What is a Sole Proprietorship?

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A sole proprietorship is a person who owns an unincorporated business by himself or herself. In a sole proprietorship, there is no legal distinction between the owner and the business entity.

A sole proprietorship is considered a single entity for tax and liability purposes, and the owner does not pay income tax separately for the company. However, sole proprietors, like other business owners, have specific tax responsibilities regarding payment of self-employment taxes, estimated taxes, social security and Medicare taxes, unemployment taxes, and other taxes.

Sole Proprietorship examples

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Let's say you open a restaurant. If you are the only owner of the business and the business is not incorporated, then your company is probably a sole proprietorship. Other examples include small businesses, such as a single person art studio, a beauty parlour, or a pet management service. As soon as a person begins offering goods and services to others, they are essentially forming a sole proprietorship. 

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Keep in mind the status of the company itself is important; if you take on a partner, incorporate, or form a Limited Liability Company (LLC), you are not considered a sole proprietorship.

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Features of sole proprietorship

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1. Less legal formalities: There is no separate law or statute to govern a sole proprietorship, therefore, not many rules and regulations are applicable. The biggest plus point is that it does not require incorporation or registration of any kind. All you need to have for a sole proprietorship running is a license. Just like incorporation, even in the case of closure or termination of the business, there are no legal technicalities involved. Therefore, it is a business which is sure to be hassle-free.

2. Unlimited liability: Because a sole proprietorship does not differentiate between a business and its owner, the liability is unlimited in nature. If the business is unable to meet its own liabilities, it will fall upon the proprietor to pay them. All of his personal assets (like his car, house, other properties etc) may have to be sold to meet the liabilities of the business. This is often seen as a disadvantage. 

3. Risk and profit: Because a sole proprietorship is marked by the unlimited liability of the proprietor, the owner becomes the sole risk bearer in the business. Since he is the only one financially invested in the company, he must also bear all the risks. If the business fails or suffers losses he will be the one affected. On the flip side, irrespective of the scale of profit, it all goes to the pocket of the sole owner. There is no obligation on him to share his profits with anyone as technically there is no one else but himself in the managerial positions of the company. 

4. No separate identity: Speaking legally, one has to keep in mind that in case of a sole proprietorship, there is no difference between the identity of the business and the owner, it is one and the same. Therefore, the owner will be held responsible for all activities and transactions of the business. In legal terms, the business and the owner are one and the same. 

5. Continuity: The continuity of the business is entirely depended on the life of the owner. If the owner dies, retires, imprisoned, or bankrupt. In most of such cases, the proprietorship will cease to exist and the business will come to an end. 

 

Merits of Sole Proprietorship:

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Some of the popular advantages of a sole proprietorship are.

• Quick decision making– A sole proprietor has the freedom to make any decision. Therefore, the decision would be prompt as they don’t have to take the permission of others.

• Confidentiality of information- Being only the owner of the business, it allows him/her to keep all the business information to be private and confidential.

• Direct incentive- A sole proprietor directly has the right to have all the profit or benefits of a company.

• Sense of accomplishment- He/she can have the personal satisfaction associated with working without any guidance or alone.

• Ease of formation and closure- A proprietor can enter the business with minimum legal formalities.

 

Demerits of Sole Proprietorship:

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Limited Capital

In sole proprietorship business, it is the owner who arranges the required capital of the business. It is often difficult for a single individual to raise a huge amount of capital. The owner’s funds, as well as borrowed funds, sometimes become insufficient to meet the requirement of the business for its growth and expansion.

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Unlimited Liability

In case the sole proprietor fails to pay the business obligations and debts arising out of business activities, his personal properties may have to be used to meet those liabilities.

This restricts the sole proprietor from taking risks, and he thinks cautiously while deciding to start or expand the business activities.

• Lack of Continuity- The existence of a sole proprietorship business is linked to the life of the proprietor. The illness, death, or insolvency of the owner brings an end to the business. The continuity of business operation is, therefore, uncertain.

 

Limited Size

In the sole proprietorship form of business organization, there is a limit beyond which it becomes difficult to expand its activities.

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Lack of Managerial Expertise 

A sole proprietor may not be an expert in every aspect of management. He/she may be an expert in administration, planning, etc., but maybe poor in marketing.

