Sole Proprietorship: Its Incorporation in India

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India is that country in which maximum of people are operating and managing their business in the form of a Proprietorship Firm. Here, people usually start their small businesses by establishing a Sole Proprietorship. The person desiring to start a sole proprietorship must be an Indian Citizen and also the Resident of India. Further, as the name suggests, the sole proprietorship is that business entity which formed and started in the name of a single individual. Furthermore, this single owner owns the business and is solely responsible and accountable for its managerial operations. Hence, a sole proprietorship can simply be formed by any person who desires to start a business without undergoing various legal formalities. 

The process of incorporating a Proprietorship firm is known as the Sole Proprietorship Firm Registration. Even though there is no governmental or formal prescribed procedure for registering this kind of business structure, still, the individual can opt for other government registrations. The term government registration includes the MSME (Micro Small and Medium enterprises) or SSI (Small Scale Industries) Registration, GST (Goods and Service Tax) Registration or the Shop and Establishment Act License based on the nature and eligibility of the concerned entity.

In India, a sole proprietorship is a convenient, easy and simplified way to commence a business. It is neither considered as a corporation nor as a company and this specific structure is solely owned by a single person who is the owner, director, a shareholder of the proposed business. Few common examples of the proprietorship entity are shops such as the chemist, saloons, grocery, etc.

Further, unlike other forms of legal structures such as the Partnership Firm, Private Limited Company, Limited Liability Partnership, etc. which may take up to ten to fifteen days to be registered, the Proprietorship can be started within a time span of few days which makes it a very well-liked choice of business, to begin with particularly among the merchants and small traders.

Why should an Individual choose a Sole Proprietorship Firm?

A sole proprietor or the sole owner is one of the best choices for budding entrepreneurs who wish to manage everything on their own. Regardless of this, it has several benefits –

  1. Provides flexibility and ease in carrying out the managerial activities
  2. One of the oldest and most chosen forms of business structures
  3. Single hand control
  4. Easy to start and shut
  5. Hassle and tension-free structures with very few legal requirements and compliances
  6. Self- Accountability
  7. Being your own boss means the owner of the concerned entity is not answerable to any shareholder or director
  8. Decision-making power
  9. Do not have to share any income earned and profits with anyone
  10. No disputes among the members

What are the Features of a Sole Proprietorship Firm?

Every business structure has its own set of features. Some of the distinct features of a Proprietorship Firm are – 

  1. Individual Investment – To incorporate a proprietorship firm, an individual who acts as a sole owner can invest his personal assets, other financial capital or can even borrow funds to commence the business activity.
  2. Ownership – In this structure, a single person possesses on the entire business and is considered as the owner of the firm. Further, the person concerned can transfer the ownership of the business either by way of a will or as a last testament as per his or her wish.
  3. No Profit no loss sharing – All the income earned or the loss incurred by the company exclusively belongs to the owner of the business, and he or she cannot share or enjoy it with someone else.
  4. Fewer Formalities – With the ease of commencement, the sole proprietorship offers compliance of a few formalities both before and after registration.
  5. Control Power – Controlling power of a sole proprietorship is in the hands of a single person, and he or she is not accountable to anyone else. Further, the person should be capable of using his expertise, skills, and intelligence to carry out managerial activities.

What are the Documents Required for the Incorporation of a Sole Proprietorship Firm?

Following are the Documents required for the Incorporation of a Sole Proprietorship Firm – 

  1. Aadhar Card Details of the Proprietor – The proprietor of the proposed sole proprietorship firm has to submit a scanned copy of his or her Aadhar card. The Aadhar card is always needed to register any sort of business in India. Further, a person cannot file an Income tax return (ITR) unless his or her PAN card is duly linked with the Aadhar card. In case the individual do not have an Aadhar card or its particulars and information does not match with details mentioned on the PAN card, he needs to get it corrected before the submission.
  2. PAN Card of the Proprietor – In addition to the Aadhar card, PAN card is also a necessary document for the registration of a proprietorship. Further, the PAN card is issued by the Income-tax department of India, which also contains a unique PAN card number. Lastly, all the details of the pre-required documents must match with the details mentioned of the PAN card.
  3. Current Bank Account Details – If in case the proprietor owns both the PAN and Aadhar card, then he is eligible to open a current bank account in the name of his business. In addition to these documents, he would also require both the identity and address proof. Lastly, the documents regarding Goods and Service Tax registration are also needed while opening a current bank account.
  4. Office Proof – A sole proprietor can carry out his managerial activities at any place whether owned or rented. Further, he has to submit proof of his registered office. The documents needed as proof are –
  • In case of an owned property – any utility bill such as the electricity bill, or the gas bill, or the water bill, etc. together with the No-Objection Certificate. Further, the bill concerned should not be older than two months
  • In case of a rented property – lease or the rent agreement together with the No-Objection Certificate from the landlord.

What are the additional Registrations required for the Incorporation of a Proprietorship Firm?

