India is full of people who are operating their business in the form of Sole Proprietorship. People generally start their small businesses by forming a Sole Proprietorship. So, it’s necessary to have some basic knowledge about it .
What is a Sole Proprietorship?
As the name suggests, it is a business entity formed in the name of a single person. That person owns the business, manages it and controls the various operations. It can simply be formed by any person who wants to start a business without going through various legal formalities. The Sole Proprietor must be a Citizen and Resident of India.
How to register a Sole Proprietorship?
There is no such specific legal registration under any law to set up a Sole Proprietorship. But, one can apply for a few registrations or licenses under various laws to avoid any complicated scenario.
These are some of the registrations/licenses that may be opted by the Sole Proprietor:
1. Registration under the Shop and Establishment Act– It is required by the local laws prevailing in the area where Sole Proprietorship is located
2. Registration under the MSMED (Micro, Small and Medium Enterprises Development) Act– It is required in case of Micro, Small and Medium Enterprises.
3. Registration under GST (Goods and Service Tax) – It is required in case the turnover of the business exceeds specified limit. The limit is ₹ 40 lakhs for supplier of goods and ₹ 20 lakhs for service providers (limit is ₹ 20 lakhs and ₹ 10 lakhs, respectively for specified States).
4. Trademark Registration– It is required in case you want to trade your products or services with an exclusive name or brand. It is beneficial where there is a threat of some misuse of the name used in your business.
5. Licenses or Certificates required according to the nature of business– Like:
Regional Transport Office(RTO) permit
Food Safety and Standards Authority of India(FSSAI) license
Certificate issued by the Institute of Chartered Accountants of India
And many more……..
Some of the basic documents required to apply for the above registrations/ licenses are:
1. Aadhar Card of the Proprietor– It is mandatory everywhere in India. It can be used as an Identity proof as well as Address proof.
2. PAN Card of the Proprietor– It is a mandatory thing if you want to file Income Tax Returns. Also, now linking of PAN with Aadhar is a must for filing Income tax returns.
3. Address proof of Place of Business– Electricity bill, Water bill, etc. can be used as address proof if you own the place of business. If not, then Rent Agreement along with a NOC (Non-Objection Certificate) will be required additionally.
An important requirement for a Sole Proprietorship is the Bank Account
A Current Account is required to be opened in the name of the Sole Proprietorship (i.e., business name), to carry out financial transactions related to proprietorship concern. RBI has prescribed some KYC (Know Your Customer) norms for opening the bank account which provides a list of the following documents:
(i) Registration certificates or licenses obtained from various departments as discussed above;
(ii) Identity proof of Sole Proprietor (Permanent Account Number [PAN] of proprietor is a mandatory requirement here). Other identity proof includes Passport, Aadhar, Driving license, etc.
(iii) Address Proof of Sole Proprietor which includes Aadhar, Electricity bill, Water bill, Bank statement, etc.
Now, let’s discuss the advantages of a Sole Proprietorship
Easiest form of business
We all come across various shops in our locality carrying out small business operations. All
2. Easier to start
Sole Proprietorships do not require mandatory registrations under
3. Lesser investment
Sole Proprietorships can be started with a very minimal amount of investment at the initial phase. So, it
4. No sharing of Profits earned
Sole Proprietor is the only person who operates and manages the whole business, so 100% of the profits belong to him/her. No one else is entitled to a share in the profits earned.
5. Lesser legal compliances
Since Sole Proprietorships are not governed by any specific law, the legal compliances are minimal. They do not have a pre-defined Certificate of Incorporation or Registration Certificate. So, the compliances depend upon registrations or licenses taken by a particular sole proprietorship. For example, if a sole proprietorship registers itself under GST law, then it will have to comply with the GST return filing, etc. There is no such requirement of uploading the Annual report or other reports on the MCA website.
6. Lesser income tax
Since the Sole Proprietorship involves only a
7. Information is not made public
Unlike Companies, Limited Liability Partnerships, etc. where financial statements and audit reports are made public for the users through MCA (Ministry of Corporate Affairs) portal, the financial reports of Sole Proprietorships remain in private hands. Even, the list of all proprietorships is not readily available with the Government officials.
Self decision making
Since the Sole Proprietorship is managed and operated
9. No specific audit requirement
Sole Proprietorship is not required to get its accounts audited each financial year under any specific law. The audit will depend upon the nature of business and the threshold turnover limits specified for the conduct of the audit. Like, a tax audit is required if the turnover/sales exceed ₹ 1 crores and for professional services, the audit is required if receipts exceed Rs. 50 lakh. Similarly, GST audit is required if the turnover exceeds ₹ 2 crores.
It’s easy to start a small business by forming a Sole Proprietorship with minimal complexities. Because of lesser complexities, the sole proprietor can focus on enhancing his/her business rather than focusing on meeting various compliances. It’s a good option for those who want to provide a platform to their business idea and try out something they want to with minimal investment.