Sole Proprietorship

July 23, 2019

Sole Proprietorship: Advantages, Requirements & FAQs

A sole proprietorship is a business that is owned and managed by a single person. Most of the businesses in India are unregistered and many are being operated as a sole proprietorship firm business.

A sole proprietorship is one of the simplest and the easiest form of business entity to register and maintain in India .You could have one up and running within 15 days, which makes it very popular among the unorganised sector, particularly small traders and merchants. There is no formal/strict sole proprietorship registration required and to start a proprietorship only the PAN number for the Proprietor, a few licenses and a capital is required. Proprietorships are recognised by other registrations, such as a service tax registration or sales tax registration. As you would imagine with a business that’s so easy to set up, though, its shortcomings are severe: the liability of the proprietor is unlimited and it does not have a continuous existence.

There are no government registrations needed to start the sole proprietorship business in India. Nor are you required to go to an online registration portal and then fill up a form or are required to submit any documents. Nevertheless, you are required to open a current account with any bank in the name of the business.
A current account in turn necessitates that one has a specified location from which they are doing the business. The bank asks you to submit at least two documents as a proof of the business location in the form of government registrations like the shop act license, service tax, CST/VAT, etc.

In this article, let us look at the process that goes into the formation of a sole proprietorship in India.

Sole Proprietorship Registration

A sole proprietorship in India is considered as an extension of the Proprietor, hence there are no formal procedure to register it. There is only a requirement of opening a bank account in the name of the proprietorship firm or obtaining the licenses required for conducting the business. To open a bank account for a sole proprietorship, the RBI’s KYC norms dictate that any of the two of following document must be submitted to the Bank:

A certificate/license issued by Municipal authorities under the Shop & Establishment Act,

2. The license issued by Registering authority like the Certificate of Practice issued by the Institute of Chartered Accountants of India, the Institute of Cost Accountants of India, Institute of Company Secretaries of India, the Indian Medical Council, Food and Drug Control Authorities,

3. The registration/licensing document issued in name of the proprietary concern by the Central Government or the State Government Authority/ Department, etc,

4. The banks may also accept the IEC (Importer Exporter Code) issued to the proprietary concern by office of the DGFT as an identity document for opening of the bank account etc,

5. Complete Income Tax return (not just the acknowledgement) in name of the sole proprietor where the firm’s income is reflected, duly authenticated and acknowledged by the Income Tax Authorities,

6. The utility bills such as the electricity, water, and the landline telephone bills in the name of the proprietary concern,

7. GST Registration/Certificate.

Advantages of a Proprietorship

Minimal Compliance

Sole Proprietorships are only recognised via their government and tax registrations, so the extent of their compliance is limited to the annual filing of their service, professional or sales taxes.

Easy to Start

Proprietorship needs only minimal registration. Hence, it is one of the easiest forms of business entity to start. A sole proprietorship could take 15 days to start if all you need is a Service Tax Registration, but this would stretch to even 45 days if you need Sales Tax Registration. Either way, the process is uncomplicated. PAN card and identity and address proofs are enough to get them done.

Relatively Inexpensive

A Sole Proprietorship is inexpensive as compared to a One Person Company (OPC) and, thanks to the minimal compliance requirements, is inexpensive even over the long-term. You would not need to hire an auditor, for example. This is why, despite its severe shortcoming (unlimited liability), small merchants and traders opt for it.

Business Name

Since name of a proprietorship is not registered, a proprietorship can choose to have any name – till such time as it does not infringe on a registered trademark. Conversely, since the name is not registered, other people can also use the same business name unless the trademark registration is obtained.

Lower Taxes

A proprietorship with less than Rs. 3 lakh of income isn’t required to pay any income tax, as the proprietorship’s are taxed as the individual owing the business. Nevertheless, unlike in a company or LLP, a proprietorship cannot have some of the tax deductions, which may possibly increase the tax liability.

Single Promoter

A proprietorship is the only type of business entity that can be registered and be operated by one person. All one needs to register a one person company, is a nominee Director, while for all other types of entities like a company or LLP or a partnership firm, two or more promoters are required.

