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Learn more about Sole Proprietorship in India

A Sole Proprietorship is the easiest form of business to do in India, as it is not governed by any specific law. Under a Sole Proprietorship, compliance requirements are minimal and easy to meet. A Sole Proprietorship is a business operated by one person. As such, the decision-making and management of the business are in the hands of one person. Please visit our India Company Registration page for additional information on the different incorporation choices : Limited Liability Partnership, Private Limited Company…

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What is a Sole Proprietorship?

Sole Proprietorship is one of the oldest and easiest business structures to start in India. A sole proprietorship is a type of business owned, managed, and controlled by one person, who is the owner. Since the Sole Proprietorship and the owners are the same people, it is very easy to start, and the compliance requirements are very minimal.

Since the owner and the business are one, a Sole Proprietorship cannot have any other partners or shareholders. In addition, there is no limited liability protection for the owner of the business activities conducted in the sole proprietorship. Therefore, this type of business entity is best suited for all small businesses with no more than 5 employees.

A sole proprietor is the only owner of the sole proprietorship. Therefore, a business will be carried forward by creating a new bank account for the business, and Goods and Service Tax registration will be done using the owner’s PAN and Aadhar. The owner is fully responsible for the business’s all assets and liabilities.

The following are the Sole Proprietorship business model’s characteristics:

1. Ease of establishment:

An ideal organization should be simple in its setup. A simple setup means minimum legal and other formalities. Setting up a sole proprietorship is simple.

2. Sole proprietorship:

A Sole Proprietorship is owned by one person. This person owns the business’s assets and assumes all the risks. Thus, the Sole Proprietorship cases with the death of the business owner or at the owner’s will.

3. No partner in profits and losses:

All profits from the Sole Proprietorship belong to the owner. If there is a loss, the owner must bear the burden. The owner has no other partner in the profit and loss of a Sole Proprietorship.

4. Capital of one person:

In a Sole Proprietorship, one person raises the capital. To do this, he raises money from himself or borrows from friends and relatives. He can also take out loans from banks and other financial institutions if necessary.

5. One-person control:

Control of a Sole Proprietorship is always in the hands of the owner. He or she makes all decisions regarding business conduct.

6. Unlimited liability:

The sole proprietor business owner’s liability is unlimited. This means that business assets or personal property may have to be sold to pay the business’s debts in the event of a loss.

Why register a Sole Proprietorship in India?

➤ Easy registration: The sole proprietorship does not have a formal incorporation or dissolution process as it is the same as the owner. However, in order to operate a business, the owner may have to obtain certain registrations and licenses to comply with the laws and regulations of India.
➤ Lesser compliance: since most sole proprietorships are only registered with government departments such as income tax and Goods and Service Tax, the burden of compliance will be less. On the other hand, entities like Limited Liability Partnership or Company are registered with the Ministry of Corporate Affairs and must file various statutory returns and be audited by a Chartered Accountant every year.
➤ Simplicity: Since there are no partners, shareholders, or directors, the owner can easily operate this business with minimal documentation and consent requirements. Therefore, this type of business structure is best suited for very small businesses.
➤ Business Decision: In a sole proprietorship, the business owner makes all business decisions. No consent or approval is required from any other person. Therefore, an owner can normally make quick decisions about his or her business affairs.
➤ Complete control: As a sole proprietorship, the owner is the sole owner. He/she has complete control over the assets, income, expenses, and all business operations.

It is a different legal entity from its owners; it may sue and be sued in its own name, and its directors and stockholders are not accountable for the company’s obligations. Company directors and stockholders are only liable to the company to a limited extent. As long as the shares are paid up, the members/shareholders have no additional responsibilities to the company’s creditors, and their personal assets are safe from these creditors. It is capable of acquiring property.

How to register a sole proprietorship in India?

In addition to the required legal documents, there are a few registrations required to establish the existence of the business:

1. Registering as an SME

You can register as a small and medium enterprise (SME) under the MSME Act. The application can be filed electronically. Although it is not mandatory to register as an SME, it is very beneficial, especially when taking out a loan for the business. The government runs various programs for SMEs where loans are provided at a preferential interest rate.

2. The license under the Shops and Establishment Act

The Shops and Establishment Act License must be obtained in accordance with local laws. It is issued based on the activity and number of employees. Generally, all sole proprietors who own a store or establish a business establishment must obtain this license.

3. Goods and Service Tax Registration

You can register under Goods and Service Tax if your annual turnover is more than Rs. 40,000,000. Also, if you are doing business online, you need to get a Goods and Service Tax number. To register for Goods and Service Tax, you need the following documents:

➤ PAN card, photo, and Aadhar card of the owner
➤ Proof of place of business (electricity bill/lease agreement)
➤ Copy of bank statement (first page to verify bank account number, address, and IFSC code)

Registration for Goods and Services Tax is simple and can be done through the Goods and Services Tax portal. Normally, the Goods and Service Tax number is received within 3-4 days of applying.

