Proprietorship

Introduction:

In the words of Gloss & Baker, “A sole proprietorship is a business owned by one person and operated for his profit.”

Whereas B.O. Wheeler defines sole proprietorship as “the forms of business ownership which is owned and controlled by a single individual.”

Thus, a sole proprietorship or individual tradership is a type of independent self-governing business or organization owned and managed by an individual. It is the easiest and the most uncomplicated form of a lawful business. As set forth by the Government of India, a sole proprietorship is an individual enterprise managed and controlled solely by the individual who owns it. He gains all the profits and suffers losses alone. It is a lucrative form of business because no charges are required in the start-up process. Additionally, the main setup is not so complicated as no registration is required.

Who is a Sole Proprietor?

According to Davidson, “A sole proprietor carries business for his profit bearing all risks.”

He/she is the individual who owns and runs the business. He solely manages, operates and controls all the business ventures. There is no separate legitimate difference between the sole proprietor and the sole proprietorship. To put it simply, their identities co-exist with each other. All the profits gained, losses suffered by the company are actually gained and suffered by the sole proprietor. He/she owns all the assets and is also liable to pay all the debts.

How to Start a Proprietorship in India?

The four essentials needed to start a business are –

i) Aadhar Card;

ii) PAN Card;

iii) Bank Account

iv) Registered Office Proof (Rent Agreement or Property Documents)

Primarily, the registration is done to mark the corporeality of the enterprise. Registration means the business venture is established and is set to run with the approval of the government. On the other hand, looking at the business is about making it real and making it function through it. Thus, in India, the establishment of a sole proprietorship can be done with only two things: a) selecting an appropriate name for the business; and b) selecting an appropriate location for the business.

What Documents Are Required For Registering A Proprietorship In India?

The essential documents required for registration of Sole Proprietorship are –

i) Aadhar Card;

ii) PAN Card;

iii) Bank Account

iv) Registered Office Proof (Rent Agreement or Property Documents)

Although, registration of a sole proprietorship is not mandatory and there is no such rigid procedure for it. Since the proprietorship is co-existent with the proprietor, it could therefore be considered as an addendum of the proprietor. The very fundamental registrations necessary by a sole proprietorship are – i) the owner must obtain a Certificate of Registration under the Shops and Establishment Act of the state in which the business is situated; ii) if the business sales exceed Rs.20 lakh, the owner must also register for GST and; iii) the proprietorship can also be registered as a Small and Medium Enterprise (SME) under the MSME Act, although not obligatory, but advantageous if registered.

Registration by Opening an Account

The most essential requirement here is the submission of appropriate documents. Thus, any two of the following documents can be used for these grounds –

i) License or certificate from Municipal Officials under the Shop and Establishment Act;

ii) Property Registration document;

iii) Rent Agreement along with utility bill;

iv) License from registering authority;

v) License for the concerned individual from the state or central government;

vi) Importer-Exporter Code (IEC) Code;

vii) Income Tax return of the proprietor (complete);

viii) Utility bills

Registration by Issuing Licenses

Issuance of license for registration depends upon the kind of business. For example –

i) PAN Card for the owner – PAN Card is a must in the business industry. This is useful for registering a company and submitting tax reports, obtaining licenses and certificates for the sole proprietorship. PAN remains the same for both the owner and the business, as they are co-existent.

ii) GST Registration – in India, GST Registration is required for businesses relating to trade and manufacturing with an expected business sale of Rs.40 lakh and Rs.20 lakh. Additionally, it is also necessary for businesses related to goods and services to possess a GST registration.

iii) Shop and Establishment Act license – Most businesses dealing with shops and factories issue this license as this acts as proof of existence.

iv) Ministry of Micro, Small and Mini Enterprises (MSME) Registration – if the particular sole proprietorship is accepted under the MSME sector, then obtaining such a registration certificate is not difficult. The Udyog Aadhar certificate must also be obtained along with this.

Thus, by achieving these requirements, one can legally start a sole proprietorship business.

Post Incorporation Compliances for a Sole Proprietorship in India

Like the LLPs and private limited companies registered in India, sole proprietorships also have certain post incorporation compliances which include –

i) Income Tax Returns – Proprietors must file income tax returns. Since the proprietor and the proprietorship are co-existent, their income tax filing would be the same.

