SOLE PROPRIETORSHIP

At first, Coca-Cola was started as sole proprietorship which was owned by Dr. John S. Pemberton in the year of 1886. At that time the owner of Coca-Cola did not realise that our brand would be one of the largest marketing brands in the world. The main other reason behind their reaching which is done by their legal protections. The owner who registered their company as a sole proprietorship and protected their business which makes a way to achieve at large.

What is Sole Proprietorship?

A sole proprietorship stands as the most common and traditional form of business, not only in India but globally. The simplicity in its formation is a key factor contributing to its ubiquity. In contrast to more intricate registration processes for entities like limited companies or partnerships, establishing a sole proprietorship involves straightforward steps. This uncomplicated business structure is characterised by a single owner who not only forms but also owns and manages the entire business. In this arrangement, the proprietor and the sole proprietorship firm are legally recognized as a single entity, simplifying administrative processes and responsibilities.

The ease of formation, coupled with the singular control and ownership, makes sole proprietorships a popular choice for entrepreneurs seeking a straightforward and manageable business structure.

What are the main characteristics of a Sole Proprietorship Firm?

Single ownership: In a Sole Proprietorship, incorporation is restricted to a single individual. The presence of directors or shareholders is not permitted; the business is solely owned by one person.

Responsibilities: The proprietor bears exclusive responsibility for both profits and losses within the firm. Decision-making and operational control rest entirely on the proprietor

Transparency: Sole Proprietorships are privately owned entities, maintaining confidentiality about company details. Unlike publicly traded firms, they are not obligated to disclose information publicly.

Existence: This kind of firm is not recognized as a separate legal entity. The proprietor and the business are considered a single entity. Consequently, when the proprietor passes away, the business ceases to exist.

Wind up: It is easy to incorporate and as well as easy to wind up. If the proprietor wishes to wrap up the firm for any reason, he/she can do so at any time.

Mandatory Licences: Running a business necessitates obtaining specific licences, depending on the nature of operations. Some essential licences include:

GST: If you are providing goods/services within India, GST registration is mandatory. The basic exemption limit is Rs.20 Lakh. It takes at least 3 to 4 days to obtain a GST certificate.
Trade licence: It is a licence or certificate issued by a municipal corporation under the state government to ensure that your goods and services are harmless. Obtaining a trade licence is a must for trading goods and is a legal way to do business smoothly.
IE Code: The IE code is essential if the proprietor intends to export goods. Without IE code, no one can export goods to other countries. The Importer-Exporter Code is the full form of the IE code and is issued by the Director General of Foreign Trade (DGFT).
Drug and Cosmetic licence: If the business objective is related to the intake medicines or external cosmetics, the operator needs to obtain a Drug and Cosmetic licence, which is regulated by the Drug and Cosmetic Act of 1940 and issued by the State Drug Standards Control Organization (SDSCO) or the Central Drug Standards Control Organization (CDSCO). Sole Proprietorship Firm.

What are the Benefits that are applicable to a Sole Proprietorship Firm?

1. Decision-making Authority:

Sole Control: The proprietor has exclusive decision-making authority, allowing for quick and efficient business decisions without the need for approvals from a board or partners.

2. Ease of Formation:

Simple Setup: Formation is straightforward, avoiding legal complexities associated with other business entities. Minimal paperwork and procedures facilitate quick establishment.

3. No Capital Restrictions:

Flexible Capital: No mandatory minimum or maximum authorised share capital is required, providing flexibility in the initial capital investment. The law does not impose specific capital constraints.

4. Tax Advantages:

Tax Flexibility: Sole Proprietorship enjoys tax advantages, with a more adaptable tax structure compared to Private Limited or Partnership entities. It avoids the flat 30% income tax requirement. The taxation slab is mentioned below for your reference.

TAX SLAB :

TAXABLE INCOME	TAX RATE
Up to Rs. 2,50,000	Nil
Rs. 2,50,000 to Rs. 5,00,000	5%
Rs. 5,00,000 to Rs. 7,50,000	10%
Rs. 7,50,000 to Rs. 10,00,000	15%
Rs. 10,00,000 to Rs. 12,50,000	20%
Rs. 12,50,000 to Rs. 15,00,000	25%
Above Rs. 15,00,000	30%

5. Exemption from Legislative Meetings:

No Formal Meetings: Sole Proprietorships are not obligated to conduct regular legislative meetings, reducing administrative burdens and streamlining operational efficiency.

What are the requirements to incorporate a Sole Proprietorship Firm?

1. One Person as a Proprietor:

Single Ownership: Sole Proprietorship allows only one individual to be the owner and operator of the business. No directors or additional shareholders are involved.

2. No Minimum Paid-up Capital Needed:

Flexible Capital: Unlike some business entities, there is no mandatory requirement for a minimum paid-up capital. The proprietor can decide on the initial capital without any specific constraints.

3. Office Space in India:

Business Location: An office space or a location in India is necessary for the operation of the business. It serves as the base for conducting business activities.

What are the Documents required to incorporate a Sole Proprietorship Firm?

PAN Card
Aadhar Card
Passport size Photo
Rental deed
EB Card / bill
Cancelled Cheque.

How to register a Sole Proprietorship Company?

