Sole Proprietorship: A Conceptual Analysis

A Sole proprietorship is that business format which is owned, controlled and managed by a single individual. In India, it is one of the most chosen forms of business, utilized by the small businesses working in the unorganized sectors. Further, starting a business as a sole proprietorship is comparatively easy and convenient to operate. Furthermore, the concept of a sole proprietorship is neither considered as a company nor a corporation, in fact, it is the business owned by an individual. Lastly, the registration of sole proprietorship is essential for opening a current account under the name of a small business.

The income earned is basically considered as the business income and the losses incurred as the business loss by the owner in his or her individual ITR (Income Tax Return). Further, the concept of a sole proprietorship has many shortcomings, like the proprietor’s unlimited liability, neither a separate legal entity nor have perpetual existence. Furthermore, because of these reasons, it is always considered only by small traders and merchants as a business structure.

What is the Concept of Sole Proprietorship Registration?

In India, a sole proprietorship is a convenient and easy way to commence a business. It is neither recognized as a corporation nor a company. Moreover, the business concerned is owned, controlled and managed by a single person, who is the owner or director or shareholder of the proposed entity. Some of the common examples of the sole proprietorship business are small shops like the chemist, saloons, grocery, etc.

Any individual who desires to sell his or her goods or services can operate their business as a sole proprietor and can also enjoy the rights offered to a registered legal company. Further, most of the new entrepreneurs find this business structure as an ideal business entity and have also registered their business under it. Furthermore, the loss incurred or the profit earned by the company is recognized as the profit or loss of the concerned individual and the income earned by the company is recognized as the owner’s income as per the Income Tax Act, 1961.

Further, registering a business as the sole proprietorship is a digital process that can be complemented with the help of a field expert. However, any person interested in registering a business as a sole proprietorship needs to fulfill some basic requirements such as the opening of a bank account in the name of the concerned business entity, etc.

Furthermore, an individual can choose any of the following options for the registration –

  1. SME Registration
  2. Registration under the Shop and Establishment Act according to the rules and regulations prescribed by the respective state
  3. GST registration

What are the Characteristics of a Sole Proprietorship?

Following are the Features attached to a business structure like Sole Proprietorship –

  1. No sharing of Profit and Loss – All the income earned or the losses incurred or any such other revenue generated from the sole proprietorship business belongs to the sole proprietor only, and no further sharing of the business profits earned and losses incurred are followed.
  2. Individual’s Capital – To commence a business or to continue the operations regarding the capital invested belongs to the sole proprietor only. Further, this can be either from his personal owned resources or by borrowing.
  3. Single Ownership – A single person can own the entire business and also all the assets and property concerned belongs to the proprietor itself, further, there is no separation of demarcation between the two and all the risk associated with the sole proprietorship is that of the sole owner.
  4. Unlimited Liability – One of the biggest disadvantages attached to a sole proprietorship is unlimited liability. In the incident of any loss, the proprietor’s personal assets can also be attached.
  5. Less Legal Formalities – This form of business structure offers the ease of commencing, operating and even the closure of the business.
  6. Single Control – All the control related to the sole proprietorship is maintained by only one person. Hence, a single person is in charge of all the business activities.
  7. No Legal Demarcation between the Owner and Business concerned – The sole proprietor uses his own skills, proficiency, intelligence, and expertise to operate the business.

What are the Benefits Annexed with the Registration of Sole Proprietorship Firm?

