A proprietorship is a state or right of owning a business or holding property. Generally, proprietorship and sole proprietorship are terms which have simultaneous usage. Since the business done under proprietorship is not registered, there exist no legal foundations as such. In India, these types of businesses are operated in unorganized sectors.
Liability of Proprietor
There exists a stark difference between limited and unlimited liability. Limited liability means that for any of the act, offences, debts and loans of other partners not all the shareholders and the partners are legally responsible. They are responsible to the extent of a particular nominal value. This is in relation to financial risk. Moreover, unlimited liability bears all the financial losses and gains on the proprietor only. However, there are a lot of questions which needs to be answered, such as what are the advantages and disadvantages of proprietorship? How can these be termed under one particular umbrella term? The advantages and disadvantages are clearly illustrated in the following excerpt.
Common form of business
This is one of the most commonly seen business type in India. It has a simple registration process. It can be formed by one person. The main benefit of the firm would be to get a Bank Account and commercial dealings on the name of the firm rather than the person. I do not involve much cost in its formation. The best advantage is that the person is having total control over all the affairs of the business.
The name of the business can be selected by the proprietor himself. There is no binding by any one else to not to name the business on his own name. The business can be registered with the Registrar of Firms.
This is a business that legally has no separate existence from its owner. The sole proprietorship is the simplest business form under which one can operate a business. The sole proprietorship is not a separate legal entity from its owner. It simply refers to a person who owns the business and the proprietor is personally responsible for its debts.
As the name suggests, ‘sole’ means ‘only one’ and ‘proprietorship’ implies ‘ownership’. Hence, a sole proprietorship is a form of business organisation, wherein a single person owns, manages and controls, all the business activities and the individual who operates the business is called as a sole proprietor or, a sole trader.
It is a type of business unit, in which a single person owns the entire business, i.e. all the assets and property belongs to the proprietor. Accordingly, he bears all the risk associated with the enterprise. Whatever income generated from the sole proprietorship; it belongs to the sole proprietor only. The capital required to start the business or to continue operations, is arranged and brought to the business by the sole proprietor only.
Personal Assets of Proprietor
In the event of loss, the personal assets of the proprietor along with the business assets can be utilized to discharge the dues of business. There is no legal distinction between the proprietor and business; they are one and the same thing in the eyes of the law. Sole proprietor uses his own skills, intelligence and expertise to operate the business.
A sole proprietorship is among the oldest and simplest business forms wherein, only one man heads the entire show. Some common examples of sole proprietorship business are grocery shop, chemist shops, beauty parlours, fabrication units and so on. In spite of various shortcomings, many businesspersons choose sole proprietorship business, especially star-up founders, due to its inherent benefits. Such business is appropriate where the market for the product is limited or when the customers demand personalized services. It also suits to the businesses where manual skills are required or where the capital required to start the business is relatively small and does not involve a high degree of risk.
Advantages and disadvantages
Registration of a business name for a sole proprietor is generally uncomplicated unless it involves the selection of a name that is fictitious, or “assumed”. The business owner is required to register with the appropriate, who will determine that the name submitted is not duplicated by another. Furthermore, the business owner must complete a form submitted to the governing authority to acquire title as a “DBA The authority in some US states is the Secretary of State.
The license for a sole proprietary business entitles the owner to hire employees and enlist the services of independent consultants. Although an employee or consultant may be requested by the owner to complete a specific project or participate in the company’s decision-making process, their contribution to the project or decision is considered a recommendation under the law. Under the legal doctrine Respondent superior (Latin: “let the master answer”), the legal liability for any business decision arising from such a contribution remains upon the owner and cannot be renounced or apportioned.
This is transposed by the unlimited liability attached to a sole proprietary business. The owner carries the financial responsibility for all debts and/or losses suffered by the business, to the extent of using personal or other assets to discharge any outstanding liabilities. The owner is exclusively liable for all business activities conducted by the sole proprietorship and accordingly, entitled to full control and all earnings associated with it. The general aspect according to the general business law is that this type of business owner does not embody a “legal entity” Furthermore, any attempted and unreliable distinctions of the business do not change the classification under this title.
Taxation & Compliance’s
The proprietorship firms are not registered with any of the Government authority like the Ministry of Corporate Affairs, the compliance requirements are very minimal. The proprietor is required to file income tax returns if the firm has the income of more than 2.5 lakhs per annum. Moreover, the proprietor who has crossed the age of 60 years would be required to pay taxes only if the income is above 3 lakhs. Also, the proprietor who has attained the age above 80 years would be required to pay only when the taxable income is above 5 lakhs. The income tax liability can also be reduced by other methods as well. The methods are as follows:
The proprietor can make a contribution in various provident funds, life insurance premiums, also to the subscription to certain equity share or debentures.
The contribution to certain pension funds also helps.
Income from the royalty and royalty on patents also give a massive advantage.
The proprietor is the sole owner of the business s/he is undertaking. This means that there is no leakage of any information to the third party in any way. The privacy of business is clearly maintained. There is no need to provide any details to the Government as well since the proprietorship is not registered except the income tax payments.
There exists a difficulty in obtaining the funds as well. A sole proprietor is a person who can never indulge in the sale of business interests and shares as his work is of sole traders. It deprives the entity of receipt of any type of equity funding. This means that the person who is running the business in proprietorship finds it really difficult to get any of the funds from banks, companies, for that matter, from private persons as well. The banks wary in lending the sums of money to a proprietor as the existence of the firm is tied directly to him itself. Whereas in LLPs and in companies, more than one person becomes responsible for the liabilities and the business continuation is nonetheless ensured even if there is any death or insolvency of one of the partners. This is clear that it is easy for a registered company or an LLP to raise loan whereas it becomes extremely difficult for the sole proprietor to raise the same. This is due to the risk factor which is associated with the proprietor as there is uncertainty factor which exists.
A proprietor can also be subject to the incidence of payment of higher taxes. Proprietorship firms are taxed as if the individual is being taxed. This means that the income tax rate for a proprietorship firm is based on certain slabs. There are certain benefits which a company might enjoy but a proprietor cannot. For example; the income tax rate for the company for income up to 10 lakhs is lowered. The income tax rate is much higher for a proprietorship when compared to a company of LLP.
In order to sum up, it would be right to say that a business always comes with its pros and cons. On the top of it, proprietorship business is not a piece of cake. A one-man business needs complete determination and courage to run it. It brings about various advantages and disadvantages. But these can be overcomed much more easily by the person aiming to run the business. However, if the challenges are well tackled, it could bring about enormous advantages and benefits to the proprietor. A proprietor can also make the employment of certain persons in order to run the business more smoothly.
Sole Proprietorship have minimum compliance as this firm is identified by its government and tax registrations. Therefore, the degree of its agreement is confined to the yearly filing of the service, sales or professional taxes.
Simple to Begin
Any sole proprietorship is simple to begin. One needs to simply have a GST Registration in place. Hence, the procedure is not complicated. Therefore, the sole proprietorship business can be set up in 15 days with the help of a PAN card for identity and proof of address.
When compared to an OPC or One Person Company, a Sole Proprietorship is economical due to its minimum compliance requisites. Even in the long-term perspective, it is still inexpensive. It works out much cheaper because one would not need to hire an auditor. One of the main reasons why small merchants and traders choose it.
Documents for Registration
- A business name.
- Select a location as the place of doing business.
- Pan card and ID for Address proof of proprietor.
- Business address proof
- Name of firm
- Electricity bill and Registered office Lease agreement
- Passport size photo Self attested.
- Mobile no
- Email id.
- Cancelled Cheque or Bank Statement