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What Is Sole Proprietorship?

A sole proprietorship is an unincorporated business entity with one owner in which there is no legal distinction between the owner and the business. This translates to mean, sole proprietorship is a business which is controlled by an individual who has the absolute authority and responsibility with respect to the business.

The sole proprietorship is the oldest, most common and simplest form of business organization. It is also the most convenient form of business where the individual owns, operates and controls the same.

Procedure To Form A Sole Proprietorship Firm

Although there are no such legal formalities that are needed to be complied with to start a proprietorship firm, certain taxation and business-related formalities must be taken care of.

First of all, the owner of the proposed proprietorship firm must come up with a trade name of the business and get it trademarked. Then a bank should be visited and a form for the opening of an account for a proprietorship firm should be asked for. The individual can run his/her business from his place of residence but if at all the individual intends to run it from a commercial space, then provisions of Shops and Establishment Act of that particular state, where he intends to establish the business, need to be complied with. In the mentioned act, the owner is required to get the establishment registered, which asks for the owner/manager’s name, address and the category of business, along with a prescribed fee which varies from state to state. Other miscellaneous details like business hours of the firm, rules and regulations of the firm are asked apart from the ones aforementioned.

It is important that the owner possesses a PAN card since all the returns will be filed in the owner’s name. Businesses which have an annual turnover of INR nine lacs or more need to pay 10% service tax and hence require to be registered.

If the nature of the business of the proprietor is such which requires of procurement and sale of taxable goods within the state then registration for VAT (Value Added Tax) is required. If procurement/sale of taxable goods is across the states, then registration for CST (Central Sales Tax) is required. And if the owner intends to engage in international trade, then an ‘Importer and Exporter Code’ from the Director General of Foreign Trade is needed. A Professional Tax, the rates of which vary in different states, is levied if the proprietorship firm owner has employees.

Advantages Of A Sole Proprietorship Firm

The most sacrosanct feature of a sole proprietorship is the ease with which a person can form and dissolve it at the same time. It involves the least number of formalities as compared to other modes of formation of a company. No formal registration is required for one to register his proprietorship firm.

There is no complex management in a sole proprietorship firm unlike in private or public limited companies. It is the owner who is responsible for the company’s day to day activities. Hence, all the important decisions can be made by himself without having to seek approval from the upper echelons of the management/Board of Directors, etc as is commonly found in public/private limited companies.

In such kind of an establishment, the business secrecy is easy to maintain for one obvious reason that the owner only runs the business.

There are higher incentives when it comes to establishing a sole proprietorship firm. The owner of the proprietorship enjoys all the benefits or profits derived from the business. But at the same time, he alone has to bear the losses and liabilities as well.

Disadvantages Of A Sole Proprietorship Firm

Establishing a sole proprietorship firm comes with its set of disadvantages. First, a sole proprietorship has no perpetual succession. The firm exists as long as the owner is alive. The firm can cease to exist as per the whims of the proprietor himself. Hence, there is a lack of credibility when it comes to the continuation of a proprietorship firm.

Secondly, the owner is as much responsible for the losses as he is for the profits from the business. The owner is responsible for any losses, debts or violations coming from his proprietorship business. If any such situations arises, the personal property of the owner is at stake to clear the liabilities. In comparison to the private limited companies, the liability is limited only to the extent of shares held in the entity concerned. In short, sole proprietorship businesses have unlimited liability.

Thirdly, problems may arise if the owner chooses to raise capital/funds for his proprietorship business. This is because proprietorship firms neither issue stocks nor do they have any money generating investments like the companies do.

Who Should Choose To Form A Sole Proprietorship Firm?

A Proprietorship form of business is meant for those businesses where the product’s market is small where the capital requirements are minimal and low levels of risk are involved. Registrations are not a compulsion for such form of businesses. This goes on to say, one doesn’t need any approval to close their business as well. The profits that accrue from such businesses are enjoyed by the proprietor himself.  

One Person Company vs. Sole Proprietorship: Which To Choose?

For a layman, the two concepts might sound the same but an One Person Company (OPC) and Sole proprietorship have stark differences. OPC came into existence only after the amendment of the Companies Act in 2013. A One Person Company has a separate legal identity whereas in sole proprietorship, the proprietor/owner and the firm are just one and the same.

A One Person Company has limited liability which is antithesis to the concept of a sole proprietorship. Therefore, if the OPC is in default, the liability is limited, i.e., the stakeholders will be liable only to the extent of shares held by them but if there is default in a sole proprietorship, the owner will be absolutely liable to the extent that his personal assets can be sold off to cover the firm’s liabilities.

When it comes to raising funds, a sole proprietorship has difficulties in doing so owing to the risks imposed by unlimited liability.

The biggest drawback of OPC over sole proprietorship is that an OPC would be charged at a 30% base tax rate, a minimum alternative tax of 18.5% and a dividend distribution tax of 15% whereas a sole proprietor does not have to file taxes as a separate legal entity. Their taxes are calculated as an individual on their net taxable income.

However, the tax rates vary as per the income. The income tax chart for sole proprietorships is mentioned below –

There are certain complications as well when it comes to compliances and drafting work in an OPC. The owner of the OPC might have to hire a Company Secretary or a lawyer for compliance matters unless the owner himself is one!

Want to Register a Sole Proprietorship Firm/One Person Company?

Wish to have a Proprietorship/One Person Company in your name? We, at LegalDesk.com, would be happy to make it come true! We have an array of pre-drafted templates that have been verified by legal experts. Browse through our templates and create the draft that you require.

We, at LegalDesk.com, would be glad to help you in facilitating the setting up of a new company. We currently offer business documentation packs for startup firms and new businesses. Besides this, we also offer an array of online legal documents, using which you can create your own document in minutes. Once created, you can either download the document or avail our delivery service in which we get the document printed on stamp paper of the requisite value and deliver it to your doorstep. If you require any customisations, our support team can help you out with it. 

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