All About Proprietorship


Proprietorship

A sole proprietorship is an independent business that is owned and managed by an individual solely. It implies that you and your business have a common identity; thus, your business does not have a separate legal entity from yours. So, if your business faces financial trouble, you have to take on all the legal responsibilities, and that’s what the biggest risk for this kind of business is. However, the plus point is that anyone who wants to start their own business can opt for sole proprietorship and do that with minimum investment. Here, you are the one who manages as well as controls the business.

To start a sole proprietorship business in India, you generally need not apply either for a government registration or visit an online portal and upload your documents there. However, it is always recommended to register your sole proprietorship business if you want to avail of some benefits offered by the government to the business sector.

KEY TAKEAWAYS

  • Sole proprietorship demands minimal administrative work in comparison to an incorporated entity.
  • A sole proprietorship business is simple to set up and does not require to be registered with the state or the central government.
  • You may register your sole proprietorship firm via an MSME registration, a Shop and Establishment Act License, or a GST registration, and avail of beneficiary schemes offered by the government to a registered business.
  • If you have decided on starting a sole proprietorship business, then the best part is you may start this business in your own name as well.
  • This type of business does not provide any legal protection to your assets even if you face a lawsuit.

Advantages of Sole Proprietorship

Here are a few of the advantages that a sole proprietorship business offers you:

Control over the Business: Being a sole proprietor, you enjoy complete control over the business. As you are the only one who is running the entire business and looking after all the aspects of your business, secrecy is easy to maintain in this type of business.

Less Compliances: A sole proprietorship is relatively an economical option to get your own business started as compared to starting a company or LLP. For, it can be started by a single individual as well. To get this type of business incorporated, you are supposed to adhere to just a few compliances.

Quick Decision Process: As you are the only one who is taking all the decisions regarding the operation of your business, you may take the final decision on an immediate basis without needing to consult anyone first. Thus, the whole decision-making power rests with you.

Disadvantages of Sole Proprietorship

Let’s have a look at some of the disadvantages that come along with the sole proprietorship business:

Difficult to Raise Funds: It is difficult to raise capital when you are the only one who is managing the entire business. A sole proprietorship business has no separate legal entity from its owner. It may come to an end anytime, and this makes it even more challenging to acquire funds from a third party. The capital used in the business is mostly the owner’s accumulated savings.

Unlimited Liability: The sole proprietor is personally liable regarding all the business transactions. Hence, this type of business attracts unlimited liability. If there occurs any loss in the business, you shall have to bear it all alone out of your personal assets.

No Perpetual Succession: If something unexpected happens to the owner, the business may come to an end as there is no perpetual succession. Your business may shut down anytime, which makes the sole proprietorship an unreliable form of business. As a result, it is challenging to gain public trust if you are planning to enter into a contract to expand your business.

How to Start a Sole Proprietorship?

A sole proprietorship business is very easy to get started with. As you do not need to register it with the state government, there is rarely a process that you are supposed to follow. However, if you want to avail of certain benefits of a registered business, then there are a few registrations required concerning your sole proprietorship firm. And then, you may dive into the following steps to complete the process:

  • Keep all the documents ready for the registration of your sole proprietorship.
  • Apply for a GST or an MSME registration whatever suits your business needs.
  • Once the registration is approved, you will receive the certification from the government.
  • Now, take your registration documents to any bank and apply for a current bank account.

Registrations Required for Sole Proprietorship Firm

MSME Registration: Unlike an MSME (Small and Medium Enterprise), registration is not mandatory for a sole proprietorship firm, it’s advisable to get one as it helps you avail of business loans and deal with some legal matters should you need it in the future. You may visit the MSME website and get your firm’s registration done through a simple online process. The government runs numerous schemes to help SMEs receive business loans at low-interest rates.

Shop and Establishment Act License: As per the local laws, notwithstanding what kind of business establishment you are running, whether it’s fully functional or not, you need to register it within 30 days. Once you obtain the Shop and Establishment License, it gives you the right to run your business in the local area or the state. You may also easily open a current account for your business with any bank by showing this license as proof.

This license is issued by the local municipality based on the number of employees working in your establishment. It covers business entities, including shops, restaurants, public amusements, retail businesses, commercial establishments, and more. You may use this license to avail of some beneficiary schemes offered by the state government.

Goods and Services Tax (GST) Registration: If your business is involved in inter-state supply of goods and services and has an annual turnover of more than ₹40 Lakh (or ₹20 Lakh if your business is in north-eastern states), your business must have GST registration. It is also indispensable for you to have this registration if you are planning to sell products online via e-commerce portals, like eBay, Flipkart, Amazon, etc. A GST registration helps you keep your taxation in check and utilize its composition scheme to lower your tax burden significantly.

Office Address Proof: For the smooth functioning of any business, it is essential to have a registered office address proof. If you own an office, you can use the electricity bill or any office ownership document for submission as an office address proof during a legal procedure. And, if your office is in a rented property, then you can use the rental agreement or a NOC given by the office landlord for your office address proof.

Sole Proprietorship vs. LLP

A sole proprietorship is a kind of business entity that is managed by only one person. It is also referred to as a ‘one-person company’. This type of business does not have a separate legal entity from its owner. And thus, being a sole proprietor, you are the only one who has to bear all the financial and legal issues and liabilities of the business.

Limited Liability Partnership (LLP) is formed with the involvement of two or more partners. In this scenario, the partners are usually protected by limited liability, and their personal assets are considered separate from the business assets. Therefore, in the case of solvency, there is no direct effect on the personal assets of the business partners.

Besides that, there are a few other factors that make these two entities differ from each other.

  • The provisions and compliances of an LLP are governed by the Limited Liability Partnership Act, 2008, not adhering to which leads to penalties. However, the sole proprietorship is not governed by any separate law or act that defines the compliance requirements.
  • A sole proprietorship does not have a compulsory audit requirement, while an LLP is supposed to follow through with the process if its turnover crosses ₹40 Lakh or capital contribution reaches ₹25 Lakh.
  • In the case of LLP, anyone can register their sole proprietorship with the same name in a different state. However, a sole proprietorship business demands a name that is exclusive to the company.
  • To expand its business, a sole proprietor has to register its business in different states, while an LLP can easily open its branches in different states.
  • A sole proprietor can use the slab rates to avail of tax exemption, while an LLP has to pay income tax at a flat rate of 30%.

Final words

Commencing a sole proprietorship business is one of the best decisions that you can ever make in your life. The risk is higher but so is the reward. The best part about a sole proprietorship is that you can start this type of business on your own without waiting for people to follow you, leasing a building, or arranging some expensive training for your staff. All you have to bear in mind is a few pointers here and there and change your name to a brand name (if you want to avail of some government benefits), and voila! You are all set to embark on an adventurous journey that may help you soar higher.

Other Words

  • Prepayment
  • Processing Fee
  • Pre-clousre
  • Partial Disbursement

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