A sole proprietorship, also known as a sole trader or simply a proprietorship, is a type of business structure that is owned and run by one individual and in which there is no legal distinction between the owner and the business. The owner receives all profits (after tax) and has unlimited responsibility for all losses and debts. All assets and debts of the business in the proprietorship are owned by the proprietor. This means that the owner has no less liability than if they were acting as an individual instead of as a business.
A sole proprietor may use a trade name or business name other than his or her name. In India, there is no specific law for registration of sole proprietorship, but as per the Shop and Establishment Law (State Law), every establishment needs to get registered under the Act, which can be used as limited purpose sole proprietorship registration.
As the name reveals, a sole proprietorship is operated managed and run by a single individual. The identity of the organization is nothing but the individual himself. However, depending on the nature of business, it is required to obtain registration such as Professional Tax, GST, IEC, etc. A sole proprietorship can be registered under the MSME Act to avail benefits and protection.
The proprietorship 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 the business liabilities.
How to start a Sole Proprietorship
Since no legal registration is required for sole proprietorship business, any individual can start such a business any time. Technically, this is the position, but the practice situation is different. No bank will open a current account in the name of the Sole Proprietorship firm unless he or she produces minimum of two registrations under any law. It means that a Sole Proprietorship as such does not require any registration, but for starting a business as a proprietorship, a person needs any two registrations.
Benefits of Sole Proprietorship
- No registration: Sole proprietorship businesses need not be registered under any specific law in India. However, for opening an account with a bank, a person needs any two registrations under any law such as service tax or VAT, etc.
- Tax: Since sole proprietorship is an individual business, all profits are taxed in the name of individual himself.
- Management: Proprietor manages the business as per his will and wish.
- Legal compliance: Since sole proprietorship is not created by law, no specific compliance or filing is required except for tax compliance and other legal compliance applicable for any business.
- Business closure: It is easy to close a sole proprietorship business. The proprietor can sell all businesses without much difficulty.