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Setting up a Sole Proprietorship Business in India

LegalKart Editor
LegalKart Editor 03 min read 27420 Views
Last Updated: Feb 01, 2024
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A sole proprietorship is the simplest form of company formation. In this form of business incorporation, you set up a business solely on your own. Sole proprietorship business is not separate from the owner, i.e., it does not have a separate legal identity of its own. The personal income tax return of the owner is used to file taxes for the business as well. In this form of business, a person alone is liable to pay the debts, if any, and enjoy the profits earned. A sole proprietorship is the preferred form of business for professionals such as consultants, lawyers, etc. Its popularity stems from factors such as simple to set up, low cost of formation, etc.

How is a Sole Proprietorship Business set up?

It is easy to form a sole proprietorship company. Since the entire business is done on the name of the owner itself, there is less paperwork to be done while setting up this kind of business. It is a hassle-free form of business. Any person who wishes to start a business that is not so complex, he/she may consider the Sole Proprietorship form of business. 


The following steps must be followed to form a Sole Proprietorship business:-

  1. Select a name and register your business: Name selected for business by a person can be any, but one must ensure that the name chosen must not be registered by others. After selecting a name, the person must register the name, if possible, the person must get the name trademarked. 
  2. Finding an appropriate location for the business: A person must decide whether he wants to do the business from home or at rent or purchase an office. If a person decides to work from home, then there's no need for finding an apt place for setting up a business. However, if a person is not opting for work from home, then he/she must find a suitable location for its business. If a person has set up a business premise, then it must be registered under the Shop and Establishment Act. 
  3. Apply for GST Registration: If the business is engaged in the sale of goods or services, it must apply for GST registration number. GST registration can be applied by providing certain documents such as Aadhar Card, PAN Card, and self-attested copies of the above documents. 
  4. Open a Current Bank Account: Most important is to open a current bank account. The person must open a separate current account in the name of the owner or business in order to avoid any mixing of the expenditure made for personal purposes or business purposes. 


Advantages of Sole Proprietorship

  1. The most important advantage of a sole proprietorship is its simplicity and that it is easy to establish and has a hassle-free process of establishment. 
  2. The owner himself enjoys all the profits earned. However, when there is a loss, he alone is liable to pay all the debts. 
  3. The person who sets up a sole proprietorship business he alone has authority over the entire business. He himself makes plans, invests money, supervises the business, enjoys profits.
  4. A sole proprietor and his business are not a separate legal entity, but it is one. Therefore, all the assets, liabilities, profits, and losses on the part of the owner. 
  5. In a sole proprietorship, the trader is taxed on the personal income of the owner, i.e., the tax is levied on the profits earned by the owner. Like other forms of business, the sole proprietor need not pay any other form of tax. 
  6. The sole proprietor can work for as long as he wishes, he may even sell it when is wishes, or may pass on to its heirs. 

 

Disadvantages of Sole Proprietorship 

  1. The owners are fully liable, i.e., if the owner fails to pay the debts, then the owner's personal property such as home, personal savings can be taken away to pay the debts. 
  2. The main disadvantage of a sole proprietorship is that it is difficult to expand the business due to factors such as lack of resources, lack of staff, and many more
  3. In the absence of a sole proprietor, the business can go haywire, i.e., it can cause huge losses if it is not managed aptly. 


Conclusion

A sole proprietorship is an excellent first step for those diving into the business world, especially if you're starting without much funding and want to gauge your product's appeal in the market. This business structure is essentially an extension of you as an individual, meaning you are the sole owner, and you hold all the decision-making power. The setup process is straightforward and cost-effective, making it ideal for those with a limited budget. You're not burdened by numerous formalities or paperwork, which are common in other types of business structures. This simplicity extends to compliance requirements as well, with fewer legal and financial regulations to worry about. However, remember that in a sole proprietorship, the owner is personally liable for the business's debts and liabilities. This means that if your business runs into financial trouble, your personal assets could be at risk.  In conclusion, if you're looking to start small, have little funding, and want to test your product in the market, a sole proprietorship could be a smart way to dip your toes into the entrepreneurial waters. As your business grows, you can always consider transitioning to a different business structure that better suits your evolving needs.

 

last updated on: 14 May 2023 

 

 

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