What are the different ways to register in India?

Firstly, a Sole Proprietorship is the most common form of business entity in which one person is the owner and is personally liable for the business’s all debts and liabilities. It is the simplest form of an entity with minimal compliance procedures:

Sole Proprietorship Registration under the Shops and Establishments Act

A sole proprietor may register his business under the Shops and Establishments Act if he has a store as his place of business.

1. Here, store means any premises:
2. A place where goods are sold, either at retail;
3. A place from which services are provided to customers;
It includes an office, store, shed, warehouse, or place of business, whether on the same premises or elsewhere, which is used in connection with that trade/business.

However, it does not include a factory, business establishment, hotel residence, restaurant, theater, or another place of public amusement or entertainment.
If you have a store as defined above, you may register your Sole Proprietorship under the Store and Establishment Law by applying to your local municipality.

Sole Proprietorship Registration through Udyog Aadhaar under the Ministry of MSME

A Udyog Aadhaar is a unique identification number provided by the Ministry of MSME to business owners. Along with all other entities such as companies and partnerships, even a sole proprietor can apply for a udyog aadhaar.

In addition to being able to avail of the benefits offered by the Ministry of MSME, a sole proprietor has the added advantage of getting a unique identity for his business, which is also considered a sole proprietorship registration.

Udyog Aadhaar is a new method of registration with the Ministry of MSME. It has replaced the old method of registration, where EM-I and EM-II forms were used to register. Now, by applying for Udyog Aadhar, any business can register to avail of the benefits of various schemes introduced by the MSME Ministry.

Sole proprietorship Registration through Goods and Service Tax registration

Goods and Service Tax registration is another way to register your Sole Proprietorship. You can apply for Goods and Service Tax registration if you are engaged in any type of exchange of goods and services. It has replaced the old VAT and service tax registration.
Goods and Service Tax registration is an excellent method of obtaining an identity for your Sole Proprietorship. However, some important considerations need to be evaluated before opting for this method.

Under Goods and Service Tax registration, the only drawback is that after registration, it is mandatory to comply with all the compliances. Each registered business is required to collect taxes from customers and file Goods and Service Tax returns.

If a sole proprietor has a turnover of less than Rs. 20 Lakhs, it is not mandatory for him to register and collect Goods and Service taxes. But if he still chooses to register in order to register his Sole Proprietorship, he will have to go through unnecessary additional compliance that he could have avoided.

What are the documents required in India?

Here is a list of documents required to set up a Sole Proprietorship in India:

1. Adhar Card : Aadhar number is now a necessity for any application for registration in India. Also, the tax return can be filed only if the person has linked his PAN card with the Aadhar number. After applying for an Aadhar card, a hard copy of the same is received at the registered address in about 15-20 days.

2. PAN Card : You cannot file your tax return until you have obtained a PAN. So, if you don’t have a PAN number, apply for it as soon as possible. The PAN card can be applied online. To apply, you need a scanned photograph, an ID, and proof of address. The form can be submitted online by checking it through Aadhar e-KYC. Once the PAN card application is submitted, it is checked at NSDL for verification, and if NSDL finds the correct information, it issues the PAN number within 7-8 days. In addition, a hard copy of the PAN card is received at the registered address within 15-20 days.

3. Bank Account : After getting your Aadhar number and PAN, you can go to any bank to open an account with them. In addition to the Aadhar number and PAN, you need to carry proof of identity and proof of address. To open a current account, you also need to submit a Goods and Service Tax registration document to the bank officials.

4. Proof of Head Office :
➤If leased: lease agreement and NOC from a landlord.
➤If it is an Independent Property: Electricity bill or any utility bill or bill of sale.

What are the disadvantages of Sole Proprietorship?

A business organization run by a single person is the best form of business because of the qualities mentioned above. However, it also has some limitations like other organizations:

Limited capital: In a Sole Proprietorship, only the owner invests the capital. It is often difficult for a person to invest more capital. The owner’s capital and borrowed capital may not be enough to grow the business.

Lack of continuity: The sole proprietorship organization’s existence is dependent on the life of the owner. Whenever the sole proprietor decides to sever ties or dies, the business ceases to exist.

Limited size: It is difficult to expand the business beyond a limit in a Sole Proprietorship. If the business is going to grow beyond a certain limit, it is not always possible for one person to take care of and manage it.

Lack of management expertise: A sole proprietor may not be competent in all aspects of management. He or she may be competent in administration and planning but may be weak in marketing.

Is registration of sole proprietorships mandatory?

Finally, registration is not mandatory. It is optional whether a person intends to register his sole proprietorship or not.
Although banks insist that the sole proprietorship be registered if you intend to open a bank account in the name of your business, according to the law, it is not mandatory.
Even if you register your Sole Proprietorship, the government will not issue a new PAN card for the same. The same PAN card of the owner would also continue to apply to the Sole Proprietorship.

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