  1. Small Medium Enterprises (SME’s) – Individual requires registering as a small and medium enterprise (SME) as per the regulations of the MSME Act. For this, the concerned applicant has to submit an online application. Although, it is not compulsory and mandatory for him to do so, but will be highly beneficial for the company, particularly during the time of low-rate loan requirement. Further, the government has launched several schemes for the improvisation of the Small Medium Enterprises registered under the MSME act.
  2. Shop and Establishment Registration – The concerned individual must have a shop and establishment license as per the prevailing local laws. This license is issued by the municipal parties on the basis of the number of workers or employees working in the firm.
  3. Trademark Registration – It is needed in the case where the individual wants to trade his or her products or services with an exclusive name or brand. Further, it is beneficial and necessary where there is a risk of some misuse of the name used in the concerned organization.
  4. GST Registration – In India, obtaining GST registration is mandatory and obligatory for carrying out the managerial activities. Even if any person is doing the online business, then also he would require a GST number, also known as GSTIN (Goods and Service Tax Identification Number). Further, GST registration can be easily be done in just five working days with the submission of the following documents –
  • PAN Card of the Proprietor
  • Aadhar Card of the Proprietor
  • Passport-sized Photograph of the Proprietor
  • Office Proof
  • Copy of the Bank Statement that includes the concerned bank account number, branch address and the IFSC code.

What are the Post Compliance Requirements regarding a Proprietorship Firm?

Following are the Post Compliance Requirements regarding the Dole Proprietorship Firm –

  1. The owner of the sole proprietorship has to file annual Income Tax returns (ITR) on time.
  2. The owner of the Sole Proprietorship has to file his GST (Goods and Service Tax) return if he has the GST registration.
  3. If liable for TAX audits, then the owner of the business should deduct tax deducted at source (TDS) from the employee’s income and then file TDS returns.

How the concept of a Proprietorship Firm different from One Person Company?

S.NoPoints of DifferenceSole ProprietorshipOne Person Company (Pvt Ltd)
1RegulationGeneralSpecific – The Companies Act, 2013
2Type of Business StructureSimple and PlainHybrid (Sole Proprietorship + Private Limited Company)
3Business RegistrationNot mandatory and compulsory, however Sectoral licenses like the MSME or SME act, Shop and Establishment Regulation act, and GST registration are needed as may be applicable to a particular organization.Mandatory Registration with the Ministry of Corporate Affairs
4Company NameGenerally, the sole Proprietor uses his own nameMust Contain word “OPC” to differentiate itself from other business entities.
5EntityNo Separate Legal EntitySeparate Legal Entity
6LiabilityA sole proprietorship is deprived of the benefit of limited liability. Which means in case of any debt or loss, the assets of the business, as well as the personal assets of the concerned owner, would be used to incur the lossesOne Person Company (OPC) enjoys the benefit of limited liability under which the personal assets of the shareholder or the director or the owner remains protected.
7Minimum MembersMinimum one member is requiredMinimum one member is required
8Maximum MembersMaximum one member is requiredMaximum one member is required
9NominationOptionalMandatory nomination of one natural person to form an OPC.
10DirectorsNot ApplicableMinimum=1
Maximum= 15 unless increased
11Type of StructureSole FormCorporate Structure
12OwnershipIndividual ProprietorIndividual Shareholder
13ManagementThe Proprietor is the whole and sole person responsible and accountable for the firm. However, he may also hire employees for his support.Directors Collectively referred to as “Board of Directors”.
14Charter DocumentsNot SpecificMemorandum of Association (MOA) and Articles of Association (AOA)
15Bank FundingVery rare chancesPossible and higher chances than a Proprietorship firm.
16Foreign OwnershipCannot have foreign ownershipAllowed only if one of the nominees of the director concerned is a foreign national. But, both cannot be foreign nationals.
17ROC CompliancesNot ApplicableApplicable but less in comparison to a pure Pvt Ltd or a Public Company (i.e. big companies)
18Statutory Audit under Companies ActNot ApplicableMandatory
19Income Tax CompliancesSimple because taxed as IndividualMore of complex Compliances because taxed as a Company
20Indirect Tax CompliancesDepends upon various factorsDepends upon various factors
21GoodwillNot Impressive because no separate legal statusGood because of a One Person Company has a separate legal status and is considered as a Company under the Companies Act, 2013
22TransparencyVery rareYes, due to regular disclosures with regulatory authorities.
23ConversionIn case of a proprietorship, there is no need to convert into a public limited or private limited company and can carry on its business activity as a single owner entity, no matter what its revenues are.The One Person Company has to be converted into a private limited or a public limited Company (PLC). Once it has exceeded the turnover limit of rupees two crores for three years or rupees fifty lakhs as a paid-up share capital income.
24ExpansionVery Less Chances to grow and scale up the business.Can convert in to a Big Pvt Ltd or a Ltd Company voluntary subject to the regulations laid down.
25LiquidationOn the death of a proprietorOnly by way of a Legal Process
26Cost for Setting UpNominalMore cost is required in comparison to a Sole Proprietorship but not that expensive to set up.
27Name Protection by Ministry of Corporate AffairsNot ProtectedProtected by the Ministry of Corporate Affairs.
28Recommended ForUnorganized SectorFor every entrepreneur who desires to do business in an organized form and also wants to take benefits and privileges of a Corporate structure.

Conclusion

A sole proprietorship firm is a type of business structure prevailing in India that requires only one individual as the owner, proprietor and owner of the business concerned. Such an individual is solely and wholly responsible and accountable for the losses that take place in the business but, also have the ultimate right at the time of profit generation. Not to forget, the greatest disadvantage of this type of business structure is that the business is not separate from the owner itself. Additionally, any sort of problem or illness to the owner or death of the owner imperils the very existence of the concerned business entity.

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