This article is written by Amarnath Simha, pursuing a Certificate Course in Advanced Corporate Taxation from LawSikho.

Introduction

A sole proprietorship basically means a single natural person is running the business as the owner thereof. That single natural person is referred to as proprietor and the business is known as a sole proprietorship or a proprietary concern.  

A sole proprietorship or a proprietary concern has no identity of its own for all legal purposes.  For e.g. a person running a kirana store under the name “Ganesha Provision Stores” will not mean “Ganesha Provision Stores” has a separate legal existence.  Even though the name may be mentioned for the purpose of obtaining permissions and licenses, it will still not be a legal entity.  It cannot apply for PAN and become an assessee.  It cannot enter into contracts in its own name or hold property in its name.  Even if distribution agreements are entered into or billings made in the name of proprietary concern as a matter of practice, it is the proprietor who is liable and nobody else.  The difference between the concern and the proprietor is followed only in accounting and has no legal effect as far as the outside world is concerned.  That a proprietary concern may in turn hire hundreds of employees, still the business structure will not become a separate legal entity and the proprietor will continue to be personally liable for all those employees.  

Who can opt for sole proprietorship

Any single natural person who has the capacity to contract can opt for sole proprietorship.  This is usually done where the proprietor does not want to involve anybody else in the business and wants full control. It is normal for small and medium businesses as well as professionals to be proprietors.  

Any single natural person can opt for sole proprietorship as long as that business itself is not prohibited under law to be run by the sole proprietor.  For example, a sole proprietor cannot open a Bank as licenses are issued only to banking companies and not to individuals (Section 7 r/w 22 of the Banking Regulation Act, 1949).

The common examples of sole proprietors can be found in everyday life e.g. doctors, advocates, CAs, industries, vegetable vendors, hotels, lodges, builders, grocery shops, all types of shops etc. Basically, there is no limit to the number of businesses which cannot be run by sole proprietorships except as provided by law.  It is not the size of the businesses or number of employees etc., which is the determining factor. Even hospitals can be run as sole proprietary concern. Hence, as long as law does not prohibit running of businesses by individuals, any single natural person can opt for sole proprietorship to conduct that business.  

How to register as a sole proprietorship

There is no registration required for sole proprietorship. However, a current account will have to be obtained as it is in respect of a business.  

Sometimes, even if the business is not prohibited to be run by the sole proprietor under law, it may require licenses and approvals for running them, e.g., permissions under Shops and Commercial Establishments Act, health certificates from the local authorities in case of hotels, licenses for running a local pharmacy etc. But these licenses and approvals are with regard to the nature of business and not concerned with the structure of business like sole proprietorship, partnership, LLP, company etc. Hence, it can be said there is no registration for the sole proprietary concern as such. 

However, from the point of view of the proprietor himself, he will be bound to file income tax returns if he crosses the personal income tax limits. Hence, he will be bound to apply for PAN and file returns.  But even here, it is not the proprietary concern which gets the PAN and the liability but the proprietor.  Supposing the proprietor is running several businesses like for e.g. 1. “Ganesha Provision Stores”  2. “Ganesha Hotel”  3. “Ganesha Builders”. Each of these three businesses need not apply for separate PAN and file separate returns. Under law, all the incomes and expenses incurred in all the three business along with income from any other sources will be taken together and calculated, and a single income tax return is filed. A company on the other hand can incorporate separate subsidiaries for separate businesses and each subsidiary files a separate return.

What are the compliances required

Since registration is not required, compliances are also not required as compared to a partnership, LLP or a company. To contrast, even though a partnership does not per se require registration under the Partnership Act, 1932 and consequently no compliances, it will be bound by disabilities if not registered, e.g., if a partnership is unregistered, it cannot file a suit against third parties on contracts worth more than Rs.100 as per section 69 of the Partnership Act. The compliances of LLP and company are numerous with each non-compliance inviting penalties. However, there are no compliances in case of a proprietary concern and hence it is most suitable for persons who are not interested in compliances.  The only tax compliance is that the sole proprietor will have to file his individual income tax returns treating all his businesses income and expenses as his.

What are the advantages

• The obvious advantage would be the whole control of the business as well as absolute retention of profits of the business by the single individual.
• Since most of the sole proprietorships are small and medium businesses, the differential tax rates play a huge role for the proprietors in opting for this structure.  For e.g., a partnership and a LLP is taxed at 30% while a company is taxed at 25% or 30% depending on the turnover.  The tax slabs of the sole proprietorship or individual are as under:

Total Income Slabs in INR	Individual- Less than 60 years	Individual- between 60 and 80 years	Individual – above 80 years
Up to 2,50,000	Nil	Nil	Nil
2,50,001 to 3,00,000	5%	Nil	Nil
3,00,001 to 5,00,000	5%	5%	Nil
5,00,001 to 10,00,000	20%	20%	20%
Above 10,00,000	30%	30%	30%

• If the total income is less than Rs.3,50,000/-, the individual assessee gets a rebate of Rs.2,500/- and hence need not pay any taxes.
• Applicability of tax deductions

Many tax deductions under Chapter VI-A of the Income Tax Act, 1961 are given only to individuals and sometimes also to HUF (Hindu Undivided Family).  Since a HUF is a result of status and not intention, that cannot be equated with partnerships, LLP and a company.  Some of the deductions available only to individuals are as under:

1. Section 80C – Deduction in respect of life insurance premia, deferred annuity, contributions to provident fund, subscription to certain equity shares or debentures, etc. 
2. 80CCB -Deduction in respect of investment made under Equity Linked Savings Scheme. 
3. 80CCC – Deduction in respect of pension fund
4. 80CCD – Deduction in respect of contribution to national pension system
5. 80CCG – Deduction in respect of investment made under any equity saving scheme
6. 80D – Deduction in respect of medical insurance premia
7. 80DDB – Deduction in respect of medical treatment
8. 80EE – Deduction in respect of interest on loan taken for residential house property
9. 80EEB- Deduction in respect of purchase of electric vehicle

What are the disadvantages

1. The proprietor will be personally liable for all the liabilities of the proprietary concern.  There is no differentiation of different proprietary concerns run by him and one business can easily incur a loss which will have to be supplemented by the profits of other proprietary concerns.  The assets purchased for the purpose of one business can easily be auctioned off if any other business incurs loss and the proprietor is subject to a legal proceeding.  

2. In the business world, the proprietary concern does not evoke the same kind of respect which a company evokes.  A company shows that the person who is working as the main person in the company is willing to work with other persons and shoulder responsibility and share profits.  Since a company has more compliances and its details are available to the public, the company gets more credibility as a law abiding structure than a proprietary concern gets.  Hence, for future development and loans, this structure is at a disadvantage.

3. There are lesser chances of successful expansion of businesses and retaining of talented skilled employees.  One person cannot look after everything in case the businesses are to be branched off for expansion.  The skilled employees will ultimately want a share in management and profits if their services are to be retained which is not possible in a proprietary concern.  Hence, sole proprietorships are unlikely to run big businesses.

4. Succession plan of successful proprietary concern will be left to testament of the proprietor or the inheritance law followed in the land.  If the proprietor has a sole legal heir, then the succession is smooth.  If the proprietor has more than one legal heir, then after his death, it would be subject to many uncertainties as to how to divide the business.  In that sense, a private company has an upper land as the shares can be divided equally without having to worry about the division of the actual businesses or assets.

Conclusion

The sole proprietorships are advisable only for small and medium businesses or for professionals who do not want to be associated with others. It holds many advantages as compared to other structures for those persons and can be followed when a new business with comparatively less risks is being started. 

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