Proprietorship Registration
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 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 under the Trade Marks Act, 1999. However, a proprietorship’s business name is not legally protected unless it is itself registered as a trademark under that Act — if the name is not so registered, any other person can also use the same business name.
Forming a Sole Proprietorship
- The proprietor or 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.
- The proprietor is required to open a current account in the name of the Proprietorship with a bank. Per the RBI Master Direction — Know Your Customer (KYC) Directions, 2016, banks require at least two documents evidencing the existence of the proprietorship (for example, the GST registration certificate, Shops & Establishment registration, or a government-issued licence in the business name), along with the proprietor’s individual KYC documents.
- Like all business entities / forms, a Proprietorship 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 a proprietor commences business in the form of Proprietorship in Bangalore or Karnataka, he is required to obtain the registrations listed below.
Common registrations for a Karnataka proprietorship
| Sl. No | Type of Registration | Requirement / Applicability |
|---|---|---|
| 1 | Karnataka Shops and Establishment Registration | Every shop or establishment carrying trade, business or services within the notified areas of the State of Karnataka shall compulsorily, within 30 days from commencement of business, register under “The Karnataka Shops and Commercial Establishments Act, 1961” and obtain Registration Certificate. |
| 2 | GST Registration | Subject to specific provisions 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. GST registration becomes mandatory once turnover crosses Rs. 40 lakh (goods) / Rs. 20 lakh (services); for Special Category States the thresholds are Rs. 20 lakh / Rs. 10 lakh. However, it is pertinent to note that the categories prescribed in Section 24 of the CGST Act, 2017 are required to be mandatorily registered regardless of turnover. |
| 3 | Karnataka Professional Tax Registration |
[A] PT Employer Registration — Certificate of Enrollment (EC): Required to be obtained from the Profession Tax Officer within thirty days from the date of commencement of business. This registration is mandatory for the business entity whether they employ any people or not. [B] PT Employee Registration — Certificate of Registration (RC): If the entity employs any employee whose salary is Rs. 25,000 per month (gross) or more — the revised threshold under the Karnataka Tax on Professions, Trades, Callings and Employments Act, 1976 (as amended) — within thirty days of becoming liable to pay tax, it should obtain “PT Employee Registration — Certificate of Registration (RC)”. |
| 4 | Import Export Code (IEC) | If the proprietorship carries on import or export activity, IEC Code is mandatory. Further, to avail export-promotion benefits like MEIS, SEIS, etc., IEC Code is mandatory. |
| 5 | Udyam Registration (formerly Udyog Aadhaar) | If the business entity wants to avail the benefits available to MSMEs being Manufacturer or Service provider, then it can obtain MSME Registration. Udyog Aadhaar was discontinued w.e.f. 1 July 2020 and replaced by Udyam Registration under the MSME Development (Amendment) Act, 2020; new registrations are now made online at udyamregistration.gov.in. |
| 6 | 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. |
| 7 | Other Registration | Other registrations may be applicable depending on the nature of business activity or types of products or services dealt with by the Proprietorship that are 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 the 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, the slab rates which apply to an “Individual Assessee” apply to the proprietor as well. Business income is taxed at individual slab rates plus surcharge (where total income exceeds Rs. 50 lakh) and Health & Education Cess @ 4%, as per the relevant Finance Act for each assessment year.
- 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 the 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. A proprietorship cannot issue shares or equity interests, because only companies incorporated under the Companies Act, 2013 are empowered to issue share capital (Section 2(84)), which limits outside investment. 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 flip side 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, the business entity may be required to pay higher tax compared to Private Limited Companies, LLPs or Firms. The peak individual rate of 30% (plus surcharge and 4% cess) can exceed the flat 22% corporate tax rate available to domestic companies under Section 115BAA of the Income Tax Act, 1961, while LLPs and firms are taxed at a flat 30%. Therefore, tax planning should be carried out before making a decision.
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