First of all, congratulate for thinking of starting a new business because starting a new business in India is tedious job as well as in legal paperwork is another challenging task.
After deciding what business you want do, then next question in mind is that how I setup/start a Legal Business entity like Sole Proprietorship and how this effect in day to day operations which divided in some parts like, Various Taxes, Different Authorities (Municipal, State and Central) Registrations, Level of Legal Compliances, Personal Liabilities, Legal Protections and benefits and easy future funding.
In India there is Major 4 type of Structures for business/Profession (Sole Proprietorship, Partnership Firm, LLP, Company) and other are social Structures like Hindu undivided Family (HUF), Trust (Section 8 Companies), Co-Op. Societies, Groups (Association of Persons Etc.)
Now here we discuss only Sole Proprietorship business Structure.
Table of Contents
Ownership of Sole Proprietorship Business
Sole proprietary is owned by one person himself/herself. Many Persons start small businesses with his name considered as a sole proprietorship. This business is not considered separately from its owner and This type of business did not require any formal registration in India. Ownership is 100% with this person/owner.
This person/owner who run this business called by designation is Proprietor.
Registrations and Compliance to Follow in Sole Proprietorship
This type of businesses are Compliance free as compared to other type of businesses since no separate income tax return need to file as well as no such major registration required.
- Registration under The Shops and Establishment Act with Municipal authority (Profession Tax)
- Take Udyam Registration under MSME Act.
- GST Registration (If Turnover Exceed 20 Lakh or some other conditions met)
- GST Quarterly/Monthly Filing of GST Returns being GSTR1/GSTR3B
- Yearly Income Tax Return
Documents Required for start Sole Proprietorship Business
- PAN (Form for PAN Application)
- Aadhaar Card/Letter (For Download Aadhaar Letter)
- Electricity Bill/Property Tax Receipt
- For Rented Premises Rent Agreement
- For Udyam Registration (Not Mandatory but Recommendatory for other benefits from government schemes)
- Bank Account
- For GST All above Documents Required
Procedure for start sole Proprietorship Firm
- Apply For PAN
- Decide Trade Name (Ex. Ram Kirana Store)
- Apply for Udyam Registration at MSME Website (Not Mandatory)
- Apply for Registration Certificate under the Shops and Establishment Act of the state in which the business is located.
- Open Current Bank Account with Trade Name in Any Schedule Bank
- If Turnover limit reached, then apply for GST Registration.
Proprietorship business can start within 5 to 10 Day subject to Government Department Approval.
Tax Treatment in Sole Proprietorship
Business Income will be considered as a income of that person himself and taxable as per the slab rate of that person being 5%, 20% and 30% with Cess and Surcharge applicable.
Tax Payable on income will be 0% to 42.744% (30% Tax with 37% Surcharge on Tax plus 4% Health and Education Cess (H.E.C.) on both)
Let’s Understand with below table.
| Gross Taxable Income | Deduction | Net Taxable Income | Tax Payable | % of Tax Payable on Income |
|---|---|---|---|---|
| 5,00,000 | 0 | 5,00,000 | 0 | 0 % |
| 6,50,000 | 1,50,000 | 5,00,000 | 0 | 0 % |
| 9,00,000 | 1,50,000 | 7,50,000 | 65,000 | 7.22 % |
| 12,00,000 | 1,50,000 | 10,50,000 | 1,32,600 | 11.05 % |
| 60,00,000 | 1,50,000 | 58,50,000 | 17,93,220 | 29.89 % |
| 1,50,00,000 | 1,50,000 | 1,48,50,000 | 51,03,930 | 34.03 % |
| 3,60,00,000 | 1,50,000 | 3,58,50,000 | 1,37,37,750 | 38.16 % |
| 7,00,00,000 | 1,50,000 | 6,98,50,000 | 2,95,89,534 | 42.27 % |
(Above Table are based on 80C Deduction of Rs. 1,50,000/- and old Tax Slabs are followed with Applicable Surcharge and Health and Education Cess)
As per above table as you see this type of business is suitable for small business with minimum tax burden. As income increase, tax burden are also increase in more Percentage compared to other business structures (Partnership Firm, Limited liability Partnership, Company).
For More Details: Check Slab Rate applicable to Person being an Individual and HUF
Advantages of Sole Proprietorship
- 100% Ownership. So, no sharing of profit.
- Easy to start since not wait for registration process.
- No conflicts with other partner/stakeholder since they didn’t exist.
- Decisions are made by such proprietor therefore easy to make and implement.
- Less/No Compliance.
- Less income tax on incomes up to 10 Lakhs. (Max 20% plus 4% H.E.C.)
- Easily use of profit/Funds of Business without worry of additional income tax.
Disadvantages of Sole Proprietorship
- Personal Liabilities is unlimited on proprietor and if loss incurred, he/she need to settle with personal assets. (no benefit of limited liabilities like LLP/Company)
- If Something happen to proprietor (owner) then this business end and there is no proper succession so, it can be shut down any time.
- Difficult to gain investor trust since this is not a separate entity like other structures (Firm/LLP/Company).
- Business with higher profits (More than 50 Lakhs) will face more Income Tax Burden compared to other business structures.
- If you are registered in GST then many personal Receipts also liable for GST of 5% to 28% like Shop Rent Income Etc.
Sole Proprietorship best fit for
- Small Business/Profession with turnover less than 20 Lakhs for other business or 40 Lakhs for trading businesses (without GST Registration).
- Person with other income as well as business and combine Yearly Taxable Income will be less than 10 Lakhs.
- For early start of business which are not scalable at beginning and business with less fund’s requirement.
- Examples: Kirana Stores, Small Bakery, boutiques, Salons, Repairing Shop, Garages, small snacks/sweets food stores etc. Local/Regional Businesses.
Frequently Asked Questions
How many days taken for registration of Sole Proprietorship Firm?
Maximum 5 to 10 Days Required to Start a Sole Proprietorship firm. Sometimes Government Authority may delay Approval.
In Shop and Establishment Act License must require for Proprietorship Business?
The Shops and Establishment Act License is required to be obtained according to the local Municipal laws. It is issued based on the business and No. of employees. Normally, Proprietor who own a shop or establishment must obtain this license. For Professional there is a Professional Tax Certificate.
In which name PAN Card Apply? Business Trade Name or Owner?
PAN Card Apply for Proprietor/Owner. Since Sole Proprietorship is not a separate Business entity from its Owner. No Separate PAN Card apply for Sole Proprietorship.
Bank Account can be open with Trade Name or Owner Name?
Bank Account open with Trade Name (E.g., Ram Kirana Store) is more suitable but owner can open his/her name also. there is no such condition for Name in Sole Proprietorship business.
Conclusion
Since this business structure easy to setup and full control over business, it is popular structure but when business grow this will lead to higher tax burden so, make a wise choice as per your requirements.
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