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Can a Foreign National Register as a Sole Proprietorship in India?

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Last Updated on July 9, 2023 by Kanakkupillai

Introduction 

The simplest and most prevalent type of business structure is a sole proprietorship, in which a single person owns and runs the whole company.

The Ministry of Commerce and Industry, Government of India, Department for Promotion of Industry and Internal Trade, constantly updates its integrated policy framework for foreign direct investment (FDI) in India. Foreign nationals are also encouraged by the Indian government to invest in start-ups, small enterprises, and MSMEs.

The regulations allowing foreign direct investment in India have also undergone fundamental modifications by the Indian government, greatly simplifying the process for foreign nationals and international firms to establish businesses in India.

Definition of a sole proprietorship

A sole proprietorship, also known as a lone trader or a proprietorship, is an unincorporated business with a single owner who reports its profits on its tax return. Because it is not necessary to establish a unique business or trade name, many sole proprietors operate under their names.

Key Takeaways

  • A sole proprietorship is the simplest business structure where a single person owns and runs the business.
  • Indian government encourages foreign nationals to invest in start-ups, small enterprises, and MSMEs.
  • A sole proprietorship has characteristics like complete command, indefinite liability, individual taxation, and a few administrative obligations.
  • Advantages include quick decision-making, simplicity in starting and closing, personal supervision, and flexibility.
  • Disadvantages include limited managerial ability, limited capital, unlimited liability, limited expansion potential, and uncertain existence.
  • Legal requirements for sole proprietorship registration in India include Indian citizenship, GST registration, and opening a bank account.
  • Eligibility criteria for foreign nationals may vary by country, including age requirement, citizenship, legal capability, business purpose, and business name.
  • Steps to register as a sole proprietorship in India include choosing a name, obtaining a PAN card, opening a bank account, acquiring licenses, registering for taxes, and obtaining relevant certificates.
  • Tax obligations for sole proprietorship include income tax, self-employment tax, sales tax, employment taxes, and excise tax.

 

Characteristics of Sole Proprietorship

1. Complete command: You own and manage the whole business as a lone owner. You have complete control over a variety of business decisions, including how your functions are managed and how you want to grow your business or spend your profits, and you are not required to consult with the company’s directors or shareholders before making a choice.

2. Consistency: This relates to the earlier point. A single trader relies on the owner since the owner and the business are not legally separate. 

3. It is not a distinct legal entity: You are given the same treatment as your business because you are a sole proprietor.

4. Indefinite liability: All business duties fall under the complete liability of sole owners.

5. Individual taxation: You pay income tax rather than corporation tax on taxable business income. If your company’s yearly turnover surpasses the current GST threshold of Rs. 20 lakhs (for the fiscal year ending in 2021/22), you must also register for GST.

6. Privacy: Since no government agency requires you to reveal your confidentiality reports, being a lone proprietor gives you greater privacy.

7. Few administrative and filing obligations: Not much paperwork is needed to operate as a sole proprietor. Remember that you must continue to track your business’s expenses and revenue to file your income tax returns.

Advantages of Registering as a Sole Proprietorship 

Some of the advantages that sole traders enjoy are the following:

Quick decision: A solo entrepreneur with experience and efficiency may make decisions swiftly in the commercial world.

Simple to start and close: A sole proprietorship business is run, owned, invested in, and controlled by a single person who can easily form and dissolve it whenever they want.

Personal supervision and control: Due to his or her dual roles as manager and owner, a lone proprietor is able to easily maintain and develop business and personal relationships with all relevant parties, including clients, vendors, employees, and others. This enhances the reputation of the company.

Secrecy: To get the intended results, it’s imperative to maintain the privacy of business affairs.

Flexibility: The sole trading firm is flexible. As a lone proprietor, the owner has more freedom to manage his or her business.

The disadvantages that sole traders have to face are the following:

Limited managerial ability: It is managed by a lone proprietor who might be incompetent regarding administration and technology.

Limited capital: Due to the involvement of a single owner, its equity is constrained.

Unlimited liability: Regarding the capital of his business, the solitary proprietor is completely liable.

Expansion potential is limited: Its potential for expansion and improvement is constrained.

Uncertain existence: Its existence is intrinsically connected to that of its owner. As a result, it is terminable whenever the owner passes away, becomes insane, becomes bankrupt, or becomes incapacitated.

