We have three main forms of business in India:
- proprietorship,
- partnerships, and
- company.
The simplest and the easiest way to start your business is by forming it as a sole proprietorship. In this type of structure, the owner who started and invested is know as proprietor or sole trader. This is an unincorporated business chosen by many individuals because of few legal requirements to establish.
To start, you are not required to formally register your business with government departments. All you need is a trade name, money, current account and some customers.
However, if you fulfill certain conditions, then you must get it registered with various departments. For instance, if your proprietorship has a turnover of Rs. 20,00,000 or more during the financial year, then you are required to get it registered under the Goods and Services Tax. With effect from 01-04-2019, this limit has been increased to Rs. 40,00,000 if your business is sale of goods. If you are a service providers, then the threshold limit is Rs. 20,00,000. Rs. 40,00,000 is not applicable if you are selling goods interstate i.e. from one state to another.
We suggest you to consult a legal practitioner to guide you for various registrations if any applicable to your type of business.
Even to open a current bank account, you are required to provide government registration for your trade name. In this type of situation, you can provide registration certificate obtained under GST or MSME or Trade License.
You can operate proprietorship business under your own name or in some other trade name. You are just required to put the nameplate on the door and start trading. You can choose any name as its not required to be registered anywhere.
As a proprietor, you receive all income from the proprietorship business, control the whole proprietorship and alone decide whether to invest the profit in it or use them for personal expenses. As a owner or proprietor, you are liable for all the debts of the proprietorship. If business assets are insufficient to pay debt, the proprietor must pay the debt out of his/her personal assets.
Names of the proprietorships and Partnerships are not protected if trademark registration is not taken. To avoid future dispute, we suggest you to check trademark registration database to know if anyone using that particular name. If you find it in trademark registration database, then consult any legal practitioner before using the name.
Many retail shop owners, doctors, chartered accountants, lawyers and other legal professionals are operating as a proprietor by forming a proprietorship business or profession. Being a 100% owner of the proprietorship business, no one can influence your decisions and you gets all of the profits of the business.
Another big advantage is it’s tax simplicity. As a owner, business Income gets added to your personal income by giving you tax deductions benefits under chapter VI-A, basic exemptions and rebate on tax liability in addition to other benefits. You need to report business income of the proprietorship under the head “Income from business or profession” in addition to other income in your personal income tax return.
To summarize, here are three main advantages of a proprietorship form of business:
- inexpensive and easy to form,
- subject to few legal compliance, and
- it avoids corporate income tax rates
Like any other form of business, proprietorship has its own limitations. Here are three main disadvantages/limitations:
- difficult to obtain large sums of capital,
- proprietor has unlimited liability, it can result in losses of personal assets for business liabilities, and
- life of the proprietorship is limited.
In certain cases you are required to get your accounts audited from a chartered accountant under section 44AB of income tax act 1961. You can also take benefits of presumptive taxation scheme while filing your return of income.