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Sole Proprietorship

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Sole Proprietorship How ?

A sole proprietorship is the oldest and most common form of business structure for a small business. A sole proprietorship is a business structure owned, operated and managed by a single individual.

Sole proprietorship firm is not a legal entity and does not have a distinct status than the owner.

Overview

A sole proprietorship is also known as a sole trader or simply a proprietorship. It is a business structure owned and run by a single individual and in which there is no legal distinction between the owner and the business. The identity of the organisation is nothing but the individual himself. The owner receives all profits (after tax) and has unlimited responsibility for all losses and debts.

He/she is the sole authority to take decisions, enjoy all profits of the firm and is personally liable for all losses of the firm. The proprietorship form business carries unlimited business risk, as the business proprietor is individually responsible to settle all business liabilities. The proprietor’s personal assets are at risk to compensate for the business liabilities.

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How to set up a sole proprietorship firm

In India, there are no specific laws for registrating a sole proprietorship. A proprietor may use a trade name or business name other than his/her name. While selecting a name, it is advisable to select a unique name to avoid the potential infringement of an existing trademark.

Even though registration is not essential, the owner has to obtain the necessary licenses specific to his/her line of business such as Shops & Establishments, Professional Tax, Service Tax, VAT, IEC, etc. A sole proprietorship can be registered under the MSME Act to avail the benefits and protection under that act.

Technically, no registration is required to start a business under sole proprietorship. However, to open a bank account in the name of the firm, a minimum of 2 registrations such as Shops & Establishments, Professional Tax, Service Tax, MSME, etc. under the local, state or central authority is mandatory to comply with the Know Your Customer (KYC) norms of the bank.

What are the benefits of a proprietorship?
  1. No registration: A sole proprietorship business need not be registered under any specific law in India, so it is easy to start a business.
  2. Tax: Since a sole proprietorship is an individual business, all profits are taxed in the name of the individual himself.
  3. Management: A proprietor manages the business as per his/her will and wish.
  4. Quick decisions and flexibility of operations: Since the proprietor is running his/her own business, all decisions can be taken by himself/herself.
  5. Legal compliance: Since a sole proprietorship is not created by law, no specific compliance or filing is required except for tax compliance, etc.
  6. Business closure: It is easy to close a sole proprietorship business. The proprietor can sell all businesses without much difficulty.
What are the disadvantages of proprietorship?
  1. Unlimited liability: As there is no legal distinction between the owner and the proprietorship firm, the liability of the owner is unlimited beyond his/her capital. A proprietorship is not a legal entity.
  2. Limited capital: The entire capital is to be brought into the business by the proprietor. As it is not a legal entity, loans cannot be obtained in the firm’s name.
  3. Limited managerial ability: A proprietorship firm being owned, managed and operated by the owner, pooling of resources is not possible. Decision making is the responsibility of the owner himself.
  4. Limited life: The firm comes to an end as decided by the proprietor or his death.

What is a sole proprietorship?

It is a business structure owned and run by a single individual and in which there is no legal distinction between the owner and the business. The identity of the organisation is nothing but the individual himself.

How does one start a sole proprietorship firm?

Anyone who intends to start a business can start a proprietorship business. The proprietor can start the business in his own name or in a separate business name. There is no registration required for starting a sole proprietorship. However, specifc to the nature of business, a proprietorship is required obtain registrations such as Shops & Establishment, Professional Tax, Service Tax, VAT, IEC, etc.

Can a sole proprietorship firm be registered under MSME?

A sole proprietorship can be registered under the MSME Act to avail the benefits and protection under that act.

Who can start a sole proprietorship firm in India?

Any Indian national who has completed 18 years of age can start a sole proprietorship firm in India. The sole proprietor is required to have a Permanent Account Number (PAN) in his/her name.

A Non-Resident Indian (NRI) or a Person of Indian Origin (PIO) resident outside India can start a proprietory concern and invest into the capital on non-repatriation basis. NRIs/PIOs can repratriate the profits of a proprietory concern with prior permission from the Reserve Bank of India (RBI). An NRI or PIO is not allowed to invest in a proprietorship concern engaged in any agricultural, plantation activity, real estate business (i.e. dealing in land and immovable property with a view to earning profit or earning income therefrom) or engaged in the print media.

A person resident outside India other than NRIs/PIO (Non-Indian National) can start a sole proprietorship firm in India and can investment by way of contribution to the capital of a proprietorship concern with the prior permission of the RBI.

Can a sole prorietorship have a separate PAN?

No. A sole prorietorship cannot have a separate PAN. The PAN of the proprietor will be the identification for the proproetorship.

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