Sole proprietorship

Sole proprietorship is one of the oldest and easiest Business Structure to start in India. A proprietorship is a type of business that is owned, managed, and controlled by one person - who is the proprietor. As the proprietorship and proprietor are one and the same, it is very easy to start and there are very minimal compliance requirements. As the proprietor and the business are one and the same, a proprietorship cannot have other partners or shareholders. Further, there is no limited liability protection for the proprietor from the business activities conducted in the sole proprietorship.

Who is a sole proprietor?

A sole proprietor is the sole owner of the proprietorship business. Hence, a business will be carried forward by making new bank account for the business and GST registration will be done by using PAN and Aadhar of the proprietor. The proprietor is completely responsible for all the assets and liabilities of the business. Proprietorship legal entity status and recognition There is no separate recognition of proprietorship as a separate legal entity. Hence, the business owner and the proprietorship are considered one and the same for all legal and official purposes.

Sole Proprietorship Registrations & Licenses

To run a proprietorship business in India, the proprietor will have to obtain PAN and Aadhar. The proprietor must obtain GST registration (voluntary or if exceeds the limit for registration), UDYAM registration and open a bank current account. In some states, the proprietor will also have to obtain Shops & Establishment Act registration. In addition to the basic requirements above, additional licence and permits may be required depending on the industry, state, and local regulations.

Advantages of Proprietorship

Easy registration: Sole proprietorship does not have any formal incorporation or dissolution process - as its the same as the Proprietor. However, to operate a business, the proprietor may have to obtain certain registrations and licenses to be compliant with the laws and regulations of India.
Lower compliance:As most proprietorships are only registered with government departments like Income Tax & GST, the compliance burden will be lower. On the other hand, entities like LLPs or companies are registered with the Ministry of Corporate Affairs and have to file various statutory returns and be audited by a Chartered Accountant each year.
Simplicity: As there are no partners, shareholders, or directors, the proprietor can easily operate this business with minimal documents and consent requirements. Hence, this type of business structure is best suited for very small businesses.
Business decision: In a proprietorship, the business owner takes all business decisions. There is no consent or approval required from any other person. Hence, a proprietor can normally take quick decisions regarding his business affairs.
Complete control: A sole proprietorship is owned only by the proprietor. He/she has complete control over the assets, revenue, expenses, and all business operations.

Disadvantages of Sole Proprietorship

Funding: This type of business structure relies solely on one person’s savings, borrowings, and credit history. As there are no other persons involved in this type of business structure, raising funds from banks will be very hard. Raising equity funds will not be possible - as this type of business entity does not allow for-profit sharing or shareholding.
Personal liability: If a proprietor is unable to pay business loans or taxes, in a proprietorship - the personal assets of the business owner can be attached or encumbered. Hence, in this type of business structure - the proprietor will be held personally liable until all the liabilities are extinguished.
Business continuity: In case of death or disability of the business owner, the sole proprietorship will be automatically dissolved. Hence, there will be no business continuity.
Growth: A proprietorship has various restrictions in terms of fundraising, liability, and business continuity. Hence, only very small businesses that are in the unorganized sector operate as proprietorship.
Unincorporated business: Sole proprietorships are unincorporated businesses. Hence, there is no centralized database available to see if a sole proprietorship is active or inactive. Thus, sole proprietorship entities are mostly classified as an unorganized business.

PAN card for Proprietorship Firm

A proprietorship is not a separate business entity. Hence, there is no procedure to obtain proprietorship PAN card. The PAN card of the business owner is used for the proprietorship.

Bank Account for Proprietorship

The bank current account for a proprietorship will be opened in the name of the business owner using his/her PAN. The business owner will have to submit proof for doing business. Any two of the following documents can be submitted to create a current account instead of savings account in the name of proprietorship:
1. GST registration certificate
2. Shop & Establishment Act license
3. License issued by the Registering authority like Certificate of Practice issued by Institute of Chartered Accountants of India, Institute of Cost Accountants of India, Institute of Company Secretaries of India, Indian Medical Council, Food and Drug Control Authorities,
4. Banks may also accept IEC (Importer Exporter Code) issued to the proprietary concern by the office of DGFT as an identity document for opening a bank account etc.

Obtaining Shops & Establishment Act License for Proprietorship

From state to state, the process for acquiring a Shop and Establishment registration certificate changes. It is available both online and offline. In most states, Shop and Establishment Act registration can be obtained within 2-3 weeks.

Proprietorship Business Activities

A proprietorship can undertake any type of business activity that an Indian person can undertake across most sectors and industries. However, there are some activities like banking, insurance, financial services, lending, defence, telecommunication that require specialized approval. In such cases, a company is mandatorily required to obtain various approvals from the Government. Hence, proprietorship business structure only works for business activities that are small scale in nature.

Compliances for Proprietorship

The following are some of the compliances that are applicable for a sole proprietorship:
Income Tax Filing: The business owner of a proprietorship will have to file personal income tax return using form ITR-3 or ITR-4. (Business Income: Only income tax forms ITR-3 and ITR-4 allow for declaring business income. Hence, all proprietorships will have to file form ITR-3 or ITR-4 to be compliant with the income tax regulations.)
GST Return Filing: If a proprietorship has GST registration, GST return must be filed every month and quarter as per the scheme under which the business is registered.
TDS Returns: In case the proprietorship is having employees or purchasing goods/services beyond a certain threshold - tax must be deducted at source and TDS returns must be filed every quarter.
In addition to the above, various other compliance requirements maybe applicable to the proprietorship based on industry and location.