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Sole Proprietorship Concern: A2Z

A sole proprietorship concern is a type of business entity/ firm in unincorporated form which is owned and run by a single individual, known as “sole proprietor” and there is no legal distinction between the sole proprietor and the business entity.

As per the World Bank’s enterprise survey in 2014, 47.40 % of the total types of business entities in India were in form of sole proprietorship concerns. The rest of the 52.60% consists of partnership firms, limited liability partnerships, listed and unlisted companies and other forms of business entities. The sole proprietorship concerns are not only popular in India but they are equally acceptable worldwide. Even the leading countries like United States, United Kingdom, Netherlands, Australia, UAE and so on, have sole proprietorship concerns as most popular form of business entity.

The reasons for such popularity, even after being in unincorporated form, are as follows:

  • Starting/ formation of a sole proprietorship concern are the easiest and cheapest of all the other types of business entities.

  • Generally there is no specific law which governs sole proprietorship concerns.

  • Sole proprietorship concerns do not require any specific registration for incorporation like registration with registrar of companies in case of private or public limited company and limited liability partnerships or registration with registrar of societies and firms in case of partnership firms and societies; but business specific registrations like weight and measurement registration under SWAMA, Food Safety registration/ Licensing under FSSAI etc. are mandatory for sole proprietorship concern as well like other forms of businesses.

  • The profits of the sole proprietorship concern are considered as the income of sole proprietor and the same are taxed based on the slabs of the Income Tax applicable to individuals, whereas flat rate of income tax is charged to the profits of partnership, LLP, company and other forms of business.

  • The burden of compliance and reporting is very less in case of sole proprietorship e.g. there is no need to file annual return as in case of companies.

  • Sole proprietorship can conduct all types of business and can have a separate legal name by which it can be recognized in the business world. Moreover two or more different sole proprietorships can have same name due to absence of regulating authority in this regard.

  • The decision making of the sole proprietorship concern is in single hand which provides a sense of security in terms of invested capital, business secrets and future expansions plans of the proprietor.

  • Sole proprietorship concerns are easy to wind-up as all the assets and liabilities belong to the sole proprietor.

How to start a sole proprietorship from a scratch

Knowing that sole proprietorship concern is an unincorporated form of the business entity, the question arises how to initiate/ form a sole proprietorship concern. The sole proprietor need following to start a sole proprietorship concern:

Sole proprietorship and One Person Company (OPC)

The concept of One Person Company was introduced in India by the Companies Act, 2013 as a new form of company which has only one member. The OPC is a hybrid of Sole proprietorship and Company, as it has mixed features of both. The distinctive features of both the types of entities are tabulated below:

Shortcomings of Sole Proprietorship

Although the most popular form of business entity, sole proprietorship is transpose by the unlimited liability it carries on the head of sole proprietor. 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”.

In case of the death of the sole proprietor, the very existence of the sole proprietorship business comes to an end. Due to this nature of sole proprietor various stakeholders, i.e. vendors, lenders etc., are always not very comfortable in rendering long credit periods or unsecured lending to the sole proprietorship concern. However the same can be continued by the legal heir of the deceased subject to the procedure lay down under the law.

The Goods and Service Tax Laws of India provides option to the legal heir of the deceased, either to close the sole proprietorship or to continue the same, but in case the legal heir wants to continue the sole proprietorship, a fresh registration need to be obtained in the name and credentials of the legal heir, which means the earlier registration in the name of the deceased need to be surrendered.

Sole Proprietorship Worldwide

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1 Comment

Sandeep Jindal
Sandeep Jindal
May 21, 2021

Nice article, clears a lot of doubts. Keep sharing.

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