Pros and Cons of Sole Proprietorship Business in India

It would be quite apt to state that most entrepreneurs embark on their journey as a sole proprietorship business. In India, there are multiple forms of business entities. However, out of these ventures, around 50% are sole proprietorship businesses. The sole proprietorship business is the oldest, simplest, and most prevalent type of business entity in the country. Small and micro industries, cottage industries, small traders, family shops, and other businesses prefer being sole proprietorships. So, in this article, let's dig a little deeper about the sole proprietorship business, what it means, and its pros and cons.

What is Sole Proprietorship?

A sole proprietorship is basically a single-person establishment, where an individual manages and controls the business as per his own will.

Important requirements to incept a Sole Proprietorship Business

You need only a handful of documents to begin your sole proprietorship. These documents include:

• Aadhar card
• PAN card
• Bank account details relevant to the business entity
• Registered office proof (Rent agreement or property documents)

Registration of Sole proprietorship in India:

The registration for Sole proprietorship could be done in two ways- firstly, by opening a bank account in the entity's name. Secondly, one can get the registration done by issuing a business license. However, there is no rigid protocol to register a sole proprietorship as it is, in reality, an extension of the proprietor.

Opening the bank account

The bank will guide you in doing this. You need a minimum of two documents from the list mentioned below:

• Property registration documents
• Rent agreement along with utility bill.
• Income tax return of the proprietor (complete)
• Certificate from the municipal officials under the shops and establishment acts.
• IEC code
• Utility bills

Availing of Permits and Licenses

Now, this one completely depends on the type of business you own. This registration could include GST registration, MSME registration, FSSAI license, PAN registration, or even Shop and establishment Act license.

Pros of operating a Sole Proprietorship Business

1. Simple to set up:

With a sole proprietorship, you do not specifically need any registration. Instead, the business owner's or proprietor's legal identity works. Hence, you can set up a sole proprietorship at any given point in time without a lot of paperwork. However, if you are willing to create an identity for your products, you can obtain permissions like a trademark registration.

2. Easier to operate:

Since only one person is responsible for deciding for the sole proprietorship, the operation becomes extremely simple. There is no concept of board meetings and no clashing opinions. The sole proprietor or the owner is the only one who manages, operates, and decides regarding the business venture all by himself. The operation is thus faster, easier, and stress-free.

3. The sole beneficiary of profits:

Okay, now, since there is no second party involved, there is no question of sharing the profits. Such an advantage is possible only in sole proprietorship and one-person companies. It makes you responsible for churning your earnings. There is a minimum of two profit-sharers in all the other types of entities, including LLP or partnership. Thus, with sole proprietorship, you have the advantage of keeping the total profit to yourself.

4. Minimal cost of establishment:

For setting up any business enterprise, the cost of the establishment is quite low in contrast to setting up other forms of ventures. It would also include the cost of registration. With a sole proprietorship, you do not need any of these, and you might as well skip the registration part. This decision will save you both time and money.

5. Minimal Regulatory and Tax Compliances:

There is no pre-requisite for a sole proprietorship to get specific registration under government authorities like the Ministry of Corporate Affairs. So, it is not liable to cater to numerous compliances of return filing and form submission applicable to LLPs or companies. The sole proprietor only needs to file income tax returns if his earning crosses individual taxpayers' minimum income threshold limit. These taxes are also quite minimal when compared to the tax liability of other types of businesses.

6. Better ability to retain the privacy of business:

Unlike other business entities where business owners need to share the crucial business data with the regulatory bodies, sole proprietorships do not require registration with the government authorities. Thus, their least amount of vital business info is shared with outside parties.

7. Lesser complications in the winding-up process

It is quite simple to close or shut down sole proprietorship businesses. All you need to do is clear all the remaining liabilities and outstanding bills and surrender licenses like the GST registration, MSME registration, or the FSSAI registration if you have any.

Cons of operating a Sole Proprietorship Business

Now that you have browsed the list of the positives, here are some downsides of a sole proprietorship.

* Unlimited liability:

As mentioned earlier, the proprietor is individually liable for the profits of his business. So, naturally, he also remains responsible for all the losses. This is a significant disadvantage as the sole proprietor's personal assets can get used to repaying the debts if the venture goes bankrupt. Thus, sole proprietorships are extremely useful only when the risks are minimum, and the chances of loss are negligible. Otherwise, with increased risk, the sole proprietorship could turn into a complete disaster.

* Possibility of Higher tax Liability:

Now, if your proprietorship churns out more than Rs. 10 lakhs annually, your income tax liability can go as high as 30 percent. But, for many registered companies, the taxability is much lower. So, if you plan to set up a business enterprise that produces higher profits, a sole proprietorship could turn out a little costly option for you.

* Fundraising is difficult:

Generally, financial institutions avoid investing in sole proprietorships. Even if they do lend any amount, the interest rates can be quite high. So, if you are willing to set up a concern that needs a lot of funding, a sole proprietorship may not prove feasible.

* Proprietor's death leads to the cessation of the proprietorship business:

As the complete responsibility of the firm is upon one owner, his death leads the business entity to conclude. You can resolve the issue of succession by drawing a will to a certain extent. But, this measure poses its own set of drawbacks. So if you want your business concern to existing for a longer duration, better look for another option.

* Limited growth:

As mentioned earlier, the tax and other compliances increase once the proprietorship earnings surpass a certain income limit. The growth of the business entity is thus relatively stagnant in the case of a sole proprietorship.

Place your reliance on Gotaxfile to find the best-in-class consultation for your business!

Duly weigh the pros and cons for this type of business entity and chose wisely. If you are still confused, Gotaxfile could help you. We have financial mentors who can help you decide and suggest the best possible option for your business entity. Then, if you are willing to set up the sole proprietorship, Gotaxfile can help you at each step. We have programs wherein we take care of everything right, from registering procedures to filing your taxes. So, let's make your dream project from an idea to an established business. Contact our proficients today!