What is a proprietorship?

What is a proprietorship?

A sole proprietorship is a type of unregistered business entity that is owned, managed and controlled by one person. Sole proprietorship is the most common type of business in India and it is used by most micro and small businesses operating in the unorganised sectors.

Proprietorships are simple to start and have minimal regulatory compliance requirements for operating. This entity is ideal for entrepreneurs who are getting into business for the first time and for small businesses with few clients.

Who is a proprietor?

The owner of a sole proprietorship business in India is called a proprietor. It cannot be a corporate or legal entity. The proprietor and the proprietorship are considered to be the same entity legally.

The PAN and other documents of the proprietor are the basis for obtaining all other business registrations and licenses. In case of any issues of liability in the business, the proprietor is held personally liable for it.

Who is a proprietor?

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Advantages

Advantages

  • Ease of setup- The entrepreneur can start operations and receive payments from clients as no registrations are required to start a proprietorship.
  • Ease of compliance- The other advantage of a Proprietorship is that it requires no additional compliance in most cases. The PAN of the proprietor and proprietorship are one and the same. Hence in most cases, only income tax return in Form ITR-3 must be filed every year.
  • Ease of dissolution- The proprietor does not have to particularly wind up the company incase he wants to cease operations. This saves a lot of time and effort.

Disadvantages

  • Liability protection: A sole proprietorship does not provide the proprietor with limited liability protection. So the proprietor would be held personally liable in case of any loss or liability.
  • Transferability: Any license or registration obtained in the name of the proprietorship cannot be transferred to any other person or entity.
  • Lifespan: The existence of the sole proprietorship is tied to the proprietor hence it would cease to exist with the proprietor.
  • Fundraising: A proprietorship cannot raise equity funds from angel investors, venture capital firms or PE funds. Banks also tend to restrictions on the amount of credit they can lend.

Due to the disadvantages mentioned above, this registration will be suitable only for small businesses and the unorganised sector with a limited period of existence.

Disadvantages

Key registrations

Each proprietorship differs in terms of the functions, clientele and the mode of operations. Hence, a couple of the registrations mentioned below will be applicable.

  • 1

    MSME registration

    MSME or Udyog Aadhaar registration can be obtained in the name of the business to establish that the sole proprietorship is registered with the Ministry of Micro, Small and Medium Enterprises.

  • 2

    TAN registration

    TAN registration must be obtained for the proprietor from the income tax department if the proprietor is making salary payments wherein TDS deduction is required.

  • 3

    GST registration

    GST registration must be obtained if the proprietor is selling goods or services that cross the GST turnover threshold limit for registration. In most states, GST registration is required for service providers having annual revenue of more than Rs.20 lakhs and in case of traders - annual revenue of more than Rs.40 lakhs.

  • 4

    Import Export code

    Import Export Code or IE code can be obtained from the DGFT in the name of the business - in case of a proprietorship business undertaking export and/or import of goods into India.

  • 5

    FSSAI registration

    In case the proprietorship is involved in the selling of food products or handling of food products, FSSAI registration must be obtained from the Food Safety and Standard Authority of India in the name of the proprietor.

  • 6

    Current account

    A current account can be opened for a sole proprietorship through VerveIndia from various banks in India. VerveIndia offers exclusive partnerships through which zero-balance current accounts can be opened. It is recommended that GST registration be obtained for the same.

General questions (7)

How many are required to start a proprietorship?
Only one person is required to start a proprietorship as it can have only one promoter.
What are the requirements to be a proprietor?
Will my proprietorship firm have a separate legal identity?
How can I transfer my proprietorship?
Can other people invest in a proprietorship?
Can I later convert my proprietorship into a company or LLP?
What is the capital required to start a proprietorship?

Registration Process (7)

What are the documents required to start a proprietorship?
PAN of the proprietor along with the identity and address proof is sufficient to start a proprietorship and obtain other registrations, as applicable or required.
How will VerveIndia help me start a proprietorship?
How do I open a bank account for a proprietorship?
Will my firm have a registration certificate?
How to register the name of a proprietorship?
What are the annual compliance requirements?
Is audit required for a proprietorship?
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