All About Proprietorship Firm
Updated: Aug 4, 2020
Often while starting a new business we get confused as to what should be the form of your entity, whether it should be a proprietorship, or partnership, or private limited company, or limited liability partnership. Due to a lack of understanding and proper knowledge about legal compliances of the said forms of business, we might end up forming an entity unsuitable as per business requirements.
Through this article, Sahaayy will help you understand various forms of businesses and legal compliances around them which will help you choose suitable business form as per your requirements.
A business entity is an organization set-up by the business owners after considering factors such as the size of the business, the nature of the business, the number of members involved, capital requirements, etc.
There are below popular forms of Businesses;
Private Limited Company
Limited Liability Partnership
One Person Company (OPC)
In this article, let’s understand about Proprietorship Firm.
What is Sole Proprietorship?
A sole proprietorship is a type of unregistered business entity that is owned, managed and controlled by one person. Sole proprietorship is the most common type of business in India and it is used by most micro and small businesses operating in the unorganized sectors.
Who is Proprietor?
The owner of a sole proprietorship business in India is called a proprietor. In Proprietorship, Sole Proprietor/ Owner of the business and the business are not different from each other & are considered as the same entity for the purpose of business.
Hence, the PAN and other documents of the proprietor are the basis for obtaining all other business registrations and licenses.
Complete control of business and only beneficiary of profits
(Proprietor being, the only managing & controlling the business, he is only entitled to the profits or losses of the business)
Easy to start and form proprietorship business
(No separate Registration Process is required, and it can be started at the will of the proprietor without obtaining any certifications)
Least costly to form a proprietorship business
(There are no government fees involved for forming a proprietorship business)
Minimal to no compliance requirements
(However, GST registration with Goods & Service Tax and Tax Deduction & Collection Account (TAN registration) may be applicable in some cases)
Simplified tax filling
(A sole proprietor does not need to file any special tax return forms. Income from business is also counted as personal income)
This entity is ideal for entrepreneurs who are getting into business for the first time and for small businesses at the initial level.
Steps for formation of the Proprietorship:
1) Select a business name
(Ensure the name does not infringe with others trademark)
2) Registration of business under Udhyam Registration
(MSME Udyog Aadhar- To seek various services and benefits offered by Government Departments)
3) FSSAI Registration
(In case the proprietorship is involved in the selling of food products or handling of food products, FSSAI registration must be obtained in the name of the proprietor)
4) TAN No., GST No., & Import & Export Certificate*, if required.
(* Import Export Code or IE code can be obtained from the DGFT in the name of the business in case of a proprietorship business undertaking export and/or import of goods into India.
5) Open Current Account of business with bank
(However Proprietorship Firm initially can use Proprietor’s personal bank account too)
Frequently Asked Questions:
What are the requirements to be a Proprietor?
The proprietor must be an Indian citizen and resident. Non-resident Indians and persons of Indian origin can only invest in a proprietorship with prior approval from the Government of India.
Does Proprietorship Firm have different legal entity?
No, the proprietorship firm and the proprietor are one and the same legally. The PAN of the proprietor will be the PAN of the firm. Therefore, there will be no separate legal identity for the business. The assets and liabilities of the business and the proprietor will also be one and the same.
Does Proprietorship Firm have a separate Registration Certificate?
Proprietorship firms do not have a certificate of incorporation or a certificate of registration. However Firm, can very well take registration under Udyog Aadhar Registration.
How does tax law treat sole proprietorships?
In the eyes of the Income Tax, you and your proprietorship are the same entity. This means that any profit you gain through your sole proprietorship is also counted as personal income. Your individual tax return and business tax return will be one and the same.
Are you personally liable for your sole proprietorship?
Yes, you are personally liable for your sole proprietorship. While company’s and limited liability partnerships gain the benefit of limited liability, sole proprietors generally do not qualify for such protections. Instead, you will be held personally accountable for your businesses debts and legal judgments.
Do I need a separate bank account for the registration of the proprietorship firm? And How do I open the same?
No, you can register for a proprietorship firm from your personal bank account. However, You may open a current account in the name of your firm, and transact from the said current account for better maintenance of business & personal records.
The Reserve Bank of India mandates that the proprietor provide two forms of registration of the proprietorship along with the PAN, identity proof and address proof of the proprietor. The two forms of registration can be any two of the following: MSME registration, Shop & Establishment Act registration, Professional License (Certificate of Practice issued under respective Professional Institution), Chartered Accountant certificate or others as provided in the RBI KYC norms.
Is it necessary to have the ownership of the office I am working from?
No, a rented office can also be used for the registration. You need to have the rental agreement and a NOC from the landlord for the registration application.
Is GST registration mandatory for proprietorship firm registration?
Service providers will continue to be required to register for GST once they cross a turnover of Rs.20 lakhs, in case of Special Category States at Rs 10 lakhs, and in case of supply of goods, it is at Rs. 40 Lakhs. Except
A ‘taxable person’ under GST, is a person who carries on any business at any place in India and who is registered or required to be registered under the GST Act. Any person who engages in economic activity including trade and commerce is treated as a taxable person. Hence, persons running temporary businesses in fairs or exhibitions or seasonal businesses would fall under casual taxable persons under GST. All persons who are classified as casual taxable persons are mandatorily required to obtain GST registration, irrespective of the annual aggregate turnover. Further, the application for GST registration for a casual taxable person must be made at least 5 days prior to the commencement of the business.
How much time does it take to start a proprietorship firm?
Generally, Proprietorship Firm can be started immediately; however, the exact time period depends upon the business activity of the Firm & No of Registrations required.
Can proprietorship firm be converted into partnership firm or private limited company?
Yes, it can be converted into Partnership Firm or Private Limited Company upon additional legal compliance & formalities with respect to applicable laws.
Can other People invest in Proprietorship?
Proprietorship firms are business entities that are owned, managed, and controlled by one person. So they cannot issue shares or have investors. However, they can accept loans.
Is there any minimum capital requirement to start the Proprietorship?
There is no limit on the minimum capital required to start a proprietorship.
How to register the name of the Proprietorship?
There is no registry or regulation for registering the name of a Proprietorship. Therefore, proprietorship firms can adopt any name that does not infringe on registered trademarks. Since there are no regulations for registering the name of a proprietorship, the only way to ensure exclusive use of the business name is to obtain a trademark registration of the business name.
Is Audit mandatory in case of Proprietorship?
It is not necessary for proprietorships to prepare audited financial statements each year. However, a tax audit may be necessary based on turnover and other criteria.
What are Annual Compliance requirements?
Proprietorships will have to file their annual tax return with the Income Tax department. However, annual reports or accounts need not be filed with the Ministry of Corporate Affairs which is required for an LLP or a company. Additionally, Annual Compliance will be required to be complied with as per the Laws applicable to the Firm.
What are the charges for opening a proprietorship business?
There are no charges to be paid to the Government. However, professional fees range from INR 2000 to INR 5000 depending upon professional or legal firm you approach and registrations you take.
Let us know in case of any queries.
CA Sukanya Kulkarni Joshi