Documents required to establish Sole Proprietorship Business in India

• Aadhar Card and PAN (Personal Identification Number) Card

• Bank account details

• Documents that authenticate the existence of business premises.

 

PAN Card

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PAN card is mandatory for filing the ITR. If you haven’t secured your PAN number yet, make sure to head over to the NSDL online portal and applied for the same. As a part of the standard registration protocol, you need to fill up an applicant upon reaching the portal. The authority will then scrutinize your application on the predetermined grounds and generate the PAN number within a week.

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The whole process will cost you around 110 bucks that you need to submit as a registration fee at the time of submission of the application. Also, keep in mind that you have to furnish your identity during online registration and address proof along with the photographs. After completing all the required investigation, the authority will send the PAN card to the applicant’s registered address.

Aadhar Card

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Although Sole Proprietorship doesn’t seek any governmental registration, the applicant needs to procure some mandatory registrations to execute their business activities such as Aadhar Card, SME registration, SHOP AND ESTABLISHMENT ACT LICENCE  and GST Registration.

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Aadhar number is a must-have requirement for all business registration. The applicant seeking the establishment of Sole Proprietorship Business also needs to link their PAN number with Aaddhar for filing the annual taxes. Keep in mind that without Aadhar, you won’t be able to set up any business form in India.

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Feel free to navigate to AadharSeva Kendra or E-Mitra to get the possession of your personal identification number. The E-Mitra, in particular, is a government-driven online portal that will allow you to avail PAN number more conveniently. As soon as you complete the application formalities, your Aadhaar card will be generated within two to three weeks.

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Bank Account

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Once you successfully obtain Aadhar number and PAN, you will become eligible to open an account in any bank. Apart from these mandatory documents, you also need to submit the GST REGISTERATION document for the same.

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Registered office proof

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If you are planning to execute your business activities on a rented property, then you must secure NOC from the landlord. On the contrary, you need to provide utility bills in case if the place of business is belong to you. Apart from that, there are some supplementary documents as well that applicants need to render for the establishment of their business.

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Registering as SME

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Though it’s not mandatory for the sole proprietorship business to avail Small and Medium Enterprise (SME) registration, it could significantly impact the business’s existence and growth. With such registration at disposal, the business entities can avail of numerous benefits such as securing government tender, getting ISO certificate, and exemptions under Direct taxes.

Shop and Establishment Act License

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Shop and establishment act licence is compulsory for small-scale enterprise and proprietorship business. The municipal corporation is the authority that allocates this license to the business owners. The issuance of the Shop and Establishment Act License is done on the basis of number of employees and the nature of business.

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GST Registration

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GST registration isn’t compulsory for the business owners that earn below the minimum threshold limit i.eRs. 20 lakhs. It’s essential to note down that GST is an indirect form of taxation applicable to all business entities, including e-Commerce operators. You will be required to arrange the following documentation to avail of GSTIN from the concerned authority.

• Proprietor’s Aadhaar Card and PAN.

• Utility bills such as water bills and electricity bills.

• Documents acting as address proof for a business place.

• Copy of bank passbook displaying IFSC code, address of the premises, and account number.

 

Obtaining GSTIN isn’t a complicated task at all, as it can be availed by merely submitting a simple application on the GST portal. Upon receiving the application, the authority would conduct a comprehensive investigation of the given credentials and then finally furnish the GST number to the applicant. The whole process would take around 3-4days before its reach to the completion. After availing of the GST number, the applicant can start their business activities.

What are the Compliances required?

• As a sole proprietor, you must file Income Tax Return annually.

• Also, you need to file your GST Return if you are registered under GST.

• A sole proprietor should also deduct TDS and file TDS return if liable for Tax Audit.

 

Conclusion

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Nearly all business entities in India are under the enormous pressure of maintaining harmony with the given compliance. These firms are highly vulnerable to hefty penalties as the margin of error for them is very low. In case if you are not willing to face legal constraints after establishing the business, make sure to adopt the Sole Proprietorship business model. Since this business model doesn’t revolve around the complexities, it would give you better control of other variables that hamper the business’s efficacy in one way or another.

 

DISCLAIMER-These materials are public information and have been prepared solely for educational purposes. These materials reflect only the personal views of the author and are not individual legal advice.

It is understood that each case is fact specific and that the appropriate solution in any case will vary. Finally, the owner will not be accountable for any loses injuries or damages from the exposures or usage of this information.

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