Under the Income Tax Act, proprietors under the age of 60 years can file an ITR only if the gross earning exceeds Rs.2.5lakh. If the proprietor is between the ages of 60 and 80, ITR can be filed if the earnings exceed Rs.3 lakhs and proprietors above 80 years of age can file an ITR if their gross earnings are more than Rs.5 lakhs.

ii) PAN no.- as it is a sole proprietorship business, the sole proprietor’s or the owner’s PAN Card number can be used which helps the Income Tax Department to keep a record of all sorts of income tax filing, etc.

iii) New Bank Account – it is also necessary for a sole proprietorship, to open and maintain a current account for business transactions with the submission of necessary documents.

iv) Shops and Establishment License – it is necessary for the regulation of the working and employment conditions in the businesses. Depending upon their own working hours and employment facilities, each state has passed their own laws.

v) GST Registration – Goods and Service Tax or GST registration is required as tax will be levied on businesses with a yearly business sale of Rs.10 lakh or more.

vi) TDS return – filing a TDS return is also important in case the entity or the proprietorship is eligible for auditing.

Audit for Proprietorship

A sole proprietorship does not generally have any commitment to obtain accounts. But, according to the Income Tax Act, 1961, proprietorship firms are taxed as individuals. Tax audit for a proprietor becomes mandatory when the business sales exceed one crore rupees and if the individual is in a profession where his annual income is more than fifty lakh rupees. Thus, a sole proprietor should also file for a TDS return, in case his enterprise is eligible for auditing.

ITR for Proprietorship Firms and Filing a Proprietorship Firm Tax Return

Like the LLPs and other registered companies in India, proprietorship firms can also file proprietorship income tax returns. Legally, since the sole proprietorship and the proprietor are co-existent and are considered the same, their income tax filing can also be done under the same name. A sole proprietorship business owner can file their taxes as their personal returns because it is not treated as a separate legal entity from its owner.

In accordance with the applicable income tax rules and subject to the tax rates applicable to its income, a sole proprietorship like any other individual taxpayer, is entitled to the private tax deduction. While the income tax rates of a registered company are assessed at a fixed rate. Proprietorship tax returns are to be filed annually unless there is an exception. Two forms are to be filed depending on the nature of the proprietorship business –

i) Form ITR-3 – if the proprietorship is run by a Hindu Undivided Family (HUF), or by any proprietor, then this form should be used to file the income tax.

ii) Form ITR-4 Sugam – a proprietorship firm would use this form for income tax filing under a presumptive tax scheme. This scheme is designed specifically to reduce the burden of compliance of small businesses by presuming a fixed rate of return on the total income of the business or profession.

The person’s business income has been added to the owner’s own payments. In this way, the business tax becomes the owner’s personal tax. Owners are always entitled to all tax deductions offered to undivided Hindu individuals or families.

As mentioned above, under the Income Tax Act, 1961, all proprietors under the age of 60 years can file an ITR only if the gross earning exceeds Rs.2.5lakh. If the proprietor is between the ages of 60 and 80, ITR can be filed if the earnings exceed Rs.3 lakhs and proprietors above 80 years of age can file an ITR if their gross earnings are more than Rs.5 lakhs.

Losses of the business of a sole proprietor would be allowed to be carried forward, if the proprietor files an ITR in advance, i.e., before the time limit. No deduction is permitted under sections 10A, 10B, 80-IA, 80-IAB, 80-IB, and 80-IC unless a proprietorship ITR has been filed within the due time.

Due date of filing an income tax return for sole proprietorship firm – there are two due dates, i.e., date of ITR filing when an audit is not necessary, which is 31^st of July and date of ITR filing when an audit is necessary, which is 31^st of October.

Presumptive Taxation Scheme – It is a type of scheme designed to reduce the burden of tax on people having small businesses. The Government of India aims at enabling these businesses to continue with the business without being burdened with excessive compliance requirements. This scheme allows taxpayers to pay their taxes at the lowest possible rates. Also, businesses registered with this scheme are not required to maintain accounting books. Such enterprises can calculate their income on estimation under Section 44AD of the Income Tax Act, 1961.

What are the Key Registrations for Proprietorship in India?

The key registrations required for proprietorship in India are –

i) Permanent Account Number or PAN – the sole proprietor must obtain the PAN or Permanent Account Number from the Government of India for business activities.

ii) MSME registration – it can be obtained if the proprietorship is registered with the Ministry of Micro, small and medium enterprises.

iii) Tax Deduction Account Number (TAN) registration – if the proprietor is paying salaries where Tax Deducted at Source (TDS) reduction is required, then he or she must obtain a TAN registration from the Income Tax Department.

iv) Goods and Service Tax (GST) registration – if the owner is involved in the sale of goods or services that exceed the GST billing threshold, they must obtain GST registration.

v) Import-export code (IEC) – If the owner is in the business of importing and exporting goods in India, he or she can obtain the IE code from the Directorate General of Foreign Trade (DGFT) on behalf of the company.

vi) FSSAI registration – If the proprietor involves the sale or handling of food, he or she must obtain FSSAI registration from the Food Safety and Standards Agency of India on behalf of the operator.

vii) Current account – a sole proprietor must open a current account in any bank to deal with business-related transactions.