Easy to Close

For all legal requirement and purpose, the proprietor and the proprietorship are one and the same. Hence, there are no formality needed for winding up or in closing a proprietorship. In most of the cases, to close a proprietorship, there is only a requirement for the cancellation of the tax registrations obtained in the name of the proprietor.

FAQs on Sole Proprietorship

Who can start a sole proprietorship?

Any Indian citizen with a current account in the name of their business can start a sole proprietorship. Registration may or may not be required, depending on what business you are planning to establish. However, to open a current account, banks typically require a Shops & Establishments Registration.

What documents are needed for opening a current account in the name of my sole proprietorship?

To open a current account, you need proof of the existence of your business. Most banks will ask for a Shops & Establishments Act Registration. In addition, you will need a PAN card and address and identity proofs.

How long does it take to establish a business with sole proprietorship?

A sole proprietorship business does not take more than 15 days to open-up and get running. This simplicity makes it popular among the small traders and merchants. It’s also much cheaper, of course. This is the other reason why it’s the most widely used business structure.

What businesses are commonly run as sole proprietorships?

Most local businesses are run as sole proprietorships, from your grocery store to a fast food vendor, and even small traders and manufacturers. This is not to say that larger businesses do not operate as sole proprietors. Even some jewellery shops are sole proprietors, but this is not recommended.

What documents are required for starting a sole proprietorship?

To start a sole proprietorship, you would need address and identity proofs, PAN card, all KYC documents and rental agreement or sale deed (in case of Shops & Establishment Act Registration).

Aside from a current account, is there no need for any other registration?

This depends on the business you’re in. If you’re running a departmental store, then you would also need a VAT Registration once your turnover is over Rs. 5 lakh per annum. If you’re running a air-conditioned restaurant, you would need a VAT Registration and Service Tax Registration.

Can I apply for any of these registrations online?

The registrations controlled by the central government — service tax, for example — can be availed of online, whereas the state-government-controlled ones may or may not be. In some technologically advanced states, such as Karnataka, they are, whereas in others they may not be.

What if I wish to convert from sole proprietorship to private limited company or partnership?

You can always choose to do so. The procedure is a little tedious, but it is possible. It is very common for sole proprietors to convert into partnerships and private limited companies at a later stage.

What are the benefits of registering as a sole proprietor as compared to registering a Partnership, LLP, or a Private limited company?

Sole proprietorship, is defined by the Govt. Of India, as a “one-man organisation where a single individual owns, manages and controls the business.” Hence one of the main benefit is that there are no formal rules required as a government sanction is not needed. Apart from that, there is no requirement to pay fees for the registry and there are no government regulatory paperwork and compliances to be fulfilled. There are no minimum capital investment requirements.
Furthermore one gets to keep whatever profit or income that is generated and the tax benefits of the sole proprietorship prevent a double taxation of the firm.

What is required to start a sole proprietorship business in India?

One can legally start a business in India quite easily. There are only two things that are required to be done for starting a sole proprietorship business in India. First is to choose a business name and second is to select a location as the place of doing business.

Why is sole proprietorship registrations best suited only for the unorganised and small business?

A sole proprietorship is a kind of unregistered business entity that is owned, managed and controlled by one single person. Sole proprietorship’s are used by most micro and small businesses operating in the unorganised sectors. Proprietorships are very easy to start, however, after the start-up phase, the proprietorship’s doesn’t offer the promoter a host of benefits like the limited liability proprietorship, corporate status, a separate legal entity, an independent existence, transferability, perpetual existence – which are the desirable features for any business. Hence, a proprietorship registration is suited only for the unorganised, small businesses that remain small and/or have a limited period of existence.
Why is a Proprietorship Registration important?

There are no formal mechanism provided by the Government of India for the registration of a Proprietorship. Thus, the existence of a proprietorship has to be established through tax registrations and the other business registrations that a business is needed to have as per the rules and regulations. For instance, the VAT or the Service Tax or GST Registration can be obtained in name of the Proprietor to establish the fact that the Proprietor is operating a business as a sole proprietorship. Therefore, all the registrations for a proprietorship are in the name of the Proprietor, thus, making the Proprietor personally liable for all liabilities of the Proprietorship.

Hi :) My name is Muskan Agarwal. I am very headstrong and go getter in whatever i do. I work as a paralegal in the team and try to bring value in my work.