There are various business structures such as Sole Proprietorship, One Person Company, General Partnership, Limited Liability Partnership, Private Limited Company, and Public Limited Company, that an entrepreneur can choose to start a business. Choosing an ideal legal structure would be one of the first decisions an entrepreneur would make. But how to decide which business entity is ideal for your business?
In this article, we will discuss Sole Proprietorship.
A Sole Proprietorship is a business entity in which a single person owns, manages, and controls all the activities of the business. All the resources are funded, controlled, and utilized by the sole proprietor with the sole objective of earning profit for the business. The sole proprietorship is not a legal entity; has no distinction between the owner and the business.
All the profits generated by the business are drawn by the sole proprietor. Similarly, in case of loss, the sole proprietor bears them. Thus, the sole proprietor enjoys all the profits and bears all the losses incurred from the business solely.
Ownership & Control
The sole proprietor is the single owner of the business. The individual owns all the assets and liabilities of the business and consequently bears all the risks associated with the business.
Since there is only one owner, the controlling power always remains with the owner. This means that the owner takes business decisions by themselves, however, the owner is free to consult anyone.
The capital required to run the business is entirely arranged by the sole proprietor and it can be funded by himself/herself solely or from numerous other sources for example friends, family, or financial institutions.
A sole proprietor has unlimited liability. In other words, in case of loss, the business assets along with the personal assets of the owner may be used to pay off all the liabilities of the business.
The formation and operation of a sole proprietorship are the easiest of all business entities. There are almost no legal formalities. Most importantly, it does not require registration. However, depending on the nature of the business, it may require obtaining certain licenses or permissions from the local administration.
Advantages and Disadvantages
1. Easy to Form and Wind up
2.Quick Decision and Prompt Action
3. Better Control
4. Low Costs Compliance
5. Maintenance of Business Secrets
6. Flexibility in Operation
7. Direct Relationship with Customers
1. Limited Capital
2. Unlimited Liability
3. Lack of Continuity
4. Lack of Managerial Expertise
5. Limited Scope of Business
6. Not Investor-Friendly
7. Difficult to Obtain Loan
Suitability of Sole Proprietorship form of Entity
Sole proprietorship form of business entity is suitable where:
- The nature of business is simple, such as internet cafes, garment businesses, etc.
- The capital requirement is small and the risks involved are not high, such as tea stalls, grocery stores, salons, etc.
- The market for the product is small and local, such as selling hardware, books, stationery, furniture, etc.
- The customers need personalized products, such as custom garments, making special types of food items, etc.
- Skilled work is required, such as making jewelry, cutting hair, or tailoring.
Non - Suitability of Sole Proprietorship Entity
Sole proprietorship form of business entity is not suitable for high-risk businesses as it will put the proprietors’ personal assets at risk. Risky businesses include import-export, manufacturing alcohol, construction, hotels, etc.
Documents required for Sole Proprietorship Entity
The sole proprietorship form of the business entity requires the following documents:
- Aadhar Card of the Owner
- Pan Card of the Owner
- Registered Address Proof
- Open a Bank Account
Registration of Sole Proprietorship Entity
Registration of sole proprietorship form of business entity is easy. It does not require any complex registration. Only a few licenses and permissions are necessary depending on the nature of the business.
The sole proprietorship is required to have:
- a business name and
- a designated business location.
Some general licenses and permissions that a sole proprietorship may require are:
- Shop and Establishment Act License: Generally, the businesses having shops and factories require this license as it acts as proof of the existence of a business.
- GST Registration: For manufacturing and trading businesses having expected turnover over INR. 40 Lakhs and INR. 20 Lakhs for special category states mandatorily require registration under GST. The businesses that do not exceed the prescribed limits have an option to choose whether to voluntarily register for GST or not. Registration under GST has both advantages and disadvantages. A detailed comparison has to be made whether voluntary registration under GST is beneficial or not for the proprietary concern.
- TAN Registration: Tax Deduction Account Number (TAN) is a 10-digit alphanumeric number issued by the Income-tax Department. It is to be obtained by all persons who are responsible for deducting tax at source (TDS) or who are required to collect tax at source (TCS).
- FSSAI Registration: FSSAI Registration requires every Food Business Operator (FBO) involved in the manufacturing, processing, storage distribution, and sale of food products compulsorily to obtain FSSAI Registration or License. FSSAI Registration is different from the FSSAI License and every FBO should obtain the necessary registration or license depending upon the size and nature of the business. It is a 14-digit number that is printed on all the food packages. The 14-digit registration number provides all details about the assembling state and producer’s permit.
Post Registration Compliance
The sole proprietorship form of the business entity requires the following post-registration requirements:
- Certificate of registration under the Shop and Establishment Act.
- Business licenses or registration by the State/ Central Government depending on the nature of the business. The requirements for these licenses or registration vary from state to state. As some states might require certain licenses for a particular industry while some states do not.
- Income Tax Return needs to be filed is in the name of the sole proprietor indicating income of the sole proprietorship entity.
- Utility bills such as water bills, electricity bills, internet bills, and telephone bills. All such bills must be in the name of the proprietary concern.
- Certificate of GST registration, if required.
Audit for Sole Proprietorship Entity
The proprietary concern that exceeds total sales of INR. 1 Crore during the financial year (1st April – 31st March) requires an audit by a practicing Chartered Accountant.
Sole Proprietorship Vs Other Entities
The sole proprietorship form of business is the most common form of business entity. The rules and regulations governing it are very minimal or few; there is no minimum capital required; the profits generated are solely enjoyed by the proprietor and the main risk of the sole proprietorship form of business is that the proprietor has unlimited liability.
Choosing the ideal legal entity for your business should be done in consultation with a legal professional. Your Virtual Legal Counsel can guide you to set up the most preferred legal entity for your business. Your Virtual Legal Counsel will work with you as a partner in incorporating and protecting your business. Schedule a meeting with YVLC to discuss the ideal structure for your business to set up in India.