This article has been written by Ritika Sharma.

Introduction

A proprietorship is a state or right of owning a business or holding property. Generally, proprietorship and sole proprietorship are terms which have simultaneous usage. Since the business done under proprietorship is not registered, there exist no legal boundations as such. In India, these types of businesses are operated in unorganised sectors. The major idea is that there is unlimited liability of the proprietor, unlike a partnership where there is a limited liability. There exists a stark difference between limited and unlimited liability. Limited liability means that for any of the act, offences, debts and loans of other partners not all the shareholders and the partners are legally responsible. They are responsible to the extent of a particular nominal value. This is in relation to financial risk. Moreover, unlimited liability bears all the financial losses and gains on the proprietor only. However, there are a lot of questions which needs to be answered, such as what are the advantages and disadvantages of proprietorship? How can these be termed under one particular umbrella term? The advantages and disadvantages are clearly illustrated in the following excerpt.

Meaning Of Proprietorship

Proprietorship refers to a type of business organization where one person or a family owns a particular firm. A sole proprietorship is also known as the sole trader, individual entrepreneurship or proprietorship which denotes a type of enterprise that is owned and run by one person and in which there is no legal distinction between the owner and the business entity. The sole proprietorship is one of the easiest types of business in order to establish or take apart in the business arena due to a lack of government regulation. As such, these types of businesses are enormously popular among sole owners of businesses, individual self-contractors, and consultants. Many sole proprietors do business under their own names because creating a separate business or trade name is not always necessary.

Difference between sole proprietorship, partnership and company

There are no formalities which are involved in creating a sole proprietorship that will become operational under the owner’s name, other than obtaining licenses or permits related to the trade or profession of the owner. For instance, a plumber or electrician might have to obtain a license. An in-home day care provider might need to meet certain inspection requirements. A sole proprietor who uses fictituos name for the business must file an assumed name certificate with the state or local government. Two or more people who agree verbally or in writing to operate a business for profit constitutes a general partnership. If a particular general partnership operates under a fictitious name, the partners must register it with the state or local government. Each partner has the right to participate in the management and arrangement of the business and to share equally in profits and losses, however, partners may agree in writing to an unequal allocation of management control and profits and losses. Partners and sole proprietors have the same exposure to personal liability. A general partner signing a partnership agreement and filing a certificate of limited partnership with the state forms a limited partnership. Unlike a general partnership which only has one class of partners, limited partnerships have at least one general partner and one or more limited partners. As in a general partnership, limited and general partners also share profits and losses that they then report on their personal income tax returns. A particular corporation is created by filing articles of incorporation with the state in which the company will be doing business. The filed articles contain the information about the new corporation pertaining to the street address, the number of shares of stock the corporation may issue and the type of business it will conduct. Corporations are owned by shareholders who do not participate in their management or operation and instead elect a board of directors to handle management responsibilities. The officers, such as a president and vice-president, are appointed by the board to oversee day-to-day operations. It is common for a small corporation to have only one shareholder who is the sole officer and director as well.

The Legal Aspect And Liability

The liability of a sole proprietor is unlimited. This means that unlike firms where partnership exists, a sole proprietor is subject to potential losses based on the company’s obligations. Thus, there is no partners to help cover financial commitment. It has to be done by the sole proprietor itself if he is at the risk when sued or owes debts on their business. The lawsuits create a lot of problems for partners with unlimited liability. A sole proprietorship is not necessarily registered or incorporated. It is the most ideal form of business organisation and the ideal choice to run a small or medium scale business. It is completely different from the partnership as a sole trader is the absolute owner whereas in partnership two or more people agree to operate a business. The important aspect of the sole proprietorship is that there exists a lack of legal formalities. There is no separate law to govern it. The only license is required to carry out the desired business and it allows for ease of doing business with minimum hassles^[1]. The owner is the only risk bearer in a sole proprietorship. Also, he is the one who enjoys all the profits with any other stakeholders. In legal terms, the business and the owner are one and the same. There is no separate legal identity.

Advantages Of Proprietorship

The sole proprietorship is a business which does not have specific registration process requirements and the proprietor’s legal identity is used by the business. They are not treated as separate persons. The major advantages are as follows:

Easy Establishment

The business of proprietorship is really easy to establish. It is not a mammoth task. It does not have any prior registration process formalities and requirements to be fulfilled. As it is the identity of the proprietor which is used as the legal identity of the business as well. The PAN and Aadhar cards of the promoter can be used to obtain the identity of the business that needs to be optionally created and protected. Its establishment is not a difficult task like other firms and companies which are required to be registered.

Easy Operation

Since there is only one single person who is operating the entire business, it becomes very easy for the sole proprietor to operate his/her business without any hassles and external interference. S/he becomes the sole decision-maker and does not need to consider any other bundle of opinions. The investment done in the business is entirely the proprietors only and no extra interference exists in the operation of the business.

Profits

Being a sole proprietor, an individual becomes the whole and sole beneficiary of all the profits as well. It is a one-person company which makes the proprietor eligible for the entire profits gains. The proprietor is not required to distribute it amongst others under any legal formality rather it helps the proprietor to gain more money than invested. In other firms and companies such as partnerships, LLPs, a minimum of at least two persons are involved. It is the only business in which only one man involvement exists.

