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Posted on April 26, 2021
Basically, a Sole Proprietorship is a type of business in which formal government registration is not needed. This type of entity is managed, controlled and owned by a single person.
Sole Proprietorship is easy to start and the most common form of business in India. It is used by all types of micro and small businesses operating individuals. Starting a proprietorship is very easy as it has very minimal regulatory compliance and a few requirements to start operating the business. So, it is considered as an ideal type for small businesses and best for the start-up Entrepreneurs who would like step into the business world.
Who is Proprietor
A Proprietor is a living individual who is the owner of that particular business or Sole Proprietorship business. A Proprietor cannot be a legal entity or corporate and in the eyes of Law both the Proprietor and Sole Proprietorship are the same. Therefore, to register a Proprietorship firm, the PAN and documents of the Proprietor are the basic need to complete and to obtain the registration process and licenses. If there are any issues or liability in the Sole Proprietorship entity, the Sole Proprietor is personally responsible or liable for all issues or liability related to the business.
The registration process of Proprietorship
There is no certain or specific mechanism or procedure provided by the Government of India for the registration process of a Proprietorship. Even, there is also no State or Central Government Authority to govern or to manage the registration process or operations of Proprietorships in India. Hence, the existence of a proprietorship firm can be founded or shown through the proper tax registrations and license which received for the business. For example, MSME registration and GST Registration of the business can be applied and received in the name of the Proprietor which will acts as evidence to establish that the Proprietor is functioning a business as a Sole Proprietorship.
As there is no proper registration process to register the name of a Sole Proprietorship business, it is always risky as any other individual or entity can also use the same name to operate their business. So, it is better to go for a trademark registration on your Sole Proprietorship business name to avoid issues like duplicates and to protect the business name from other unwanted problems.
Proprietorship Registration Procedure
Before getting into the registration process, it is important to prepare and collect all the required information and documents which are needed. Collect which types of registrations will be suitable for your business, the average time required to complete a proprietorship registration is about 3 – 5 working days and is completely depend on the client document submission and government processing time. Once the registration process is completed, you can submit the application to the Banks to open a Current Account in the name of the business.
Common Registrations for Proprietorship
A Sole Proprietorship can be established through various ways, registrations and licenses, mentioned below are some of the common registrations process that are received to start a Sole Proprietorship firm.
GST Registration: In India GST Registration is a must for all types of business. If the Proprietor is selling goods or services and if that business cross the turnover threshold limit of GST, then it is a must to obtain GST registration. In almost all states of India, GST registration is needed for service providers whose annual revenue is more than Rs.20 lakhs and for traders, if the annual turnover is more than Rs.40 lakhs.
Import Export Code: If a Sole Proprietorship business undertaking import or export of goods into India then it is required to obtain the Import Export Code or IE Code in the name of the business from the DGFT
TAN Registration: If the Proprietor is making salary payments, then the Proprietor should obtain TAN Registration from the Income Tax department. TAN registration is a must to debut TDS from the salary.
MSME Registration: If the Sole Proprietorship is registered under the Ministry of Micro, Small and Medium Enterprises, then MSME or Udyog Aadhaar registration need to obtained in the name of the business to establish a business in the market.
FSSAI Registration: If the Proprietorship business deals with the selling of food products then FSSAI registration must be received after formal procedure from the Food Safety and Standard Authority of India and it is should be taken in the name of the Proprietor.
Opening a Current Account for Proprietorship: A current account must be opened for a Sole Proprietorship business. And to open a bank account, it is urged to obtain the GST registration in the name of the business.
Advantages of Proprietorship
The first and foremost advantage in starting a Sole Proprietorship business is their simple setup. as there is no proper registration process required to register or to start a Proprietorship, the business owner can start his/her business any time and start taking payments and issuing invoices from their customers without any worries about the registration.
The other advantage of starting a Sole Proprietorship business is that there is no need for any additional compliance in most of the cases. The PAN of the Proprietorship and Proprietor are the same and both are one. Hence, for a Sole Proprietorship business all you have to do is to file only income tax return in Form ITR-3 and it has to be done every year without fail, as this is the only evidence to prove that you are running a business.
Disadvantages of Proprietorship
Starting a Sole Proprietorship business is extremely easy but after the start-up phase, a Proprietorship firm does not offer a host of benefits like limited liability, proprietorship, separate legal entity, transferability, perpetual existence, corporate status and so on to the Proprietor – which are considered as desirable features for any small business.
Limited Liability: A Sole Proprietorship does not feature the Proprietor of the business with limited liability protection. Therefore, in case of any loss in the business or liability is made by the Proprietorship business, the Proprietor should take all responsibility for payment or to recover from the loss.
Separate Legal Entity: A Sole Proprietorship does not own a separate legal entity which means opening a current account in the bank in the business name can be a long process for a proprietorship when compared to the process of opening a current account for a Company or LLP.
Fundraising: A Sole Proprietorship business are not allowed to raise any funds for the business from any source like Private Equity funds, Venture Capital firms and Angel Investors. Banks also have some limitations to lend loan to a Sole Proprietorship business.
Transferability: As the PAN of a Sole Proprietorship business and the Proprietor are the same, any license or registration received in the name of the Proprietorship business cannot be transferred to any other individual.
Perpetual Existence: As a Sole Proprietorship business and the Proprietor are the same, therefore, the existence of the Proprietor and the Sole Proprietorship is also tied-up together. For instance, if the Sole Proprietor is no more, then the existence of the Sole Proprietorship business also ends.
As mentioned above, there are various disadvantages in starting Sole Proprietorship, therefore, a Sole Proprietorship registration is suitable only for individuals who runs an unorganized, small businesses which will remain the same or small or for business which will be operated for a limited time period.
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