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Proprietorship

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What is 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.

Pay as you Grow !

Income tax return filing for an individual with salary income of less than 5 lakhs.
Rs. 4999 /- Inclusive of all charges
Income tax return filing for an individual with salary income of less than 5 lakhs.
Rs. 9999 /- Inclusive of all charges
Income tax return filing for an individual with salary income of less than 5 lakhs.
Rs. 13999 /- Inclusive of all charges

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.

  • 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.

  • 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.

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.

  • 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.

  • 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.

  • 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.

  • 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.

  • 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.

  • Current account

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

  • PAN of the proprietor
  • Identity proof
  • Address proof

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  • How many people 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?
    • The proprietor must be an Indian citizen and resident. Non-resident Indians and persons of Indian origin can only invest in a proprietorship with prior approval from the Government of India.
  • Will my proprietorship firm have a separate legal identity?
    • No, the proprietorship firm and the proprietor are one and the same legally. The PAN of the proprietor will be the PAN of the firm. Therefore, there will be no separate legal identity for the business. The assets and liabilities of the business and the proprietor will also be one and the same.
  • How can I transfer my proprietorship?
    • A business operated under a proprietor cannot be transferred to another person unlike a limited liability partnership or a private limited company. Only the assets in the proprietorship can be transferred to another person through sale. Intangible assets like government approvals, registrations, etc., cannot be transferred to another person.
  • Can other people invest in proprietorship?
    • Proprietorship firms are business entities that are owned, managed and controlled by one person. So they cannot issue shares or have investors.
  • Can I later convert my proprietorship into a company or LLP?
    • Yes, there are procedures for converting your proprietorship business into a company or an LLP at a later date. However, the procedures for the same are cumbersome, expensive and time-consuming. Therefore, it is wise for entrepreneurs to consider and start an LLP or a company in case they are expecting it to be operational at a bigger scale or they want to raise investment.
  • What is the capital required to start a proprietorship?
    • There is no limit on the minimum capital required to start a proprietorship.
  • How do I open a bank account for a proprietorship?
    • The Reserve Bank of India mandates that the proprietor provide two forms of registration of the proprietorship along with the PAN, identity proof and address proof of the proprietor. The two forms of registration can be any two of the following: MSME registration, Shop & Establishment Act registration, professional license, chartered accountant certificate or others as provided in the RBI KYC norms.
  • Will my firm have a registration certificate?
    • Proprietorship firms do not have a certificate of incorporation or a certificate of registration. The identity and legitimacy of a proprietorship firm is established by registering with the relevant or applicable Government authorities.
  • How to register the name of a proprietorship?
    • There is no registry or regulation for registering the name of a Proprietorship. Therefore, proprietorship firms can adopt any name that does not infringe on registered trademarks. Since there are no regulations for registering the name of a proprietorship, the only way to ensure exclusive use of the business name is to obtain a trademark registration of the business name.
  • What are the annual compliance requirements?
    • Proprietorships will have to file their annual tax return with the Income Tax department. However, annual reports or accounts need not be filed with the Ministry of Corporate Affairs which is required for an LLP or a company.
  • Is audit required for a proprietorship?
    • It is not necessary for proprietorships to prepare audited financial statements each year. However, a tax audit may be necessary based on turnover and other criteria.
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