notes on sole proprietorship

Understanding Sole Proprietorship

A sole proprietorship is the most common type of business. There are sole proprietorships everywhere. Small grocery stores, STD booths are mostly proprietorship businesses.

A “Sole Proprietorship” business means that there is only ONE owner. There may be employees or helpers hired under the owner, but there is only one “head” who administors and runs the show.

The definition of a Sole Proprietorship is: A business enterprise exclusively owned, managed and controlled by a single person with all authority, responsibility and risk.

The basic advantage of a sole proprietorship is that since you are the only owner, you are free to run the business just the way you want to run it. Also, in a sole proprietorship you get to keep all the profits.

The biggest disadvantage is that there is “unlimited liability” on the “Sole Owner”.

What is the meaning of unlimited liability?

In the case of “Sole Proprietorship”, the Govt. does not see any difference between the firm and the individual. If you are a plumber named Raju Sharma and you start a plumbing service firm called “Flush” which is a sole proprietorship, the government does not differentiate between “Flush” and “Raju Sharma”

This means that if someone sues “Flush” and “Flush” owes that person a huge sum of money, it is as good as Raju Sharma owes that person a huge sum of money. Raju Sharma's bank accounts, property and even his house may be used to settle the claim.

This is the biggest disadvantage of sole proprietorships. Because of this reason, sole proprietorships are generally started if the business is small and there is “not much risk involved”.

If the concept of unlimited liablity is not clear, dont worry. It shall be cleared when you concider the other kinds of business.

To properly understand the nature of a sole proprietorship, here are a few characteristics of a sole proprietorship explained in detail:

Single Ownership:

A single individual owns the sole proprietorship! That individual owns all the assets and properties of the business. He alone bears all the risk of the business.

No sharing of profit & loss:

The entire profit out of the sole proprietor ship business goes to the sole proprietor. If there is any loss, it is also borne by the sole proprietor alone. Nobody else shares any of the profit and loss of the business.

Low capital:

The capital required by a sole proprietorship is totally arranged by the sole proprietor. He raises the capital either from his personal resources or by borrowing from friends, relatives, banks or financial institutions. Since there is only one person raising capital, very low capital can be raised.

One-man control:

The controlling power in a sole proprietorship business always remains with the owner alone. The owner or proprietor alone takes all the decisions to run the business. He may take decisions though a consultant or some advice, but the final decisions are always in his hand.

Unlimited Liability:

The liability of the sole proprietor is unlimited. This implies that, in case of loss the business assets along with the personal properties of the proprietor shall be used to pay the business liabilities.

Almost no legal formalities:

The formation and operation of a sole proprietorship requires almost no legal formalities. However, the owner may be required to obtain a license from the local administration or from the health department of the government, whatever is necessary depending on the nature of the business.

How to start a sole proprietorship?

A sole proprietorship requires almost no legal formalities. It can start the day you want it to start. One may even open a bank account on the name of your sole proprietorship concern.

In case you wish to have a trade mark, design and use it as your trade mark. One may even register a Trade Mark with the proper authorities.

The only thing you must take care of is that you have the required licenses specific to your line of business. For Example: If you are a doctor you need a license to practice etc. Find out about your line of business and what licenses you may require before setting up.

What kind of business is suitable for sole proprietorships?

To give you an idea what kind of business are suitable sole proprietorships, consider the following business. These would be suitable for sole proprietorships:

Ø  Where the market for the product is small & local. For example, selling grocery items, books, stationery, vegetables, etc.

Ø  Where customers are given personal attention, according to their personal tastes and preferences. For example, making special type of furniture, designing garments, etc

Ø  Where the nature of business is simple. For example, grocery, garments business, telephone booth, etc.

Ø  Where capital requirement is small and risk involvement is not heavy. For example, vegetables and fruits business, tea stalls, etc.

Ø  Where manual skill is required. For example, making jewelry, haircutting or tailoring, cycle or motorcycle repair shop, etc.

Advantages of Sole Proprietorships

Easy to form and wind up:

A sole proprietorship form of business is very easy to form. With a very small amount of capital you can start the business. There is no need for any legal formalities. (Except for those businesses which require a license from local authorities or health department of government etc.) It is also very easy to wind up the business. It is the owners decision to form or wind up the business at any time.

Direct motivation:

The profits earned belong to the sole proprietor alone and he bears the risk of losses as well. Thus, there is a direct link between the effort and the reward. If he works hard, then there is a possibility of getting more profit and he will be the sole beneficiary of this profit. Nobody will share this reward with him. This provides strong motivation for the sole proprietor to work hard.

Quick decisions:

In a sole proprietorship business the sole proprietor alone is responsible for all decisions. He is free to take any decision on his own. Since no one else is involved in decision making it becomes quick and prompt action can be taken on the basis of the decision.

Better control:

In sole proprietorship business the proprietor has full control over each and every activity of the business. Since the proprietor has all authority with him, it is possible to exercise better control over business.

Maintenance of business secrets:

Business secrecy is an important factor for every business. It refers to keeping the future plans, business strategies, etc., secret from outsiders or competitors. In the case of sole proprietorship business, the proprietor is in a very good position to keep his plans to himself since management and control are in his hands.

Close personal relation:

The sole proprietor is always in a position to maintain good personal contact with the customers and employees. Direct contact helps the sole proprietor to know the individual likes, dislikes and tastes of the customers. It also helps in maintaining close and friendly relations with the employees and thus, the business can run smoothly.

