What is Sole Proprietorship in India?
Proprietorship is a popular type of unregistered business entity owned, managed, and controlled by one person. Most of the micro and small businesses operating in the unorganized sectors prefer registering a Proprietorship.
Sole Proprietorship is simple to start and has very few regulatory compliance requirements for conducting the operation. Proprietorship registration is ideal for entrepreneurs who are getting into the business for small businesses with few clients.
Who is a Sole Proprietor?
proprietor is the owner of the Sole Proprietorship business. It is not a corporate or legal entity. The proprietor and the Proprietorship are the same legal entity.
The PAN and other documents of the proprietor are the basis for obtaining all the registration and licenses. The proprietor is held personally liable in case of any liabilities in a business.
How to start a Proprietorship in India?
Registering a Proprietorship firm in India requires no formalities or registration. It is necessary to obtain a business license as required by the state/central government. Further, if the business name is unique, then it is better to Register a Trademark.
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Business Licenses
Irrespective of the type of entity, business licenses are a must for any permit. For any applicant, before registering a Proprietorship in India, it is necessary to understand the regulatory framework which surrounds the activity he wishes to undertakes and obtain relevant licenses. From the respective Local, state, and Central Government authorities.
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Tax Registrations
It is necessary to obtain Tax registration from the relevant Tax authorities, which are based on the type of activity the Proprietors perform.
This includes GST registration, Professional tax registration, and ESI/PF registration.
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Trademark registration
As there is no registrar for Proprietorship in India. Proprietorship can usually be operated under any name unless the name doesn't conflict with any trademark registration and other rules and regulations.
If a person is investing enough time and money in the Proprietorship or if the business and wants the goods and services offered by him to be identified exclusively, it is always recommended to get a Trademark registration.
What documents are required for registering a proprietorship in India?
The entire process for proprietorship registration can be completed online. You will just have to upload the following documents:
- Identity Proof - Aadhar & PAN Card
- Address Proof - Latest Bank Statement
- Passport size photos
Post Incorporation compliances for Sole proprietorships in India
Like LLPs and private limited companies registered in India, proprietorships must file income tax returns. As the proprietor and the proprietorships are the same, the
Proprietorship and the proprietor's income tax return filing would be the same.
Under the Income-tax Act, all the proprietors below the age of 60 will file ITR only if the total income exceeds Rs. 2.5 lakhs. If the proprietor is over 60 years and below 80 years, he should file ITR only if his income exceeds Rs. 3 lakh.
Proprietors over the age of 80 years are required to file income tax if the income exceeds Rs. 5 lakh.
Audit for Proprietorship
An audit will be required for the proprietorship firms if the total sales are over Rs. 1 crore during the financial year.
In a professional case, an audit is necessary if the total gross receipts are more than Rs.50 lakhs during the financial year assessment.
Also, an audit is required for any proprietorship firm under a presumptive taxation scheme irrespective of turnover if the income claimed is lower than the deemed profits and gains under the scheme.
Audit for Proprietorship for income tax purposes must be conducted by a practicing Chartered Accountant.
ITR for Proprietorship Firms
Proprietorship firms are required to file Form ITR-3 or Form ITR-4-Sugam.
Form ITR-3
Form ITR-3 can be filed by a proprietor or a Hindu Undivided Family carrying out a proprietary business or profession.
Form ITR-4-Sugam
Form ITR-4-Sugam can be filed by a proprietor who would like to pay income tax under the presumptive taxation scheme. A presumptive taxation scheme is designed to help ease the compliance burden of small businesses by assuming a set profit margin on the business or profession's total income.
Filing a Proprietorship Firm Tax Return
The income tax return of a proprietorship firm in ITR 3 or ITR V Sugam can be filed online using the proprietor's digital signature or manually.
What are the Key Registrations for Proprietorship in India?
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MSME / Udhyog Aadhar registration
If the registration of Proprietorship is with the Ministry of Micro, small and medium enterprises, MSME / Udhyog Aadhar registration can be obtained.
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TAN registration
A proprietor must obtain a TAN registration from the Income Tax Department if the proprietor is making salary payments or any other payment wherein the TDS reduction is required.
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GST registration
GST registration is to be obtained if the proprietor is involved in selling goods or services that cross the GST turnover threshold.
