Reviewed by Aug 27, 2020| Updated on
What is meant by Sole Proprietorship?
A sole proprietorship is a business form or structure under which a business can be carried on. It refers clearly to a person who owns the entity and is personally responsible for his or her debts.
A sole proprietorship, such as Radhe Shyam Groceries, can operate under the name of its owner or it can carry out business under a fictitious name. The fake name is just a trade name—it doesn't create a separate legal entity from the sole proprietor owner. Although simple to set up, the sole proprietorship is not a legal entity.
Understanding Sole Proprietorship
Owing to the simplicity of a sole proprietorship, ease of setup, and minimal cost, a sole proprietorship is a popular business type. A sole owner needs to register his name and obtain local licenses to get the sole owner ready for business.
Nonetheless, one distinct drawback is that the owner of a sole proprietorship remains personally liable for all the debts of the company. And if a sole proprietor company faces financial trouble, creditors can bring claims against the owner of the business. If such suits hold good, the plaintiff will have to pay his/her own money for the company debts.
The owner of a sole proprietorship generally signs contracts in his or her name, as there is no separate identity under the law for the sole proprietorship. Usually, the sole proprietor owner will have clients write checks in the name of the owner, even if the business adopts a fictitious name.
What are the Advantages of Sole Proprietorship in India?
- Business to be commenced by just one person.
- Least compliance needed to start and run the business.
- It is comparatively cheaper to start this type of business.
- Corporate tax rates do not apply for a sole proprietorship. Hence, income tax slab rates will apply.
- The decision-making and control of the business are vested with one person only.
What are the Disadvantages of Sole Proprietorship in India?
- The proprietor is exposed to unlimited liability. He is personally liable for all the transactions.
- There is always a threat of business shutting down due to a single person owning and managing the entire business.
- It isn't very easy to raise capital to scale the business.
Compliances Required for Sole Proprietorship in India
- A sole proprietor must obtain PAN compulsorily, even if not obtained before starting the business. Accordingly, there is a need to file income tax returns annually.
- Decide and fix a trade name for the business.
- No need for formal registration, but a sole proprietor must open a bank account in the name of the business.
- Option to register as a Small and Medium Enterprise (SME) under MSME Act; although not mandatory, it is beneficial.
- A sole proprietor must register for GST if the annual turnover exceeds the threshold limit as specified under the CGST Act, 2017. Such persons must file GST returns too. Voluntary GST registration is also available to enjoy certain benefits.
- A sole proprietor must also obtain a Shop and Establishment certificate.
- TDS must be deducted, and TDS returns must be filed if the sole proprietor is liable for Tax Audit.