MSME registration :

Micro Small Medium Entrepreneurs are also called as Udyog Aadhar registration. As small-scale industries are the backbone of the Country, the government is providing various schemes to small and medium-scale industries through MSME. While the government does not offer formal registration for sole proprietorship firms under the Indian Companies Act, obtaining MSME registration serves as legal proof and grants various privileges. The MSME registration is issued by the State Government and now from 2015, it is changed to Udyog Aadhar.

MSME registration is categorised based on capital:

Micro Industries: Capital does not exceed ₹25 Lakhs.
Small Scale Industry: Capital does not exceed ₹5 Crores.
Medium Scale Industry: Capital does not exceed ₹10 Crores.

Business Location: An office space or a location in India is necessary for the operation of the business. It serves as the base for conducting business activities.

Does the Sole Proprietorship Firm need to get a separate PAN card?

There is no separate PAN card to be obtained for a Sole Proprietorship Firm. In the case of a Sole Proprietorship, the PAN card of the individual proprietor serves as the PAN for the business entity. Since a Sole Proprietorship is not considered a separate legal entity distinct from its proprietor, there is no requirement for a separate PAN card for the business.

The proprietor’s PAN is used for all financial and tax-related transactions associated with the Sole Proprietorship. It is important for the proprietor to use their individual PAN for filing income tax returns and fulfilling other tax obligations related to the business.

What are the differences between a Sole Proprietorship Firm and a One-Person Company?

1. Registration Requirements:

Sole Proprietorship: Not mandatory to register under Indian law.
OPC: Mandatory registration with the Registrar of Companies (ROC).

2. Compliances:

Sole Proprietorship: Requires filing only annual returns.
OPC: Requires maintaining record books, notifying ROC about structural changes, and filing annual returns.

3. Legal Entity Status:

Sole Proprietorship: Not a separate legal entity; the proprietor and the firm are considered one person.
OPC: Recognized as a separate legal entity, with a distinction between the company and its shareholders.

4. Name Approval:

Sole Proprietorship: No requirement for a unique name or ROC approval.
OPC: Requires a unique name and approval from the ROC.

5. Directors and Nominees:

Sole Proprietorship: No appointment of directors or nominees; the owner alone incorporates the business.
OPC: Requires the appointment of a director and a nominee during incorporation.

6. Liability:

Sole Proprietorship: Sole proprietor has unlimited liability; personal assets are at risk.
OPC: Limited liability for shareholders, protecting personal assets from business liabilities.

7. Transferability of Ownership:

Sole Proprietorship: Ownership cannot be easily transferred; requires a change in business structure.
OPC: Transfer of ownership is possible through the transfer of shares.

8. Statutory Audit:

Sole Proprietorship: Not required to undergo statutory audit.
OPC: Mandatory statutory audit if turnover exceeds prescribed limits.

9. Conversion Possibilities:

Sole Proprietorship: Can be converted to other forms like LLP or private limited company.
OPC: Can be converted to a private limited company if it surpasses certain thresholds.

10. Capital Contribution:

Sole Proprietorship: Capital contributed by the proprietor alone.
OPC: Capital can be contributed by the shareholder(s).

Termination of a Sole Proprietorship Firm:

Unlike more complex business structures, the termination of a sole proprietorship is a relatively straightforward process. The proprietor has the autonomy to decide when and how to conclude the business. Here are key aspects to consider when contemplating the termination of a sole proprietorship:

Decision-Making Authority: The proprietor, being the sole decision-maker, has the authority to choose when to terminate the business. This decision can be influenced by various factors such as personal reasons, financial considerations, or a shift in career objectives.

Legal Formalities: While there are no elaborate legal formalities involved in terminating a sole proprietorship, it is advisable to settle any outstanding obligations, including debts and contractual commitments, before initiating the closure. Proper documentation of the termination process can help in avoiding future complications.

Closure of Business Operations: The proprietor should cease business operations and settle any pending transactions. This involves notifying customers, clients, and suppliers about the closure and settling any outstanding financial matters.

Licences and Registrations: Any licences or registrations obtained for the sole proprietorship should be appropriately cancelled or updated with the relevant authorities. This ensures compliance with legal requirements and prevents any unnecessary obligations.

Financial Settlements: All financial matters, including the payment of outstanding bills, employee dues, and taxes, should be addressed before finalising the termination. Clearing financial obligations contributes to a smooth closure process.

Communication: Informing stakeholders, such as employees, clients, and suppliers, about the decision to terminate the business is essential. Transparent communication can help in managing expectations and maintaining positive relationships.

Documentation: Maintaining proper documentation of the termination process, including records of financial settlements, closure notifications, and any legal correspondence, is advisable. This documentation can serve as evidence in case of any future queries or disputes.

In summary, the termination of a sole proprietorship is within the discretion of the proprietor. While there are no intricate legal procedures involved, careful attention to financial settlements, legal obligations, and transparent communication can contribute to a smooth and well-managed termination process.

FAQ

FAQs

Are there any mandatory licences to run a business?

Yes, each business requires a specific licence, depending on its objectives. Some of the mandatory licences are:

GST
Trade licence
IE Code
Drug and Cosmetic licence

Have Any Questions?

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SOLE PROPRIETORSHIP