Legal Requirements and Documentation for Sole Proprietorship Registration in India

The following criteria must be met to qualify for sole proprietorship:

1. The candidate must be an Indian citizen who pays taxes.

2. The applicant must register their business for GST.

3. Open a bank account in the proprietorship’s name.

Eligibility for foreign nationals 

Overview of eligibility criteria for foreign nationals 

Different individuals or entities may be eligible for sole proprietorship registration depending on the nation or location. There are a few standard eligibility requirements that must be met in general.

  1. Age requirement: In most nations, an individual age must be at least 18 to register as a sole proprietorship. The age requirement, however, may be lower or greater in various areas.
  2. Citizenship: To register a sole proprietorship, the owner may need to be a citizen or a legal resident of the nation. Foreign nationals may form sole proprietorships in some countries; however, additional criteria may exist.
  3. Legal capability: A lone proprietorship owner needs to be able to sign contracts legally. In other words, they shouldn’t have any legal restrictions, like being declared bankrupt or having a felony conviction.
  4. Business purpose: Before launching a sole proprietorship, the owner should have a certain goal in mind. This could be any legitimate commercial endeavour, such as selling goods or rendering services.
  5. Business name: The proprietor must have a distinctive business name not already used by another company. The company name may need to adhere to specific naming conventions in some nations.

Step-by-step Guide for Foreign Nationals to Register as a Sole Proprietorship in India

Registering a sole proprietorship in India is a rather easy and uncomplicated process. The procedures for setting up a proprietorship are as follows:

  1. Pick a name for your proprietorship business: Picking a distinctive name for your company is the first step in registering a proprietorship. Make sure no other firm or business has already registered the name you intend to use.
  2. Obtain a PAN card: After deciding on your company’s name, you must get a permanent account number (PAN) card from the income tax department. An exclusive identifying number called a PAN card is required for all enterprises in India.
  3. The third step is to open a bank account specifically for your sole proprietorship business. To open the account, you must give the bank your PAN card and other necessary documents.
  4. Acquire the relevant licenses: Depending on the nature of your business, you might need to apply for different licenses and permissions from the municipal, state, or federal governments. For instance, you must seek a license from the Food Safety and Standards Authority of India (FSSAI) if you are beginning a food business.
  5. Register for GST: You must register for the goods and services tax (GST) if your annual turnover exceeds Rs. 20 lakh. Through the GST portal, you can register for GST online.
  6. Register for additional taxes: Depending on the state of your firm, you might also need to register for other taxes, such as the professional tax.
  7. Register with other authorities: Depending on your line of work, you might also need to register with additional agencies like the Employee Provident Fund Organisation (EPFO) and the Employees State Insurance Corporation (ESIC).
  8. Obtain the relevant certificates: If your company needs certifications, like ISO certification, you should get them to boost your company’s credibility.

Tax Obligations of a Sole Proprietorship

A sole proprietorship must fulfil certain tax requirements to comply with the tax regulations of the nation or territory in which it conducts business. Here are a few typical tax responsibilities for a sole proprietorship:

  1. Income tax: The net income of a sole proprietorship, which is the revenue earned less permissible deductions, is taxed. The owner discloses the earnings and outlays on their personal income tax return.
  2. Self-employment tax: A sole proprietorship’s owner is accountable for paying this tax, comparable to Social Security and Medicare taxes for independent contractors.
  3. Sales tax: If a sole proprietorship sells products or services subject to sales tax, the owner must collect the tax and send it to the appropriate taxing body.
  4. Employment taxes: If a sole proprietorship employs people, the owner is responsible for withholding and remitting federal, state, and payroll taxes, including Social Security and Medicare taxes.
  5. Excise tax: Companies that sell alcohol or cigarettes, for example, may be liable for excise taxes.

Conclusion

The simplest option for a foreign national to establish a sole proprietorship is to connect with the Chennai-based Kanakkupillai, the web page of Govche India Pvt. Ltd., India’s leading legal service provider. Your paperwork will be completed promptly and simply with their legal experts’ help. Kanakkupillai is an expert in India at registering sole proprietorships firm online. Their services will make your experience hassle-free, enabling you to confidently and effortlessly start down your entrepreneurial road.

Kanakkupillai

Kanakkupillai is your reliable partner for every step of your business journey in India. We offer reasonable and expert assistance to ensure legal compliance, covering business registration, tax compliance, accounting and bookkeeping, and intellectual property protection. Let us help you navigate the complex legal and regulatory requirements so you can focus on growing your business. Contact us today to learn more.