Taxation and Compliances

The proprietorship firms are not registered with any of the Government authority like the Ministry of Corporate Affairs, the compliance requirements are very minimal. The proprietor is required to file income tax returns if the firm has the income of more than 2.5 lakhs per annum. Moreover, the proprietor who has crossed the age of 60 years would be required to pay taxes only if the income is above 3 lakhs. Also, the proprietor who has attained the age above 80 years would be required to pay only when the taxable income is above 5 lakhs. The income tax liability can also be reduced by other methods as well. The methods are as follows:

• The proprietor can make a contribution in various provident funds, life insurance premiums, also to the subscription to certain equity share or debentures.
• The contribution to certain pension funds also helps.
• Income from the royalty and royalty on patents also give a massive advantage.
• The caring of the dependent is being done by the proprietor would help him availing the deduction in income tax liability.

Confidentiality

The proprietor is the sole owner of the business s/he is undertaking. This means that there is no leakage of any information to the third party in any way. The privacy of business is clearly maintained. There is no need to provide any details to the Government as well since the proprietorship is not registered except the income tax payments. This shows that the proprietorship firms are more private than the private companies itself as the details of the private companies gets published from time to time.

No Limited Liability

Unlike an LLPs and other companies which are registered and possess limited liabilities, in a proprietorship, there is no limited liability. The concept of a limited liability says that the partners are liable for the amount of investment done by them. This means that liability is limited and the partners will be liable for only some nominal value. Whereas in the proprietorship there is no concept of limited liability and hence everything has to be bear by the proprietor.

The disadvantage of the proprietorship

As far as there are manifold advantages of the proprietorship, there also exist certain disadvantages of a proprietorship. The disadvantages are as follows:

Unlimited Liability

This can also prove to be the biggest disadvantage as the proprietor is the sole owner of the business. This means that at the occurrence of any loss the proprietor would be the only person who must meet all the liabilities at any cost. The personal assets get used for discharging any liabilities and debts. Nobody else can be made liable.

Obtaining Funds

There exists a difficulty in obtaining the funds as well. A sole proprietor is a person who can never indulge in the sale of business interests and shares as his work is of sole traders. It deprives the entity of receipt of any type of equity funding. This means that the person who is running the business in proprietorship finds it really difficult to get any of the funds from banks, companies, for that matter, from private persons as well. The banks wary in lending the sums of money to a proprietor as the existence of the firm is tied directly to him itself. Whereas in LLPs and in companies, more than one person becomes responsible for the liabilities and the business continuation is nonetheless ensured even if there is any death or insolvency of one of the partners. This is clear that it is easy for a registered company or an LLP to raise loan whereas it becomes extremely difficult for the sole proprietor to raise the same. This is due to the risk factor which is associated with the proprietor as there is uncertainty factor which exists.

Higher Taxes

A proprietor can also be subject to the incidence of payment of higher taxes. Proprietorship firms are taxed as if the individual is being taxed. This means that the income tax rate for a proprietorship firm is based on certain slabs. There are certain benefits which a company might enjoy but a proprietor cannot. For example; the income tax rate for the company for income up to 10 lakhs is lowered. The income tax rate is much higher for a proprietorship when compared to a company of LLP.

No Business Write-Offs

There are no business write-offs which exists in a proprietorship. A proper business write-off can reduce the amount of taxable income of tax one owes. It actually deducts the cost of running the business from one’s own income. But being a sole proprietor, again this benefit does get availed by the individual running such business.

Owner’s sole Control

There exist the whole and sole control of the owner itself. This means that it is the owner who makes all the decisions without any external interference. This makes it more difficult for the business to grow as well the employees also do not get many opportunities to grow. Also when more employees are added up, it is the owner only who is allowed to take any vacation or a holiday. Usually, employees get off or vacations.

How To Start Proprietorship In India?

In order to start a proprietorship in India, there is no government registration needed. Neither there is no need to go for online registration portal and fill-up the form with the submission of any document. But a current open bank account is required in the name of the business. A current bank account proves that the specified location has been specified from where the business will operate. Since it is a one-man organisation, there is no fee to be paid for starting the same. There are no government regulatory paperwork and compliances. There are no separate income tax returns that are to be filed. In order to start the sole proprietorship in India, there are two things which are essential that are choosing the business name and selecting the location as the place of doing the business.

In order to receive payment in the name of the business, the need of proof of the existence of the firm and the address proof is required. The documents required are as follows:-

• Pan card and ID for the address proof of proprietor is required.
• The business address proof is another important document.
• The government registration documents (two in number) confirming the name and address of the business.
• CA Certificate is also required which can make from a CA who would charge a nominal fee.

Conclusion

In order to sum up, it would be right to say that a business always comes with its pros and cons. On the top of it, proprietorship business is not a piece of cake. A one-man business needs complete determination and courage to run it. It brings about various advantages and disadvantages which should be overcome much more easily by the person aiming to run the business. However, if the challenges are well tackled, it could bring about enormous advantages and benefits to the proprietor. A proprietor can also make the employment of certain persons in order to run the business more smoothly but the losses and the profits incurred in the business are solely his own. Nobody else has any right on the same. Hence, it implies that in order to run a business of proprietorship kind, one must be a pro and should construe each and every aspect of the same with great details.

Students of Lawsikho courses regularly produce writing assignments and work on practical exercises as a part of their coursework and develop themselves in real-life practical skill.