Proprietorship literally corresponds to ‘ownership’. Sole proprietorship is perhaps the easiest and the oldest business forms taken up by individuals. Before the business gains roots in the market, an entrepreneur likes to start browsing profitability of his business avenues out in the open. A sole proprietor, hence, is the only person initiating the start-up, carrying it forward to achieve revenues & profits and subsequently paying personal income tax on the income so generated. However, the legal existence of this form of business is not recognized by law and is touted to be a risky choice as compared to other structures of business like a private limited company or Limited Liability Partnership (LLP). In this article we will enunciate all about Sole proprietorship, its characteristics and registration process.
1. Single Entrepreneur – A sole proprietorship is run by a sole trader and is suitable for small businesses with light investment.
2. Complete Control: Since the daily affairs to run the business are taken by the proprietor himself, there is less confusions and more clarify about business decision.
3. Low cost investment: The cost of forming a sole proprietorship is relatively less, with requirements just being limited to having a bank account.
4. Easy entry and exit: The compliance part for a sole proprietor is almost nil, so it doesn’t take much time to come into the market and in case of business failure, it is an equally simple exit.
5. No legal distinction of enterprise assets: The assets and other resources used by the proprietor for his business are his own and are not considered separate from the business entity. Therefore, in case of possible loss or failure of repayment of a loan, a proprietor is accountable.
6. Proprietor to pay income tax: Unlike in case of a company or LLP, where the entity pays corporate tax, the income generated from the operations of a sole proprietor is his own. This makes him eligible to pay income tax on the income earned by his firm.
Sole proprietorship has been considered a traditional approach to run a business. It may a low cost budget and less investment, but it carries an equal number of drawbacks, namely:
While there is no legal procedure stipulated by law to register a sole proprietorship, it largelydepends on the type of business carried by the proprietor which decided the future course of actions. A business will either be
a. Manufacturing/product based
b. Service based
These type of enterprise aims at productions and sales of selling physical and tangible products to the customer online or offline. For eg: ecommerce websites, FMCG products wholesalers and retailers. The products so manufactured or sold require:
While for Firm registration, the documents required are more or less similar as provided in the checklist above, VAT registration procedure may vary state to state.
Unlike Manufacturing, Service based proprietorship specialises in providing consultancy services/Marketing/Digital Content/SAAS services/Business intelligence/technical know-how etc. The two main requisite here would be:
The same document checklist mentioned above in the article would be adhered.