Proprietorship Formation
Sole proprietorship is one of the oldest and easiest business structures to start in India. A proprietorship is a type of business that is owned, managed, and controlled by one person, who is the proprietor. As the proprietorship and proprietor are one and the same, it is very easy to start and there are very minimal compliance requirements.
As the proprietor and the business are one and the same, a proprietorship cannot have other partners or shareholders. Furthermore, there is no limited liability protection for the proprietor from the sole proprietorship's business activities.Hence, this type of business entity is best suited for small businesses with no more than five employees.
Who is the sole proprietor?
A sole proprietor is the sole owner of the proprietorship business. Hence, a business will be carried forward by making a new bank account for the business and GST registration will be done by using the PAN and Aadhar of the proprietor. The proprietor is completely responsible for all the assets and liabilities of the business.
How to check the proprietorship status?
In India, we don’t have to register our sole proprietorship. Hence, there is no platform to check the status of a sole proprietorship. However, if a proprietor has applied for GST registration, the GST registration and filing status of the proprietorship can be checked on the GST Portal to confirm the existence of the proprietorship.
Proprietorship legal entity status and recognition
There is no separate recognition of proprietorship as a separate legal entity. Hence, the business owner and the proprietorship are considered one and the same for all legal and official purposes.
Sole Proprietorship Registrations & Licenses
To run a proprietorship business in India, the proprietor will have to obtain PAN and Aadhar. The proprietor must obtain GST registration, UDYAM regis In order to begin operation of the business, the proprietor should obtain various registrations and licences from the government, in accordance with laws and regulations, and open a bank current account. In some states, the proprietor will also have to obtain a Shops and Establishment Act registration.
In addition to the basic requirements above, additional licences and permits may be required depending on the industry, state, and local regulations.
Advantages of Proprietorship
Easy registration: a sole proprietorship does not have any formal incorporation or dissolution process as it is the same as the proprietor. However, to operate a business, the proprietor may have to obtain certain registrations and licences to be compliant with the laws and regulations of India.
Lower compliance: As most proprietorships are only registered with government departments like Income Tax and GST, the compliance burden will be lower. On the other hand, entities like LLPs or companies are registered with the Ministry of Corporate Affairs and have to file various statutory returns and be audited by a chartered accountant each year.
Simplicity: As there are no partners, shareholders, or directors, the proprietor can easily operate this business with minimal documents and consent requirements. Hence, this type of business structure is best suited for very small businesses.
In a sole proprietorship, the business owner takes all business decisions. There is no consent or approval required from any other person. Hence, a proprietor can normally take quick decisions regarding his business affairs.
complete control, as sole proprietorship is owned only by the proprietor. He/she has complete control over the assets, revenue, expenses, and all business operations.
The Disadvantages of Sole Proprietorship
Funding: This type of business structure relies solely on one person's savings, borrowings, and credit history. Raising funds from banks will be very hard as there are no other people involved in this type of business structure. Raising equity funds will not be possible as this type of business entity does not allow for profit sharing or shareholding.
Personal liability: If a proprietor is unable to pay business loans or taxes, in a proprietorship, the personal assets of the business owner can be attached or encumbered. Hence, in this type of business structure, the proprietor will be held personally liable until all the liabilities are extinguished.
Business continuity: In the event of the death or disability of the business owner, the sole proprietorship will be automatically dissolved. Hence, there will be no business continuity.
Growth: A proprietorship has various restrictions in terms of fundraising, liability, and business continuity. Hence, only very small businesses that are in the unorganised sector operate as proprietorships.
Unincorporated businesses: Sole proprietorships are unincorporated businesses. Hence, there is no centralised database available to see if a sole proprietorship is active or inactive. Thus, sole proprietorship entities are mostly classified as unorganised businesses. The sole proprietor will have to file his tax returns as per his normal tax regime. In fact, the income tax department does not entertain any queries related to sole proprietorship.