Encourages self-employment:

Sole proprietorship form of business organization leads to creation of employment opportunities for people. Not only is the owner self-employed, sometimes he also creates job opportunities for others. Thus, it helps in reducing poverty and unemployment in our country.

How to open and register Sole Proprietorship in India with current bank account?

If you want to start a new online or offline business, sole proprietorship is the best option for you. A sole proprietorship is an unincorporated business owned by one person. The owner of a sole proprietorship is known as a sole proprietor. You can start it the day you want it. When your business grows you can then turn it into an LLP or a Company.

As a sole proprietor, you can operate the business under your own name or under a trade/firm name or your website's name. e.g. Let's say you are an IT consultant, you can operate the business under your own name "Sumedh, IT Consultant" or under a trade/firm name "ABC IT Consultants".

How to open a current bank account for my proprietorship

If you want to open a current bank account under your trade name "ABC Consultants" you will need couple of things

1) Service tax registration or Sales Tax or VAT registration or Shop Establishment license.

Note For consultancy you need just service tax regd but for selling goods you will have to go for sales/vat/ registered and shop license

2) Letter from your CA regarding the nature of your business.

3) Letterhead with the firm's name and address.

4) Stamp in the name of the Proprietorship.

5) Address and ID Proof of the proprietor. If proprietorship address is different then you will also need office premise address proof.

You can register your proprietorship for Service tax with the ACES website by filling the ST1 form.

Note - Make sure you enter the trade name in "Name of the Applicant" Section.

Submit the ST1 form online and take a printout of ST1. Submit the ST1 printout along with proof of ID, address documents to the Service tax office where your business is located. Couple of days later you will get the ST2 form in your email. Take a printout of ST2 and go to the service tax office to get it stamped. You may have to pay a small bribe to get the stamp. Long live India :)

Once your ST2 is stamped take a copy of it and submit it along with the rest of documents mentioned above to your bank. Enter the name of your firm in the first name section on the current account opening form of the bank.

Note - You will have to file a Nil return if your annual turnover from the proprietorship is less than 10 Lakhs. If your turnover is more than 10 Lakhs per annum you will have to pay service tax. Talk to your CA for more details on this.

How to set up your Sole proprietorship Firm in India

Kindly guide on how to go about starting a company as sole proprietorship in Bangalore? What kind of registrations etc are required? What other formalities are required?

Its always best to first decide on the businesses entity that you want for doing business. Every business has different needs and goals, and so does the type of registration that you want to choose for your business. I recommend you to check these Option for registration before proceeding further.

If you want to do business as Sole proprietorship then it doesn’t need any registration with Government but there are some business licences you need to take when setting up Sole proprietor firm/company.

And these business licences depend on the type of business that you want to do. For example it can be a product based or a service based business. These licenses will also help in getting a bank account in the name of your business entity.

Business licenses in India

PAN Card

As a Sole Proprietor firm you will be filing returns in your name so a PAN card is mandatory. you can apply for the same online for  94 which you will get in 7 days. Apply here – https://www.tin-nsdl.com/

TAN [Tax Collection & Deduction Account Number]

If you are collecting tax either from the customers or your employees then a TAN is Must.

Service Tax Registration

In any year if your firms total turnover crosses 9 lacs then you will have to pay service tax which is 10% and you can register and pay for the same online.

VAT/ CST Registration

VAT is a State based tax and CST is Central based tax. If you are buying or selling taxable goods within a state, then VAT registration should be obtained. And if you are buying or selling taxable good across different states then you have to obtain CST registration. VAT rules varies according to the states in which you are doing business. You can register for VAT online.

Shops & Establishment License

Under the Karnataka Shops and Commercial Establishments Act,- (1961), within thirty days of the establishment of the new company, the business owner should send a statement to the inspector of the area concerned, and this statement should contain the name of the owner/manager, Postal address, name of the shop/establishment and any other prescribed details.  once the fees and the statement is accepted by the inspector, the Registration Certificate will be given immediately. Shops & Establishment License fees depends on the number of employees that you have, starts from  125 to  12500 for 100 employees

Importer Exporter Code

This is a 10 digit number like PAN number and is issued by Director General of Foreign Trade [DGFT] , Ministry of Commerce, Government of India to Indian Companies and Individuals who want to carry International Trade.

Professional Tax

If you have employees then you have to collect professional tax from them and pay it to government. Some states do not have this tax imposed and some states collect fixed amount say  2500 Annually.  Please check with you respective states and do the needful.

Employee Provident Fund Registration

If you have less than 20 employees then its not mandatory but you can voluntarily take this for the better employee benefits and employee retention. Its mandatory for more than 20 employees firm and other 180 business classes specified under the law. It can be used as a valid company expense and deducted from the total tax. The registartion is done at no Cost at The Employees Provident Fund Organization (EPFO) which is a statutory organization under the Ministry of Labor and Employment. Once the employer is registered with the EPFO, it will register his employees with the office and open Provident Fund accounts in the name of each employee

ESI (Employee State Insurance) Registration

This is used for health insurance purposes for your employees and is  mandatory for employing 10 people in factory and 20 people in other establishments like shops, hotel etc. The Employees’ State Insurance (ESI) Act (1948) provides for a fund administered by the ESI corporation in which contributions is made both by the employer and the employee at the rates prescribed by the National Government. This is done at no cost at the regional offices in the states.