Sole proprietorship is a simple and most commonly used form of business entity in India. Its a business owned and managed by a single individual which can be carried over easily by the legal heir without much of legal formalities.
For income tax and legal liability purpose, there is no difference between the owner and the sole proprietorship business. Both are one and the same for legal purpose.
Earnings of the sole proprietorship business is taxed in the hands of individual or owner. The sole proprietorship business is not taxed separately. For liability purposes, individual and the sole proprietorship business are also one and the same.
The liability of the proprietor is unlimited. This means, as a business owner, liabilities and losses should be borne or taken from your personal property as a proprietor after settling the property with the sole proprietorship’s business assets.
- Books of account to be maintained by a sole proprietorship business
- Income tax audit required for a sole proprietorship business
If you have decided and have a clear vision of what your business would be then you can initially start a sole proprietorship business instead of a private limited company or firm.
Following steps can be followed to start a sole proprietorship business in India:
The first step would be to decide a name for your sole proprietorship business that matches with the type of business you do.
If you think that someone may misuse your name or use as the name for their own business then you can register your name as a trademark of your business.
If you are a service provider and your services are covered under the list of services to be charged under service tax act then in the second step, you need to register to get a service registration number. This registration will be applicable only if your turnover for the financial year exceed Rs. 900000.
The third step is to open a bank account with the name of your sole proprietorship business. You can visit any banker for opening up an account.
Banks generally asks for address proof of the owner like electricity bill or any such document having the owner’s name and address (better you contact your banker to know more on the requirement of documents for opening an account).
Due to KYC norms, your banker may ask you to provide a government registration certificate. In that case you can either provide your VAT registration or service tax registration certificate or municipality permission to start your business.
In the fourth step, to comply with Income Tax matters, if you as an individual do not have a PAN then apply for it. Your sole proprietorship business does not require having a separate PAN card for its business. Owner’s PAN card will be sufficient as income tax return will be filed with owner’s name not in the name of business.
If your business requires having other registrations like sales tax registration then apply according to your business need. Income from the sole proprietorship firm would get added into owner’s personal income and would be taxed accordingly.
Print few letter heads and visiting cards for the purpose of communication and few broachers stating how your business will add value to your customer’s need.
Based on your business requirements, you can also apply for import/export code, MSME registration or registration under Shops and Establishments act. These are government registrations which can be used as a certificate of your existence.
Advantages of Sole Proprietorship
- Minimal Compliance
- Easy to Start
- Relatively Inexpensive
- Easy exit or closing business does not require much legal compliance