Following are the benefits or the advantages of sole proprietorship registration

  1. Cost-Effective – As there is no formal type of registration required, the cost of setting up a sole proprietorship firm is comparatively low as compared to other business formats such as the Private or Public companies or the OPC company
  2. Flexible Business Decision – In a sole proprietorship business, the person operating and managing such a business as the whole and sole. Thus, the process of decision-making becomes comparatively quick, easy and efficient and also the decisions are taken within the timeframe prescribed.
  3. Sole Control over the Finance – Handling finance is a very crucial aspect of every business concerned. So, a quick and timely financial decision undertaken by the person concerned in such business format helps in grabbing various opportunities.
  4. Business Relations – This helps to build good relations with both the customer and employees and such business models are found in lines of work where close and personal relations are maintained.
  5. Confidentiality – The sole owner is the only person who looks after the entire business, so the business secrets are not leaked to the outsider like another proprietor.
  6. Less Time-Consuming – The registration of the sole proprietorship business is not a time-consuming task, and moreover, it is very easy and simple to register such business.
  7. Relatively Inexpensive- It is inexpensive in comparison to the One Person Company. As, there is no requirement to hire an auditor. Further, there is no need to provide a lot of employment.
  8. Minimal Statutory Compliance – The statutory compliance such as the annual fillings, sales taxes, professional taxes are not there, etc.
  9. Easy to Close – Being a Sole Proprietorship Firm owner, the process of winding up of the business is easy as not much formality is needed.  Only the tax registration is acquired by the proprietor named must be canceled.
  10. Information is not made available to the Public – Unlike the Private Company, Limited Liability Partnerships or the One Peron Company, etc. where the financial statements and the audit reports are made available to the public through the MCA (Ministry of Corporate Affairs) portal. In contrast, the financial reports concerning the Sole Proprietorships remain in the private hands. Further, even the list of all the running proprietorships is not readily available with the Government officials.
  11. No Specific Audit Requirement – The Sole Proprietorship is not needed to get its accounts audited for each financial year under any of the specific law. Further, the audit requirement will depend upon the business nature and the threshold limits for the turnover prescribed for the conduct of the audit. Further, a tax audit is needed if the annual turnover or the sales of the concerned business exceeds rupees one crore, and for the professional services, the audit is needed if the receipts exceed rupees fifty lakh. Similarly, the GST audit is needed if the annual turnover exceeds rupees two crores.

Is it Necessary to get a Sole Proprietorship Registered?

It is not compulsory and mandatory to register such a kind of business. But, for the sake of transparency and giving surety to creditors, it becomes very important to register a sole proprietorship business. But today, in the case of Goods and Service Tax, a sole proprietor can register himself to establish that he is operating and working as a sole proprietorship firm.

What are the Documents Required for the Registration of the Sole Proprietorship?

Following are the documents required for the incorporation of the sole proprietorship firm –

  1. Aadhar Card
  2. PAN Card
  3. Current Bank Account Details
  4. Rent agreement and the No-Objection Certificate from the concerned landlord in case of the Rented Property
  5. Electricity bill or any other type of address proof in case the property used as the registered business is the self-owned property

What is the Procedure for obtaining the Registration of the Sole Proprietorship?

There is no such specific procedure prescribed for obtaining the legal registration of the Sole Proprietorship under any law. But, the individual can apply for a few registrations or licenses under various prescribed laws to avoid any complicated future scenario. The following are some of the registrations or licenses that may be chosen by the Sole Proprietor –

  1. Registration under the Shop and Establishment Act – It is needed by the local laws prevailing in an area where the concerned Sole Proprietorship is located.
  2. Registration under the Micro, Small and Medium Enterprises Development Act (MSMED) – This specific License or Registration is needed in the case of a Micro, Small and Medium Enterprises (MSME).
  3. Registration under the Goods and Service Tax (GST) – This registration is required if in the case the annual turnover of the business exceeds the specified limit. The limit prescribed is rupees forty lakhs for the supplier of goods and rupees twenty lakhs for the service providers. Further, this specified limit is reduced further to rupees twenty lakhs and rupees ten lakhs respectively for some specified States.
  4. Trademark Registration – It is needed in the case where the applicant concerned wants to trade in his products or services with an exclusive brand name or brand. Further, it is beneficial where there is a threat or risk of some kind of misuse of the brand name used in his or her business.
  5. Licenses or the Certificates required according to the Business nature – These Licenses and Registration include the following –
  • Drug License
  • Labour License
  • Regional Transport Office (RTO) permit
  • FSSAI (Food Safety and Standards Authority of India) License
  • Mandi License
  • Certificate granted by the ICAI (Institute of Chartered Accountants of India)