Things to know before starting a sole proprietorship business in India

We have three main forms of business in India:  proprietorship, Partnership and Company. A business which is owned, operated and managed by a single individual is called sole proprietorship business.

Sole proprietorship form of business is the most common form of business owned and operated by many individuals across India. It’s the simplest and the easiest way to start your business.

You can operate proprietorship business under your own name or in some other trade name. You are just required to put the nameplate on the door and start trading. You can choose any name as its not required to be registered anywhere.

In India sole proprietorship form of business does not have any legal identity. In this type of structure, the owner who started and invested is known as proprietor or sole trader. In case of any business liability or legal actions, the owner or proprietor will be liable and responsible for the whole liability after paying from business assets.

How to start sole proprietorship businesses in India

Registration for Proprietorship Business

In India To start, you are not required to formally register your business with government departments. All you need is a trade name, money, current account and some customers. Registration is required only if you requires certain approval from certain authority to run the business.

For instance, if your proprietorship business has a turnover in excess of the aggregate threshold limit as specified in GST law during the financial year, then you are required to get it registered under the Goods and Services Tax. Read our article on GST registration, to know if its applicable to you.

While deciding name of the sole proprietorship business you need to take trademark and other copyright issues in to account. Names of the proprietorships and Partnership Firms are not protected if trademark registration is not taken.

To avoid future dispute, we suggest you to check trademark registration database to know if anyone already using that particular name. If you find it in trademark registration database, then consult any legal practitioner before using the name.

Many retail shop owners, doctors, chartered accountants, lawyers and other legal professionals are operating as a proprietor by forming a proprietorship business or profession. Being a 100% owner of the proprietorship business, no one can influence your decisions and you gets all of the profits of the business.

Bank Account for a Proprietorship Business

To open a current bank account, you are required to provide government registration for your trade name. In this type of situation, you can provide registration certificate obtained under GST or MSME or Trade License.

Under “know your customer” requirements of bank, you need to provide two certificates to open your bank account.

Tax Return and PAN card

You need not file a separate application for your pan card if you as an owner of the business already have a pan card.

As a owner, business Income gets added to your personal income by giving you tax deductions benefits under chapter VI-A, basic exemptions and rebate on tax liability in addition to other benefits. While filing income tax return, you need to calculate profit and loss in your name and file the income tax return accordingly.

You need to report business income of the proprietorship under the head “Income from business or profession” in addition to other income in your personal income tax return.

TAN Registration

TAN is not required if your proprietorship businesses turnover does not exceed Rs. 1 crore. If you have a proprietorship business which is rendering professional services then you need not apply for TAN if it’s not crossing the limit of Rs 50 lakh.

TAN is applicable to those persons who are liable to deduct income tax for certain payments. For above mentioned business or profession these TDS provisions are not applicable.

Provident fund registration

You can register your business under provident fund act if you have 20 or more employees in business. You have to get yourself registered at the register office of employee provident fund. After registration with EPFO you can open PF accounts in the name of your employees and start contributing to it. Registration will not cost you anything but if you are doing it through a professional then you need to pay professional charges.

Employee State Insurance registration

ESI registration will be mandatory if you are employing more than 10 employees in factory or 20 employees in other establishment not being a factory. Registration will not cost you anything but if you are doing it through a professional then you need to pay professional charges.

Proprietorship Registration under Shop and establishments Act

Under the state act for shop and establishment you need to send an application within the specified time as applicable to the state for registration. After getting accepted you will be issued a certificate on that.

Advantages of forming sole proprietorship business

  • Easy to form and inexpensive to get started
  • The owner has complete control on the business
  • Secrecy of business are maintained
  • Flexibility in operating business
  • subject to few legal compliance
  • it avoids corporate income tax rates

Disadvantage of forming sole proprietorship business

Like any other form of business, proprietorship has its own limitations.

  • Limited life as it will over when the sole proprietor dies
  • Unlimited liability of the owner  for the sole proprietor business
  • Business does not have any legal existence
  • difficult to obtain large sums of capital,
  • proprietor has unlimited liability, it can result in losses of personal assets for business liabilities, and
  • life of the proprietorship is limited.

As a proprietor, you receive all income from the proprietorship business, control the whole proprietorship and alone decide whether to invest the profit in it or use them for personal expenses. As a owner or proprietor, you are liable for all the debts of the proprietorship. If business assets are insufficient to pay debt, the proprietor must pay the debt out of his/her personal assets. In certain cases you are required to get your accounts audited from a chartered accountant under section 44AB of income tax act 1961. You can also take benefits of presumptive taxation scheme while filing your return of income.

is a fellow member of the Institute of Chartered Accountants of India. He lives in Bhubaneswar, India. He writes about personal finance, income tax, goods and services tax (GST), company law and other topics on finance. Follow him on facebook or instagram or twitter.