Sole Proprietorship Business
A sole proprietorship is a business owned by a single individual. This is the most basic and common form of business in India.The individual who owns the business is called Proprietor and hence the name Proprietorship Concern. In the eyes of law, the Proprietor and the proprietorship business is a single entity and they donot differentiate between both of them. This means that all the assets, liabilities, profit, loss etc. of the business are property of the proprietor and they are also taxed at individual rates instead of business rates. This is also the reason why proprietorship businesses donot have a separate PAN card for them and the PAN card of the Proprietor is used for any tax related purposes.
Flavours of Sole Proprietorship Business
- Governing law – A proprietorship business is not considered to be separate and independent entity and is treated same as proprietor (owner) of the business in the eyes of Law.
- Taxation - The tax returns are filed for the owner and not for the business. If you are owner of more than 1 businesses, all incomes are clubbed to arrive as single figure and then taxes are calculated. The tax rates applicable are Individual tax rates and not business tax rates.
- Compliances – Lower compliances requirements for individual nature of business. No liability towards MAT (Minimum Alternate Taxes). Audit of accounts are not mandatory until business crosses, specified turnover.
- Ease of starting – Proprietorship business donot need any company registration with any authorities. You can start the business in flick of a moment. All you need to do is come out with a name and you can start doing business with that name.
- Name restrictions – There is no naming guidelines and restrictions applicable (except copyright or trademark rules). So you can start a company with the name GOOGLE INC and be an owner of the same (if you are not violating any copyright or trademark rights for which the owner of the trademark may have objections). So its advisable to run a check for the same before you finalise a business name
- Control & Authority – All the controls, rights, authorities, responsibilities, risks etc. lies with the owner. You are in absolute control of what is being done at your business. A proprietorship business cannot have 2 owners and hence the owner enjoys 100% and absolute control and authority on the business.
- Flexibility & Freedom – There is no limitation on what can be done in a Proprietorship Business. Any permissible and legal business activity under Indian Law can be executed.
- Team – Can hire any number of employees to facilitate various business functions. Applicable labour laws and rules need to be followed. May not attract high caliber employees, as they are also interested in sharing profits and business ownership, which is not possible here.
- Investments – All investments are done by owner either through personal resources or loans. This limits growth of business irrespective of how attractive is the proposition.
- Flexibility – You can do any permissible and legal business as there is no scope document to restrict the activities. You can apply for any trademarks, patents, copyrights or any other IP assets as per applicable laws.
- Profits & Losses – No sharing of profits (losses) is involved. Everything is retained by the owner.
- Life Span – Very easy to close. Donot requires any approval from any authorities to close the business. All licenses taken for the business however, need to be surrendered as per rules of various licenses. The business also closes with the death of the owner and cannot be continued further.
- Credibility – The credibility of the business is associated with the personal credibility of the owner. Since the business is not a different entity, it does not have any independent credibility.
- Liability – The owner has unlimited liability for various activities. This means personal property of the owner is also considered as assets of the business and is used to settle any law suits or debts from debtors, if any.
- Limiting factors – The growth might be limited for want of expanded controls and authority as the business grows.
- Other Factors –
- KYC Norms – RBI (Reserve Bank of India) has now directed all banks to follow the KYC norms (know-your-customer norms) strictly, before opening a bank account. Proprietorship business should have at least 1 or at times 2 valid registrations with any government authorities before they can open a new bank account. These registrations should be in the name of business and not proprietor.
- General availability - Proprietorship business have been associated mostly with trading concerns and other businesses having small capital requirement. Common examples are Grocery shops, Garment business, Practicing Doctors, Freelance Insurance agents, Tailors, Traders etc.
- Risky perception – People refrain to do big business with Proprietorship concerns because of stability and scalability factors. Since the business can be closed at the will of the owner, people consider it a risky proposition to invest long term projects or money in the business.
- Repatriation – NRIs and PIOs can form a proprietorship business with proper approval from RBI. However, the profits earned cannot be repatriated.