market before plunging into full time
If you want complete control of your business and do not want any partners

Few Major Disadvantages of Sole Proprietorship Business in India

Client credibility could be low as winding up is simple and quick and can happen overnight.
It is not a separate legal entity.
Cannot issue shares or have partners in a sole proprietorship firm.
Liability is unlimited and proprietor’s personal assets can be attached in case of any default.
A sole proprietorship firm ceases to exist in the event of death or incapability of the proprietor.

List of Documents Required for Registration of a Sole Proprietorship Firm in India

PAN Card of the Proprietor
ID Proof of the proprietor- Voter’s ID / Passport / Driving License / Aadhaar
Passport Size Photograph
Address Proof of the Premises:
- Rental agreement or Lease agreement if the premise is rented/leased
- Latest tax paid receipt / Sale deed if the premise is owned by any of the Directors
Latest Electricity bill / Telephone bill / Gas Connection bill
NOC from the owner of the premise

Timeline – How long does it take to register a Sole Proprietorship firm in India

Based on the nature of statutory registration (like GST, MSME, etc) it normally takes anywhere between 5-10 working days. However, this timeline is further subject to Government processing, approval time, public holidays, etc.

Sole Proprietorship Registration Fees / Cost in India

A MSME registration would cost you Rs. 1,000, GST registration would cost you Rs. 2,500.

Feel free to get in touch with us. Our Business Expert will guide you with the proper form of entity, suitable for your needs.

FAQs for Private Limited Company Registration in India

What is a Proprietorship Firm?

A proprietorship firm is the simplest form of business organization where a single individual owns and operates the business. The owner is solely responsible for all aspects of the business.

Is there a legal registration requirement for a proprietorship firm?

There is nothing called proprietorship registration, any statutory registration such as GST or Shops and Establishments or Professional tax registration will suffice.

What are the advantages of a proprietorship firm?

Advantages include ease of formation, complete control by the owner, minimal compliance requirements, slab based taxation and direct decision-making.

Is there a legal registration requirement for a proprietorship firm?

There is nothing called proprietorship registration, any statutory registration such as GST or Shops and Establishments or Professional tax registration will suffice.

What are the advantages of a proprietorship firm?

Advantages include ease of formation, complete control by the owner, minimal compliance requirements, slab based taxation and direct decision-making.
Winding up a private limited company is a tedious and lengthy process.
Maintenance of Books of Accounts in the prescribed format is mandatory.
Statutory Audit by a qualified Chartered Accountant is mandatory.
A Private Limited Company cannot accept deposits from the general public.

What is the liability of the owner in a proprietorship firm?

The owner has unlimited liability, meaning they are personally responsible for all debts and obligations of the business. Personal assets can be used to settle business liabilities.

Can a proprietorship firm have employees?

Yes, a proprietorship can employ workers to assist in running the business. The owner is responsible for managing the employees and their obligations.

Can a proprietorship firm be converted into another business structure?

No, a proprietorship firm cannot be converted into other forms of business structures.

Is a proprietorship firm a separate legal entity?

In most jurisdictions, a proprietorship firm is not considered a separate legal entity from the owner. The business and personal assets of the owner are not distinct.

What are the disadvantages of a proprietorship firm?

Disadvantages include unlimited liability, limited access to capital, lack of continuity (as it is tied to the owner), and cannot seek investments.

Can a proprietorship firm raise funds through external sources?

It is not possible for a proprietorship firm to raise significant external funds

Is a separate bank account required for a proprietorship firm?

It’s advisable to have a separate bank account for business transactions to maintain clarity.

What are the tax implications for a proprietorship firm?

Taxation depends on the Proprietor’s tax regime and is slab based

Is there a need to prepare formal financial statements for a proprietorship firm?

While not always mandatory until a certain revenue threshold, maintaining proper financial records is recommended for tracking business performance and ensuring compliance with tax regulations.