Overview of Sole Proprietorship Registration
A sole proprietorship is a type of enterprise in which business is owned and managed by an individual. In a sole proprietorship business there is no legal difference between the owner and the business. To put it in another way a sole proprietorship is not a legal entity, where an is responsible for clearing off the debts of business. The sole proprietorship is a preferable and popular business form. It is simple and easy to form at nominal cost.
A sole proprietorship is a convenient and simplified way to commence a business in India. It is neither considered as a corporation nor a company where the business is owned by a single person who is the owner/director/shareholder of the proposed entity.
Some common examples of proprietorship business is shops such as chemist, saloons, grocery, etc.
An individual who wishes to sell his/her own products or services can run their business as a sole proprietor, and can enjoy the rights provided to a registered legal company. Most of the entrepreneurs find it as an ideal business entity and have registered their business under it. The loss or profit of the company is considered as the loss or profit of the individual and the income of the company are considered as the income of the owner as per the Income Tax Act.
Basic Requirements and Options Available for Sole Proprietorship Registration
Registering a sole proprietorship business is a digital process that can be accompanied with the help of an expert. However, a person interested in registering as a sole proprietorship requires fulfilling some basic requirements like opening a bank account in the name of the business entity, etc.
- Sole Proprietorship Registration through Udyog Aadhaar under Ministry of MSME
- Sole Proprietorship registration under Shop and Establishment Act
- Sole Proprietorship registration through GST Registration
SME Registration : Udyog Aadhaar under Ministry of MSME
Individual requires registering as an SME (small and medium enterprise) as per the provisions of the MSME Act. For it, you have to submit an online application. An Udyog Aadhaar is a unique identification number offered by the Ministry of MSME to the business owners. Even a sole proprietor can apply for udyog aadhaar along with all other entities such as company and partnership. However, it is not compulsory but is beneficial for the company, especially during the time of loan requirement at a low-interest rate. The government has launched various schemes for the improvisation of SMEs registered under MSME act.
Shop and Establishment Registration
Individual must have shop and establishment license as per the local laws. It is issued by the municipal parties based on the number of workers/ employees in the firm. Here, shop means any premises:
- a place where goods are sold, either by wholesale, retail, or
- a place from where services are offered to customers.
It includes an office, godown, a store-room, warehouse or work place, whether in the similar premises or otherwise, which is used in connection with such business/trade.
It does not include a factory, a residential hotel, commercial establishment, restaurant, eating house, theater or other place of public entertainment or amusement;
If you have a shop under the definition given above, then you can register your sole proprietorship business by making an application to the local Municipal Corporation of your city under the Shop and Establishment Act.
Registration under GST
GST registration is mandatory to carry business activities in India. Even if you are doing online business, you would require a GST number. GST registration is another way to get your sole proprietorship business registered. If you are dealing in any kind of exchange of goods and services then you can apply for GST registration. It is a great method of getting an identity concerning your sole proprietorship. However, there are certain important considerations that must be evaluated before opting this method.
Every registered business has to compulsorily collect the tax from the customers & file the GST returns periodically. It is not necessary for him to get registered & collect GST, if a sole proprietor has a turnover of lesser than Rs. 40 Lakhs (subject to few exceptions)
- PAN Card of the proprietor
- Aadhar Card of the proprietor
- Passport size photograph of the proprietor
- Office proof
- Bank Statement copy that contains bank account number, IFSC code, and address
Trademark Registration is required in case you wish to trade your goods or services with a special name or brand. It is profitable where there is a threat of some misuse of the name or mark used in your business.
License/Certificates Required according to the Nature of Business
- Drug license
- Regional Transport Office(RTO) permit
- Mandi license
- Labour license
- FSSAI license registration -Food Safety and Standards Authority of India
- Certificate issued by the Institute of Chartered Accountants of India, etc
Sole Proprietorship Registration
An individual can select any of the below-given options for the registration:
- SME registration
- Registration under Shop and Establishment Act as per the rules and regulations of the respective state
- GST registration
Why should one choose a Sole Proprietorship firm?
A sole proprietor is one of the best choices for entrepreneurs who wish to handle everything on their own. It is the most common form of business entity, where the small business owners generally start their businesses as Sole Proprietorship only. The benefit of sole proprietorship can be classified under two categories: those are 1) Entity type benefits 2) Registration benefits.
