Sole Proprietorship is arguably one of the most popular business structures in India. Unlike other companies, it adheres to minimal compliances that make the business journey more seamless. It is a kind of business structure where one person is responsible for handling the entire business affair. Sole Proprietorship doesn’t allow outsiders to intervene in the business proceeding or any other aspects unless the owner wishes them to do so.
Benefits of a Sole Proprietorship Firm
Every business structure renders different benefits. Following are some notable benefits offered by a Sole Proprietorship Business to its owners.
Fairly Easy To Establish
An applicant seeking to run their business affairs as a Sole Proprietor doesn’t need to undergo any registration process. They only need to secure business-specific licenses or registrations to run their business legally.
Seek Minimal Investment
Since the Sole Proprietorship model is a boon for low-cost business ideas, it is often chosen by small businesses like retail shop outlets, grocery retailers, so on and so forth.
Incorporation of business structure like a private limited company, OPC seeks significant expenditure in terms of capital procurement, which otherwise is nil in the case of the Sole Proprietorship model.
Ensures no profit distribution
The sole proprietors serve as the sole owner of their business and rejoice uncompromised control over their profit.
Adheres to minimal compliances
The Sole Proprietorship business model doesn’t come under the ambit of any specific law; hence, it is free to operate without tedious compliances. Unlike entities functioning under Company Act, 2013, they are free to work without a Certificate of Incorporation or Registration Certificate. Also, they are not obligated to disclose annual reports with MCA. However, such businesses need to stay in line with applicable GST compliances. In view of this, they are also mandated to register under the prevailing GST Act.
Attract lower Taxes
Tax authority doesn’t treat Sole Proprietorship and Sole proprietor differently. Therefore, they do not need to address separate tax liabilities. Prevailing IT Act mandates sole proprietor to file an income tax return. It is a way to disclose profit and income generated before the tax authority for the given FY.
Please remember that tax estimation is done as per the income tax slab rates as applicable to the taxpayer. Therefore, there is no requirement of filing a separate tax return for the Sole Proprietorship firm.
Seamless Decision Making
Sole Proprietorship business outweighs other business structures when it comes to the decision making. It offers complete authority to the owner to take any decision regarding business affairs without intervention of anyone else.
No Auditing requirement for low income firm
The financial accounts of Sole Proprietor business are not exposed to mandatory auditing requirements. It only comes into play when a business income surpasses the certain turnover threshold underpinned by the concerned authority.
Documents required to operate as an Sole Proprietor
- PAN, photographs, & Aadhar Card of the proprietor
- Utility bill of the business place such as water bill or electricity bill
- Bank statement copy and other details such as account number and IFSC code
- Applicants can avail of GST registration by submitting relevant e-application on the GST portal.
Procedure for Establishing Sole Proprietorship Business in India
The section below reflects the list of mandatory documents that is required for establishing a sole proprietorship business.
Step 1: Obtain Aadhar Card
Aadhar number is a must-have requirement for legalizing any business in India. Also, an IT return can only be filed if the taxpayer has synced his/her PAN card with PAN. The applicant can approach the nearest Aadhar, Seva Kendra or E-Mitra to secure the Aadhar number in a legit way.
Step 2: Apply for PAN Card
You cannot file an IT return in the absence of a PAN. There is a dedicated government portal that enables a person to apply for PAN at a nominal fee. The standard documents required to apply for PAN includes applicant photograph, ID proof, & address proof.
The online submission of the PAN application can be made after validating it via Aadhar e-KYC. After this, it is scrutinized at NSDL for verification. Post successful verification, the authority grants the PAN number to the applicant within a week. The hard copy of the same is routed to the registered address within 15-20 days.
Step 3: Open the Bank Account in the name of Business
Once you have secured the PAN and Aadhar Number, you can approach any designated bank opening a current account. Common documents required for serving this purpose include PAN, Aadhar Number, GST registration, and address and identification proof.
Note: the applicant can furnish the copy NOC or rent agreement for address proof. Likewise, they can also facilitate utility bills to serve such a purpose.
Step 4: Secure Shop and Establishment Act License
A shop and Establishment license is a legal compulsion for a commercial establishment that vend goods or services to the customer. Owning a small establishment or a shop is a small form of business, and it is a legal compulsion for the owner to secure such a license.
Step 5: Register under GST
GST registration applies to all forms of business whose annual turnover is above the prescribed threshold limit. At present, businesses whose yearly turnover is greater than Rs 40 lakh are mandated to secure this registration. Keep in mind that GST also covers online business owners.
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Regulatory Compliances
These are the laws and rules passed by some regulatory bodies set up by the state or central Government. Some of them are listed as follows.
Accounting & Payroll
- Accounting
- Employee Payroll
Assurance
- Statutory Audit
- Tax Audit
- Internal Audit
Direct Tax
- Corporate Tax
- Transfer Pricing
- Withholding Tax
- Expatriate Taxation
Indirect Tax
Secretarial Compliance
Businesses in India must comply with secretarial matters specified under the Indian Companies Act and report to the concerned ROC.
Labour Laws
An employer needs to consider the impact of the Provident Fund, a government-regulated Pension Plan scheme.
Miscellaneous
- Specific state-specific regulations, e.g., Professional Tax and the Shop and Establishment Act, prevail in Indian states like Karnataka, Maharashtra, Tamil Nadu, etc.
Corporate Law
- Board Meeting
- Annual General Meeting (‘AGM’) (adoption of financials)
- Annual Return with the ROC
Tax
- Corporate Tax Return
- Tax Audit Report
- Transfer Pricing Report
- TDS Returns (Tax Withholding)
- Individual tax return
- GST Return – Turnover > ` 50 million) – Turnover < ` 50 million)
Compliance
- Deposit of TDS
- Deposit of GST – Turnover > ` 50 million) – Turnover < ` 50 million)
Internal Compliance
Internal Compliance refers to an internally designed set of rules and regulations that the owners, employees, traders, and customers follow to maintain the quality of the services or products provided by the organization. These are created and sanctioned by senior professionals and are followed by everyone in the company. Some internal compliance is setting up a Board of Directors, Conducting regular meetings, and distributing stocks to shareholders.
Other internal compliance rules you can include:
- Which employee activities you can monitor, and how.
- How to handle discrimination complaints.
- What forms of donations can you make on behalf of your business?
- The penalties for damaging a business resource or property.
- How to address conflicts of interest between employees.
An organization will comply with external requirements only when working in line with internal rules and regulations.
