What is a sole proprietorship?
Sole Proprietorship is a business enterprise that is owned and controlled by one person who possesses the entire authority & responsibility with respect to the business. He can hire employees and pay them salaries, but legal responsibility for the obligations of the business is on the sole proprietor. The practical implication of such an arrangement is that an owner alone gets the entire profit (after paying costs) but he is also personally liable. This is so as a proprietorship is not a distinct entity unto itself, rather the business and its owner are clubbed together.
What are the advantages of a sole proprietorship?
1. Cost effective: Since no formal registration is needed there is no cost at all in setting up a sole proprietorship. However, operating the business from a separate space will require you to obtain business specific registrations such as a trade Shops and Establishment Registration and in some states, a trade licence (see subsequent chapters of this course for a detailed discussion on trade licence). Additional income tax registrations (apart from a simple PAN card) and service tax registrations may be required if the business crosses a certain turnover threshold.
2. Flexible business decisions: Since one person owns the business and has absolute control he can always make quick decisions and be flexible as well.
3. Control over financials of the company: Retention of complete control over the finances of the business all of whose profits flow to the owner means that this form of business organization gives a very strong incentive for work to the business owner.
4. Business relations: Often the sole proprietorship business model is found in lines of work where close personal relations are maintained since the sole proprietor is capable of ensuring adequate one on one relation with both employees and customers.
5. Confidentiality: Ensuring the safety of business secrets is also a much easier task in this form of business organization than any other.
What are the disadvantages of a sole proprietorship?
1. No perpetual succession: It can exist only for as long as the owner exists (an end can be put to the business by the owner’s death or insolvency).
2. Difficult to hire and retain employees: Expansion of the business beyond a certain point becomes very tough as since the proprietor cannot be an expert in every aspect of business management more employees are needed.
3. Raising capital: As sole proprietorship is run by a single person, it is difficult to raise capital.
4. Unlimited liability: Sole proprietors have unlimited liability, which means that in a situation where a sole proprietor fails to meet his debts or business obligations and a lawsuit is filed by a consumer then the personal properties of the proprietor could also be disposed of to satisfy the debts.
What are the legal compliances to be met for running a sole proprietorship business?
1. Applying for PAN. If you already have one this step is not required.
2. The next step is to name the business.
3. There is no formal registration required, but the next step is to open a bank account in the name of the business.
4. You can also register as a Small and Medium Enterprise (SME) under MSME Act, though not mandatory, it is beneficial to be registered under the same.
5. You can also register for GST if your turnover exceeds Rs 20 lakh.
6. One can also get a Shop and Establishment registration done.
1. Utility Bill of the business place
2. KYC documents of the Bank
3. License issued by the shops and Establishment Act
4. Income Tax Returns of the Proprietor
Any 2 of the documents can be submitted for the Bank Account opening along with the Identity and Address proof of the proprietor.
What are the Compliances required?
As a sole proprietor, you must file Income Tax Return annually.
Also, you need to file your GST Return if you are registered under GST.
A sole proprietor should also deduct TDS and file TDS return if liable for Tax Audit.
Contributed by SARVESH KUMAR, CA Final student of ICAI and a trainee at SMMP & Associates (www.smalpani.com). For any queries or suggestions mail at firstname.lastname@example.org