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Proprietorship

Sole Proprietorship Firm Registration

Proprietorship Registration

A sole proprietorship is a type of unregistered business entity that is owned, managed and controlled by one person. Sole proprietorships are one of the most common forms of business in India, used by most micro and small businesses operating in the unorganised sectors.

Proprietorships are very easy to start and have very minimal regulatory compliance requirement for started and operating. However, after the startup phase, proprietorship’s do not offer the promoter a host of benefits such as limited liability proprietorship, corporate status, separate legal entity, independent existence, transferability, perpetual existence – which are desirable features for any business. Therefore, proprietorship registration is suited only for unorganised, small businesses that will remain small and/or have a limited period of existence.

There is no mechanism provided by the Government of India for the registration of a Proprietorship. Therefore, the existence of a proprietorship must be established through tax registrations and other business registrations that a business is required to have as per the rules and regulations. For instance, VAT or Service Tax or GST Registration can be obtained in the name of the Proprietor to establish that the Proprietor is operating a business as a sole proprietorship. Thus, all the registrations for a proprietorship would be in the name of the Proprietor, making the Proprietor personally liable for all the liabilities of the Proprietorship.

Advantages of Proprietorship

The following are some of the major advantages of proprietorship firm.

Easy to Establish

A sole proprietorship business does not have any specific registration requirements and the proprietor’s legal identity is used by the business. Hence, a proprietorship can be started without any registration. Using the PAN and Aadhaar of the promoter,  Udyog Aadhaar registration and Trademark Registration can be obtained optionally to create and protect the identity of the business.

Easier to Operate

As a single person is at the helm of affairs, it is easier to operate as a particular person will be the sole decision maker and he need not consider a plethora of opinions. There is no concept of a board meeting or approval from other persons in a proprietorship firm.

Sole Beneficiary of Profits

No other business, other than that of a sole proprietorship and one person company, entitles the owner as of the sole beneficiary of profits. In all other types of an entity like a partnership, LLP or company, a minimum of at least two persons are involved.

Compliance & Taxation

Since a proprietorship firm is not registered with any Government authority like the Ministry of Corporate Affairs, the compliance requirements are minimal. Further, the proprietor would only have to file income tax returns if the firm has a taxable income of more than Rs.2.5 lakhs per annum. In the case of proprietors who have attained the age of 60 years or more during the previous year, income tax filing would be required only if the taxable income is more than Rs 3,00,000. In the case of proprietors who have attained the age of 80 years or more during the previous year, income tax filing would be required only if the taxable income is more than Rs 5,00,000.

Finally, the sole proprietor can also reduce the income tax liability by availing the following deductions:

  • Contributions to provident fund, life insurance premium, subscription to certain equity shares or debentures etc.
  • Contribution to certain pension funds.
  • Contribution to notified pension scheme of the Central Government.
  • Medical insurance premium.
  • Caring for a dependent who is ailing with disability.
  • Medical expenses.
  • Repayment of the loan availed for higher education.
  • Payment of rent.
  • Income from royalty.
  • Royalty on patents.
  • Handicapped persons.

Privacy

Since sole proprietorships are an unregistered form of entity, there is no database maintained by the Government with a list of all proprietorships. Hence, proprietorship firms are more private when compared to a company or LLP whose details are published on the MCA website.

Disadvantages of Proprietorship

The following disadvantages must be taken into perspective while deciding to start a sole proprietorship firm:

Unlimited Liability

This is one of the most disturbing aspects of a sole proprietorship firm. On the occurrence of a loss, the proprietor must meet the liabilities at any cost, which implies that if the need occurs, his/her personal assets may have to be used for discharging the liabilities.

Difficulty in Obtaining Funds

A sole proprietor cannot indulge in the sale of business interest or shares, which deprives the entity of the receipt of any type of equity funding.

Further, banks are also wary of lending large sums of money to a proprietorship firm as the existence of the proprietorship firm is tied to the proprietor. On the other hand, in a company or LLP, more than one person would be responsible for the liability and business continuity would be assured in the event of death or insolvency of one of the promoters. Hence, it would be easier for a company or LLP to raise a bank loan when compared to a proprietorship firm.

Higher Tax Incidence

Proprietorship firms are taxed similarly to an individual. Hence, the income tax rate for a proprietorship firm is based on slabs. Though the income tax rate for income of up to Rs.10 lakhs is lower when compared to a company, proprietorship firms cannot enjoy various benefits enjoyed by an LLP or Company. Further, for taxable income of more than Rs.10 lakhs, the income tax rate for a proprietorship firm is higher than the income tax rate of a company. Hence, in the long-run, it would be more prudent to register a company to reduce income tax liability.

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