- Less Compliances
- Easy to start
- Cost Efficient
- Absolute Control
- Ease in opening the bank account in the name of business
- Separate Business Identity
- Provides flexibility in carrying out business activities
- Easy to start and close
- Hazel free business structures with very few compliances
- Self- Accountability
- Being your Own Boss
- Decision-making power
- Don’t have to share your income and profits with anyone
- No disputes between the Members
Benefits of a Sole Proprietorship Firm
Every business structure has its own benefits. Some of the specific benefits of a Sole Proprietorship Business are given below:-
- Simplest form of Business
We generally come across various shops in our local places carrying out small business operations. They are the Sole Proprietorships who do not involve any complexities & can be hold by a single person in an easy manner.
- Easy to Start
You must note that Sole Proprietorships do not need mandatory registrations under the eye of law. They only require licenses or registrations specific to the nature of particular business. Therefore, any person can start his/her business very easily with a trade name of their own choice. Any trade name can be used until and unless it does not infringe with any brand name.
- Require Lesser Investment
Sole Proprietorships business needs minimal amount of investment in order to start at the initial phase. Therefore, it is a great opportunity for that entrepreneur who wishes to set up a business with low investments as no minimum capital is prescribed for starting a Proprietorship business.
- No sharing of Earned Profits
The sole proprietor is the only person who manages and operates the whole business, which means that 100% of the profits belong to only him/her. It is profitable to not that no one else is entitled to a share in the profits earned.
- Minimum Legal Compliances
It is important to note that the sole Proprietorships are not administered by any specific law; therefore the legal compliances are automatically minimal by its nature. They do not need to avail the Certificate of Incorporation or Registration Certificate from the concerned authority. Subsequently, the compliances depend upon licenses or registrations taken by a specific sole proprietorship.
To make it simpler, sole proprietorship have to comply with the GST return filing if it registers itself under GST law, or any other related laws. Therefore, there is no such obligation of uploading the Annual report or other reports on the website of Ministry of Corporate affairs.
- Minimum Income Tax
In general, no separate tax is needed to be paid by because the Sole Proprietorship involves only a Sole proprietor. Sole Proprietorship and the Sole proprietor are meant to be same or the purpose of calculation of tax liability. The assets & liabilities of the Sole Proprietorship are the assets as well as the liabilities of the Sole Proprietor.
In accordance to the Income Tax Act, the sole proprietor is needed to file his/her IT returns, showing the profits earned in the business in that IT return itself. It must be noted that the tax is calculated at income tax slab rates as applicable to an individual, therefore any separate return is not required for the Sole Proprietorship firm.
- Information Remains in Private hand
Unlike Limited Liability Partnerships, Companies, etc. where audit reports and financial statements are made public for the users via MCA (Known as Ministry of Corporate Affairs) portal, the financial reports of Sole Proprietorships remain in private hands. Also, the list of all sole proprietorships is not easily available with the Government officials/websites.
- Own Decision Making
It is important to note that there is no chance of conflict of ideas or any sort of decisions in view of the fact that the Sole Proprietorship is managed & operated single handedly. Sole Proprietors has the sole right to do whatsoever he/she thinks to do is correct for the business.
- No Requirement for Audit
Sole Proprietorship is not obligatory to get its accounts audited in each and every financial year under the eye of law. However, the audit will depend upon the nature of business & the threshold turnover limits that has been specified for the conduct of the audit for that particular firm.
Documents Required for Sole Proprietorship Registration
Documents Required for Sole Proprietorship Registration
Aadhar of the Proprietor:
The proprietor of the proposed firm has to submit a scanned copy of his/her aadhar card. Aadhar card is required to register any business in India. A person cannot file Income-tax return unless his/her PAN card is linked with aadhar card. In case you don’t have an aadhar card or its information does not match with PAN card, get it corrected before the submission.
PAN card of the Proprietor
In addition to Aadhar card, PAN card is also a mandatory document for a proprietorship business registration. PAN card is issued by the Income-tax department t of India which contains a unique PAN card number. All the details of the prerequisite documents should match with the details of the PAN card.
Current Bank Account Details
If the proprietor owns a PAN and Aadhar card, then he is liable to open a bank account in the name of his company. In addition to these documents, he would require identity and address proof. Documents regarding GST registration are also required to open a current bank account.
A proprietor can carry out his business activities at any owned or rented place. He has to provide proof of his registered office, documents worked as proof are:
In case of owned property: any utility bill such as electricity bill, gas bill, water bill, etc. along with the NOC. The bill should not be older than two months
In case of Rented property: lease/ rent agreement along with the NOC from the landlord.
Additionally, few registrations given as follows are required for the registration purpose of the proposed firm:
Individual requires registering as an SME (small and medium enterprise) as per the provisions of the MSME Act. For it, you have to submit an online application. However, it is not compulsory but is beneficial for the company, especially during the time of loan requirement at a low-interest rate. The government has launched various schemes for the improvisation of SMEs registered under MSME act.
