When entering a new business idea, it is important for an entrepreneur to consider a number of factors in determining the structure of his business. Of these, sole proprietorship, a business organization form deserves to be categorized as one of the easiest and most often used. Sole Proprietorship registration is thus a common way people opt for those willing to register a company variant which will not be highly complicated. In this blog, you will find out all the required information about sole proprietors, its benefits as well as the process of company registration.
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A Sole Proprietorship is a legal business owned by an individual who manages and runs the business. Though other forms of organization, for instance, private limited companies or partnerships need to go through Company Registration, in the case of a Sole Proprietorship, it is not so. It is absolutely identified with the owner: this means that it is all the owner’s responsibility including the profits, losses, and other liabilities of the business.
This is pretty much alike in appearance to the business of most of the small-scale firms, and due to this, most of the self-employed people in India would love to follow this kind of business. A Sole Proprietorship Registration can easily initiate a business without going through legal procedures, and he or she will not waste much cash on the company formation process.
Among all the key benefits of sole proprietorship registration, the formation of a business is one of the most convenient. One of the advantages of a Sole Proprietorship business structure is that it lacks formalities of registering as compared to other business structures; it is therefore fast to establish and does not require much capital. There is no more work that you have to do to legalize your business apart from getting the licences and permits that will allow you to run your business.
In a Sole Proprietorship form of business, the owner has full control of the business organization. This implies that all decisions within the business regardless of the business field they belong to; operations, finances, or expansion are all made by the proprietor. Such control gives more freedom and versatility in managing change, and reactiveness in adjusting and responding to running the business.
Apart from the below ones, there are relatively fewer legal formalities for a Sole Proprietorship Registration, those are mandatory, in the case of other forms of business entities like private limited companies or LLPs. It is also worth noting that Start Mine does not require firms to file returns to the Ministry of Corporate Affairs (MCA) at least once a year or prepare serious formal financial statements. This greatly minimizes the burden and expenses of the owner/ operator of the building.
As there is no legal procedure for Sole Proprietorship Registration, it costs quite low to start a business if one wants to start a sole proprietorship business. Also, the number of legal and regulatory requirements that come with forming this type of business entity is smaller, which decreases ongoing costs even more.
Under the Indian tax system, sole proprietorships are not taxed distinctively from the proprietor his or herself. However, the amount earned by the business forms part of the owner’s earnings and is subject to taxation. This can mean that for a small business entity in India, the taxes can be much lower than those that are accompanied by the corporate taxes levied on the private limited companies.
The banking of the Sole Proprietorship business is easy because the owner can open a business account under his or her name. However, in order to open a business account at a local bank, private limited companies or partnerships need several documents such as a company registration certificate while Sole Proprietorships can easily continue with a current account on condition they have got the necessary government consent.
Although sole proprietorship registration is very effective, it has some drawbacks. These drawbacks must be taken into account carefully by the business owners in case they choose to use this business structure.
The greatest disadvantage of Sole Proprietorship Registration is that it holds unlimited liability. There is no separation between the business and the owner, so all debts and obligations must be met from the proprietor’s personal resources. In case of solvency issues or legal actions, personal funds or property may be seized. This highlights the need to get Sole Proprietorship Certificate to formalize the business structure and understand the risks involved.
This happens due to limited funding options available to Sole Proprietorships to seek funding to expand their business. Because they are not limited, they cannot sell stocks or attract funds from investors. Consequently, they rely on personal savings, friends and relatives as well as small business loans. As for the finance issue, sole proprietor businesses might be easier to get funding than private limited companies but they have more difficulties in large-scale financing.
Unlike a corporation or LLP, a sole proprietorship does not experience perpetual existence either. The business is associated with the life of the owner and most of these businesses close as the owner retires or passes on. Incurring in this can become a problem when one dies and wants to transfer the business to the next generation or sell it to another person.
It is always challenging to determine where the owner of the business ends, and the business begins because both in law constitute one entity. This results in some problems with bookkeeping and balanced tax payments and deductions, because the owner has to distinguish between business and personal expenses.
Although sole proprietary registration has ease, some other forms of businesses such as private limited company or LLP may prove to be more appropriate for some individuals. Here’s how a sole proprietorship compares to these other structures:
Sole Proprietorship vs. LLP: A Limited Liability Partnership (LLP) gives its partners limited liability and organisational flexibility. Another thing that must be understood between LLP and Sole Proprietorship is these structures also demand formal company registration and compliance with the provisions of the MCA. Nonetheless, LLPs are used where professional or service-oriented business personalities want limited liability protection with operational freedom.
Sole Proprietorship vs. Private Limited Company: A private limited company provides its owners with limited liability which implies that their other personal possessions remain at risk in case the business goes bankrupt. However, it entails a rigorous and lengthy company registration process and more paperwork. The private limited company structure is more appropriate for business organisations that intend to expand and seek funds from investors.
A Sole Proprietorship is the most suitable business type for those who want to launch a small enterprise with low expenses and paperwork. Sole Proprietorship Registration is also relatively popular in India which also makes it a good option for many new business owners. Nonetheless, it is imperative to bear in mind the following drawbacks inherent to this structure: legal liability is unlimited, besides, the business lacks several important sources of funds.
For these reasons, for small business operators who require expansion or to safeguard personal assets, private limited companies or LLP structures might be better suited. Regardless of your selection, it is important to know how the registration, taxes, and other compliance affect your business for sustainability.
Since the Sole Proprietorship Registration process is not an easy one, LegalRaasta will help with the necessary instructions. That means you can concentrate on business development while we bother with the legalities.