MSME Registration or Udyog Aadhar

MSME is the abbreviation for Micro, Small and Medium Enterprises. Such industries are considered to be the pillars of the economy for a third world country like India. They are also known as Small Scale Industries or SSIs.

MSME Registration or Udyog Aadhaar is issued to micro, small and medium industries under the Micro, Small and Medium Enterprise Development Act, 2006 (MSMED). This Act became effective on October 2^nd, 2006. It was established to further the growth of such small-scale industries. Although the government has not made registration obligatory, but it is advantageous to register a business under this because it offers many advantages in terms of taxes, business establishments, credits, loans, etc.

Previously, Udyog Aadhaar used to be perceived as MSME Registration. The procedure has now been consolidated and it is possible to apply online. The main purposes of MSME department to promote Udyog Aadhaar Registration are :

i) enabling small, medium and micro enterprises to effectively participate in international competition;

ii) to stimulate the growth and development of such industries, and effectively solving the problems of unemployment and impoverishment;

iii) comprehensive extension of benefits from various government programs to SSI units;

iv) protecting the small-scale industries from being economically exploited by the large industries;

Eligibility for Udyog Aadhaar

MSME Registrations are not compulsory only establishments that are classified as small, medium and micro enterprises as per the following table are eligible for Udyog Aadhaar –

Classification	Manufacturing Sector	Service Sector
Micro Enterprises	Up to Rs.25 lakh investment in plant and machinery.	Up to Rs.10 lakh investment in equipment.
Small Enterprises	Up to Rs.5 crore investment in plant and machinery.	Up to Rs.2 crore investment in equipment.
Medium Enterprises	Up to Rs.10 crore investment in plant and machinery.	Up to Rs.5 crore investment in equipment.

Why is Udyog Aadhaar Registration Beneficial?

The government provides the registration of Udyog Aadhaar for free and the registration is easily obtained on an online platform. Such registration is beneficial because of the following reasons –

i) bank loans are offered at a rate as low as 1 to 1.5%, which is much lower than interest o regular loans;

ii) funding is provided to those participating in international trade fairs to showcase their products;

iii) getting a registration will make it easier to open a current account in the name of the business;

iv) seekers are also entitled to apply for government grants and subsidies;

v) once registered, the cost of obtaining a patent or the cost of establishing a business dwindles with more discounts and incentives;

vi) obtaining licenses, approvals and other registrations becomes easier;

vii) there are also various other tax declarations and immunities for such small, medium and micro enterprises registered in Udyog Aadhaar.

TAN Registration

Tax Deduction Account Number or Tax Collection Account Number is a 10-digit alpha-numeric number issued by the Income Tax department. It must be compulsorily obtained by all such organisations or persons who are accountable to pay the Tax Deduction at Source or TDS in the representation of the government. All sole proprietorships must deduct TDS while making payments such as salary, wages, rent more than rs.1,80,000 per year, etc. After the TDS is deducted, the TAN registrant will issue a TDS certificate as tax proof.

How to Obtain TAN Registration?

For obtaining a TAN Registration, an application must be filed for allotment of TAN  with all the essential documents. Depending on such application, TAN will be allotted to the business and the business must anticipate all its TDS or TCS returns, payments, challans, certificates, etc.

GST Registration

It is essential for businesses having sales of more than Rs.40 lakh to register themselves under the GST registration, like a normal person paying tax. Such registration has been made compulsory for certain businesses. If an organisation continues to do business without registering for GST, it will be subjected to GST violations or heavy penalties.

Proprietor’s Document

The proprietor’s documents required for GST registration are –

• PAN Card of the proprietor seeking GST registration;
• Aadhaar Card of the proprietor seeking GST registration;
• Passport size photo;
• Bank passbook and bank statement;
• Electricity bill in the proprietor’s name seeking GST registration.
• Address and business proof document

Documents required if the property is owned by the proprietor: electricity bill in that address, or property receipts;

Documents required if any other person owns the property –electricity bill, receipt of property tax and the letter of consent from the property owner to use the address as GST registration;

Documents required for rented premises – rent and lease agreement in the name of the proprietorship or tax receipt of the property or electricity bill;

Documents required if the business is situated in a special economic zone (SEZ) – if the business is situated in an SEZ, then documents, as issued by the Government of India, should be posted.

FSSAI Registration

FSSAI is an abbreviation for Food Safety and Standards Authority of India, an organisation that keeps an eye on the food business in India. It is an autonomous body established under the Ministry of Health and Family Welfare, Government of India. Any sole proprietorship, if involved, in the production processing, storing, distributing of food products, i.e., basically is involved in the food business must mandatorily obtain FSSAI Registration or license. There is a difference between FSSAI registration and FSSAI license which is given depending on the size and nature of the business. Depending upon various aspects such as installed capacity, place of business, annual business sale, etc., a registration seeker becomes eligible for a license such as a basic license for petty food businesses, state license for medium food businesses and central license for large food businesses.