Shop and Establishment Registration
Individual must have shop and establishment license as per the local laws. It is issued by the municipal parties based on the number of workers/ employees in the firm.
Registration under GST
GST registration is mandatory to carry business activities in India. Even if you are doing online business, you would require a GST number. GST registration can be done in 5 working days with the following documents:
• PAN Card of the proprietor
• Aadhar Card of the proprietor
• Passport size photograph of the proprietor
• Office proof
• Bank Statement copy that contains bank account number, IFSC code, and address
• One has to file annual Income Tax returns on time.
• One has to file his GST in case they have GST registration
• If liable for TAX audits, the individual should deduct TDS (tax deducted at source) from employees income and file TDS returns
Difference between Sole Proprietorship and One Person Company (OPC)
Both of the entities can carry on their business activities with just one person as an owner or shareholder or director. Still, there are various points of differences between them.
Point of Difference
One Person Company (OPC)
A sole proprietorship is deprived of the limited liabilities of the members. Under which in case of debt or loss, the assets of the company as well as the owner would be used to incur the losses.
One Person Company enjoys the benefit of limited liability under which assets of the shareholder/ director/ owner remains protected.
In Sole Proprietorship, the income of the entity is considered as the income of the owner and is liable to pay tax as per his income.
OPC is taxed as a Private Limited Company, and there are no separate tax brackets for it.
Conversion into other business entities
A sole proprietorship does not require converting into any public or private limited company and can carry on its business activity as a single person entity, no matter what its revenues are.
OPC has to be converted into a private limited or a public limited Company. Once it has crossed the turnover limit of Rs. 20 crores or Rs. 2 crores as a paid-up share capital.
In a sole proprietorship, ownership can be granted to some other person through will and last testament that can or cannot be challenged in the court.
OPC can enjoy the rights of perpetual succession through the nominee
Sole Proprietorship has to get its account audited as per the provisions of Income-tax Act only in the case when company crosses its threshold limit
On the other hand, OPC has to fulfil all the compliances followed by a private limited company such as filing of annual returns and account audits, etc.
It is not so compulsory but is beneficial
Has to be registered as per the provisions of Companies Act, 2013 under the Ministry of Corporate Affairs
Cannot have foreign ownership
Allowed if one of the nominees of director is a foreign national. But both cannot be foreign nationals.
Minimum: sole proprietorship
Maximum: 1 person
Minimum: 1 person
Maximum: 2 person
Registration Procedure of Sole Proprietorship
Frequently Asked Questions
Any citizen of India can start a sole proprietorship. All you need is a current bank account which should be on the name of your business. Registrations requirement depends on what kind of a business you want to start up.
Most of the banks ask for a registration of Shops & Establishment Act Registrations. Other than this, you need PAN card, proof of your company's existence and address & identity proofs.
It usually takes around 15 days, no more than that. This is one of the reasons it a popular type of business among merchants and traders.
Business like grocery stores, manufacturing businesses, small traders and fast food vendors are most common to be sole proprietorships. Although bigger businesses can be sole proprietorship but it is not recommended as it would be hard to manage alone.
For the start up, you need to acquire PAN card, address and identity proof, rental agreement or sale deed and KYC documents.
This completely depends on the type of business you would be running as your sole proprietorship. If you are to run an air conditioned restaurant, you would need a Service Tax Registration and VAT Registration. However, if you have a grocery store then after you have made 5 lac from your business, you would have to have a VAT Registration as well.
Registrations like Service Tax and any of the registrations handled by the central government are available online. Such as GST, Trademark Registration, PAN, Udyog Registration, etc.
Yes, there is no restriction in that. The process is a little sophisticated and might take time but it is very much possible and a common process done by sole proprietorship owners.
Any Indian citizen can start a Sole Proprietorship Firm in India. They only need to open a current bank account in the name of the business, and other required licenses as stated above.
The greatest benefit of this kind of firm is that it is the least complex and the cheapest form of the business form of doing business.
Unlike another type of businesses, Sole Proprietorship Firms are not recognized by the Indian Revenue Services and hence not given any special tax benefits. Thereby, the owner needs to file the Tax returns as per the income generated.
You need to declare your intention to operate as a Sole Proprietorship Firm to act as one.
The proprietor personally is liable for the profits and losses of the business in a Sole Proprietorship.
You will need GST Registration if the turnover of your business exceeds the limit as prescribed by the government.
Yes, you can choose to change the form of your entity anytime you want as per by the government regulations.
There are only two requirements to start a Sole Proprietorship Firm. First is a name for your business, and the second is a place for setting up your business.
Sole Proprietorship Firm is best suited for unorganized and small businesses. It is because of the ease of incorporation and minimal compliance requirements that the individual needs to adhere.