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Import-export code
The IE Code can be obtained from the DGFT in the name of the business- if the proprietor is undertaking export or import of goods in India.
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FSSAI registration
FSSAI registration must be obtained from the Food and Safety and Standard Authority of India in the operator's name if the Proprietorship is involved in the selling or handling of food products.
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Current account
A current account can be opened for a Sole Proprietorship from various banks in India.
What are the benefits of Proprietorship Registration?
- Complete Control- Proprietorships firms are owned and operated by just one person. The owner has full authority and can make all the decisions as no partners are involved to consult.
- Easy Setup- As no registrations are required to start, a proprietorship can create and receive payments from clients very easily
- Easy Compliance- The significant advantage of the Proprietorship is that it doesn't require any additional compliance in most cases.
The PAN of the Proprietor and Proprietorship are the same.
Hence, in most cases, only income tax returns in the form of ITR3 must be filed every year.
- Dissolution- If an individual has to cease operation, he does not have to wind up the company significantly. This undoubtedly saves time.
- Requires less investment- Registering a proprietorship in India requires very little investment. Hence, anyone who wants to start business with low funds can go for proprietorships as no investments are involved.
- Information is not disclosed in public- The Proprietorship firms' financial reports are public like that of the LLPs, where the financial statements are made public.
What are the disadvantages of Proprietorship firms?
- Liabilities: The proprietor is held liable in case of any loss or harm as the Sole Proprietorship does not provide the proprietor with limited liability protection.
- Transferability: Any license or registration that has been obtained in the name of the Proprietorship cannot be transferred to any other person or an entity.
- Lifespan: The existence of the Proprietorship is tied to the proprietor. Hence, it will cease to exist with the proprietor.
- Cannot raise funds: Proprietorships cannot raise equity funds from angel investors, venture capital firms. Banks also have certain limitations on the amount of credit they can lend.
FREQUENTLY ASKED QUESTIONS
Will my proprietorship firm have separate legal entity?
No, the proprietorship firm and the proprietor are one and the same legally. The PAN of the proprietor will be the PAN of the firm. Therefore, there will be no separate legal identity for the business. The assets and liabilities of the business and the proprietor will also be one and the same.
How can I transfer my proprietorship?
A business operated under a proprietor cannot be transferred to another person unlike a limited liability partnership or a private limited company. Only the assets in the proprietorship can be transferred to another person through sale. Intangible assets like government approvals, registrations, etc., cannot be transferred to another person.
Can other people invest in a proprietorship?
Proprietorship firms are business entities that are owned, managed and controlled by one person. So they cannot issue shares or have investors.
Can I later convert my proprietorship into a company or LLP?
Yes, there are procedures for converting your proprietorship business into a company or an LLP at a later date. However, the procedures for the same are cumbersome, expensive and time-consuming. Therefore, it is wise for entrepreneurs to consider and start an LLP or a company in case they are expecting it to be operational at a bigger scale or they want to raise investment.
What is the capital required to start a proprietorship?
There is no limit on the minimum capital required to start a proprietorship.
How do I open a bank account for a proprietorship?
The Reserve Bank of India mandates that the proprietor provide two forms of registration of the proprietorship along with the PAN, identity proof and address proof of the proprietor. The two forms of registration can be any two of the following: MSME registration, Shop & Establishment Act registration, professional license, chartered accountant certificate or others as provided in the RBI KYC norms.
Will my firm have a registration certificate?
Proprietorship firms do not have a certificate of incorporation or a certificate of registration. The identity and legitimacy of a proprietorship firm is established by registering with the relevant or applicable Government authorities.
How to register the name of a proprietorship?
There is no registry or regulation for registering the name of a Proprietorship. Therefore, proprietorship firms can adopt any name that does not infringe on registered trademarks. Since there are no regulations for registering the name of a proprietorship, the only way to ensure exclusive use of the business name is to obtain a trademark registration of the business name.
What are the annual compliance requirements?
Proprietorships will have to file their annual tax return with the Income Tax department. However, annual reports or accounts need not be filed with the Ministry of Corporate Affairs which is required for an LLP or a company.
Is audit required for a proprietorship?
It is not necessary for proprietorships to prepare audited financial statements each year. However, a tax audit may be necessary based on turnover and other criteria.