The proprietor’s document required for FSSAI registration is – passport size photo, documents for identity proof such as Voter ID Card, Driving License, Ration Card, Passport, Aadhaar Card. Other documents include a NOC by the Municipality or Panchayat or a Health NOC.

Obtaining a license can provide food companies with legal benefits, generate goodwill, ensure food safety, increase consumer awareness and help business expansion. In addition, it helps to supervise, manufacture, store, distribute and sell imported food.

What are the Benefits of Proprietorship Registration?

i) Easy establishment – Registrations under any law is not mandatory for a sole proprietorship business. Licenses and registrations are required which are related to the type of the business.

ii) Lesser funding required – A sole proprietorship business can be started with a very little amount of capital which is a benefit.

iii) No sharing of profits – The sole proprietor enjoys his entire profit earned as there is no sharing because he/she is the sole person who manages, controls, operates the entire business.

iv) Fewer compliances – A sole proprietorship is not governed by any law, hence the legal compliances for a sole proprietorship is less. It depends upon the licenses and registrations obtained.

v) No separate income tax – Since a sole proprietorship and a sole proprietor is considered to be co-existent, i.e., they are not considered as separate, their income tax is also not paid separately. The sole proprietor can file for an ITR for his business under his personal income.

vi) Information is not disclosed in public – Unlike LLPs and other companies, financial reports of a sole proprietorship business is not disclosed in the public. They remain private with the sole proprietors or their employees, for that matter.

vii) No Audit required – Unless the business sales exceed over a crore, the accounts of a sole proprietorship is not required to be audited each financial year.

What are the Disadvantages of Proprietorship Firms?

i) Unlimited liability – The proprietor is solely liable for the losses and debts suffered. If needed to pay off such losses, his personal assets might also have to be discharged.

ii) Restricted financial capital – It is quite difficult for a single individual to bring in a large amount of capital for expanding his business. Proprietors cannot arrange for funds from investors, etc. Even banks and financial institutions cannot lend them as they have a certain limit depending on the amount of credit.

iii) Difficulty in management – Unlike a business, a sole proprietorship is not run and managed by professionals. These professionals are highly skilled and knowledgeable experts who understand the scenario clearly and can solve problems accordingly. A proprietor, on the other hand, has to manage everything single-handedly as they cannot pay high salaries and employ qualified experts.

iv) Limited Life Span – Unless sold or taken over by the heirs, a sole proprietorship ceases to exist if the proprietor dies or becomes physically ill so much so that he/she is not able to manage and run the business.

v) Transferability – If a license or registration is obtained in the name of the proprietor, it cannot be transferred to any other person or any other company.

Proprietorship v. Private Limited Company

A limited liability company offers many benefits over a sole proprietorship.

In the event of a loss, the sole proprietor is not liable for unlimited liability for the loss incurred.

Owners are responsible for personally accruing losses. The rules of a limited liability company perceive owners and businesses differently, and thereby limit their debt.

Owners are taxed at the income tax rate, but this does not happen in a limited liability company. A limited liability company has more funding options than a sole proprietorship company.

When a sole proprietor dies, the company is closed, but the promoter’s statutory heirs can rightfully take over the business.

Conclusion

The sole proprietorship is less complex and easier for people seeking to consolidate small businesses. The entire business operation is managed and controlled by a single person. The sole owner makes all the business investments. He bears all the losses and liabilities and enjoys all the benefits. He can hire other people to run the business but the ownership will entirely be his own. Many regional businesses such as small supermarkets, retail stores, boutiques, etc., can be initiated as sole proprietorship businesses.

There are pros and cons of a sole proprietorship establishment as well. Benefits include the ease of creation, low fees of creation and maintenance, profits, entire control and ownership of the business, no payment of separate tax, etc. Likewise, the disadvantages of a sole proprietorship are that it exceeds the unlimited liability of the enterprise to the owner and it is difficult to obtain equity financing particularly through the issuance of stocks and established channels such as the acquisition of bank loans and credit facilities.

Usually, for a sole proprietorship, registrations are not mandatory, but it is beneficial to get such registrations done. The key registrations include MSME (Ministry of Micro, Small and Medium Enterprises) Registration or Udyog Aadhaar, TAN Registration, GST Registration and the FSSAI Registration. Such registrations help the businesses to be certified by the government i.e., getting the approval of the government. It also marks the corporeality of the venture. Benefits from government schemes, subsidised rates, etc., can also be availed. The businesses can thus focus on improving their dealings rather than meeting a long list of post-corporate compliance.