A sole proprietorship is the simplest and most common structure chosen to start a business in India. It is an unincorporated business owned and run by one individual with no distinction between the business and, the owner. The owner is entitled to all profits, controls and he is responsible for all the business’s debts, losses and liabilities.
Since the name of a Proprietorship is not registered, a Proprietorship can choose to have any name as long as it does not infringe on a registered trademark. However, if the name is not registered as a Trademark, any other person can also use the same business name.
Forming a Sole Proprietorship
- The proprietor or the Owner is not required to take any formal action to form a sole proprietorship. As long as the proprietor is the only owner, this status automatically comes from his business activities.
- No Statutory Incorporation is required to form a Proprietorship
- Required to Open Current Account in the Name of Proprietorship with the bank. However, in order to Open the Account with the Bank, the entity is required to provide the Bank minimum 2 Legal Entity Proof along with KYC of the Proprietor.
- But like all business entities/Forms, Proprietorship Entity is required to obtain the necessary licenses/permits or Registrations as applicable to the law of the land and depending on the nature of the business activity carried out. For example, if proprietor commence business in the form of Proprietorship in Bangalore or Karnataka, he is required to obtain the following registrations; -
||Type of Registration
||Karnataka Shops and Establishment Registration
||Every Shop or Establishment carrying trade, business or services within the notified areas of State of Karnataka, shall compulsorily, within 30 days from Commencement of the business register under “The Karnataka Shops and Commercial Establishments Act, 1961” and Obtain Registration Certificate
||Subject to Specific Provision depending on the nature of the business activity under the “GST Act 2017” GST Registration can be obtained Voluntarily or after crossing the Threshold limit prescribed. However, it is pertinent to note that, the categories prescribed in Section 24 of the CGST Act 2017 is are required to be mandatorily registered.
||Karnataka Professional Tax Registration
[A] PT Employer Registration - Certificate of Enrollment (EC) is required to be obtained from the Profession Tax Officer within Thirty days from the date of commencement business. This registration is mandatory for business entity whether they employ any people in or not
[B] PT Employee Registration - Certificate of Registration (RC): If entity employees any employee whose salary is Rs.15000 or more, within thirty days of his becoming liable to pay tax, it should Obtain “PT Employee Registration -Certificate of Registration (RC)
||Import Export Code (IEC)
||If proprietorship carries Import or Export Activity, IEC Code is mandatory. Further to avail export promotion benefits like MEIS, SEIS etc. IEC Code is mandatory
||If business entity wants to avail the benefits available to MSMED being Manufacturer or Service provider, then it Can Obtain MSME Registration/ Udyog Aadhaar.
||Tax Deduction Account Number (TAN)
||Every person liable to deduct tax at source or collect tax at source under Income Tax Act 1961, is required to obtain TAN
||Other Registration may be applicable depending on the nature of Business activity or types of products or Services dealt by the Proprietorship, that is not addressed above.
Advantages of a Sole Proprietorship
- Easy and inexpensive to form: A sole proprietorship is the simplest and least expensive business structure to establish. Costs are minimal, with legal costs limited to obtaining the necessary licenses or permits.
- Complete control. Because Proprietor is the sole owner of the business, he will have complete control over all decisions. He is not required to consult with anyone else when he needs to make decisions or wants to make changes.
- Easy Tax Filing and Lower Income Tax rates. The proprietor's business is not taxed separately, so it’s easy to fulfil the tax reporting requirements for a sole proprietorship. The tax rates are also the lowest of the business structures. As per Income Tax Act 1961, Tax rates i.e. Slab rate which applies to an “Individual Assessee” applies to the Proprietor as well.
- Lower Compliance Burden: Since proprietorship is not registered with any Government authority like the Ministry of Corporate Affairs, the compliance requirements are minimal.
Disadvantages of a Sole Proprietorship
- Unlimited Personal liability. There is no legal separation between proprietor and his business, he will be held personally liable for the debts and obligations of the business. This risk extends to any liabilities incurred as a result of employee actions.
- Difficult to raise money. Sole proprietors often face challenges when trying to raise money. The proprietor cannot sell stock in the business, which limits investor opportunity. Banks are also hesitant to lend to a sole proprietorship because of perceived additional risk when it comes to repayment if the business fails.
- Heavy burden. The flipside of complete control is the burden and pressure it can impose. The proprietor alone is ultimately responsible for the successes and failures of his business.
- Higher Tax Rate: If the profit size of the entity grows, its business entity may be required to pay Higher Tax Compared to Private Limited Companies, LLP’s or Firms. Therefore, Tax planning to be carried out before making a decision.