A sole proprietorship is a type of unregistered business entity that is owned, managed and controlled by one person. Sole proprietorship's are one of the most common forms of business in India, used by most micro and small businesses operating in the un organised sectors. Proprieterships 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, transfer ability, perpetual existence – which are desirable features for any business. Therefore, proprietorship registration is suited only for un organised, 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
Advantages and Disadvantages of Proprietorship
Sole proprietorship is the most widespread form of business ownership in the world. As the name suggests, it is a kind of business in which a single person is vested with the ownership of the assets and affairs of the business. In this article, we look at the advantages and disadvantages of a proprietorship firm.
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 sale of business interest or shares, which deprives the entity from the
receipt of any type of equity funding.
- Higher Tax Incidence
Proprietorship firms are taxed similarly to an individual. Hence, income tax rate for a proprietorship firm is based on slabs. Though the income tax rate for income of upto 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.
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 the 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.
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 taxable income of more than Rs.2.5 lakhs per annum. In 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 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.
Documents Required for Conversion of Proprietorship into Private Limited
- Copy of PAN Card of the Directors
- Passport size photograph of Directors
- Copy of Aadhaar Card/ Voter identity card
- Copy of Rent agreement(If rented property)
- Electricity/ Water bill (Business Place)
- Copy of Property papers (If owned property)
- Landlord NOC (Format will be provided)
Minimum Requirements for Conversion
- Minimum 2 Shareholders for Private Limited Company Registration
- Minimum 2 Directors
- Minimum Rs.1 Lac Share Capital
- DIN for all Directors