A sole proprietorship is the most common form of a business entity where one person is the owner and is personally liable for all the debts and liabilities of the business. It is the most simple form of an entity with minimal compliance procedures.
Sole Proprietorship Registration can be done in 3 ways:
- Register under the Shop and Establishment Act.
- Get a Udyog Aadhaar under the Ministry of MSME.
- Get a GST registration.
1. Sole Proprietorship registration under Shop and Establishment Act
A sole proprietor can register his business under the Shop and Establishment Act, if he has a shop as a place of business.
Here, shop means any premises:
- a place where goods are sold, either by retail, wholesale, or
- a place from where services are provided to customers.
- It includes an office, a store-room, godown, warehouse or work place, whether in the same premises or otherwise, which is used in connection with such trade/ business.
It does not include a factory, a commercial establishment, residential hotel, restaurant, eating house, theater or other place of public amusement or entertainment;
If you have a shop as per the definition given above, then you can register your sole proprietorship business under the Shop and Establishment Act by making an application to the local Municipal Corporation of your city.
Sole Proprietorship Registration Process under Shop and Establishment Act
You can register your sole proprietorship under the Shop and establishment Act by following the process given here.
2. Sole Proprietorship Registration through Udyog Aadhaar under Ministry of MSME
An Udyog Aadhaar is a unique identification number provided by the Ministry of MSME to the business owners. Along with all other entities such as company and partnership, even a sole proprietor can apply for udyog aadhaar.
Apart from getting eligible to avail the benefits offered by the Ministry of MSME, a sole proprietor has an added advantage of getting a unique identity for his business which is also considered as Sole Proprietorship Registration.
Udyog Aadhaar is a new method of registration under Ministry of MSME. It has replaced the old method of registration, where form EM-I and EM-II were used to register. Now, by applying for Udyog Aadhar any business can register itself to avail the benefits of the various schemes introduced by the Ministry of MSME.
To know more details about Udyog Aadhaar and the process of applying for the same, you can refer this article on Udyog Aadhaar Registration.
3. Sole Proprietorship Registration through GST Registration
GST registration is another way of getting your sole proprietorship registered. You can apply for GST registration if you are dealing in any kind of exchange of goods and services. It has replaced the old VAT and Service tax registration.
GST registration is a great method of getting an identity for your sole proprietorship concern. However, there are certain important considerations that must be evaluated before opting this method.
Under GST registration, the only drawback is that after registration it is mandatory to meet all the compliances. Every registered business has to compulsorily collect the tax from the customers and file the GST returns.
If a sole proprietor has a turnover of less than Rs. 20 Lakhs, it is not mandatory for him to get registered and collect GST. But if he still chooses to register in order to register his sole proprietorship then he will have to go through unnecessary added compliances which he could have avoided.
GST Registration Process for Sole Proprietorship Registration(Step-by-step guide)
To know about the registration process and other details with respect to GST registration, please refer here.
Which of the above 3 ways of Sole Proprietorship Registration is the best?
After evaluating all the three options, in our opinion if you are a sole proprietor who has a business with a turnover of more that Rs. 20 Lakhs, then you should go for the GST registration to get a business identity, as it is the most widely accepted form of identity for sole proprietorship concern.
However, if your turnover is less than 20 lakhs then GST registration may not be very beneficial for you as there are a lot of returns to be filed after obtaining a GST Number.
If getting a business identity is your main concern. You can opt for Registration under Shop and Establishment Act, or apply for Udyog Aadhaar.
Opening a Bank Account in the name of your Sole Proprietorship
Most banks have their own criteria for opening of a bank account.
Although all the above 3 ways of registering a sole proprietorship are legally valid, some banks still dont accept Udyog Aadhaar or Registration under the Shop and Establishment Act.
Banks insist on a GST Registration. If the GST Registration is not there, some banks are willing to accept the Income Tax Return as a proof of registration provided your Trade Name is mentioned in your previous year’s ITR.
Some banks do not accept Udyog Aadhaar or the Registration under the Shop and Establishment Act and therefore, it is advisable that if your sole purpose of registering is to open a bank account in your name, you should first check with your banker on what are the documents which they need.
Is Sole Proprietorship Registration mandatory?
No, Sole Proprietorship Registration is not mandatory. It is optional on whether a person intends to register his sole proprietorship or not.
Although, banks insist on getting sole proprietorship registered if you intent to open a bank account in the name of your business, but as per law – it is not mandatory.
Even if you register your sole proprietorship, the govt will not issue a new PAN Card for the same. The same PAN Card of the proprietor would continue to be applicable for the sole proprietorship as well.
Benefits of opting for a Sole Proprietorship
Sole Proprietorship is the most common form of business entity. The small business owners usually start their businesses as Sole Proprietorship only. The benefit of sole proprietorship can be classified under two categories:
- Entity type benefits
- Registration benefits
These benefits are available irrespective of whether you register your sole proprietorship or not. In other words, sole proprietors who have not registered their firm and are carrying on business on their own name are also eligible for these benefits.
Sole Proprietorship Entity Benefits
There are various benefits of starting your business as a proprietorship concern, some of which are listed below,
- Less Compliances
- Easy to start
- Cost Efficient
- Business Name
- Absolute Control
- Easy to close
A sole proprietorship concern does not have to file any separate tax returns for the business even if it is registered under any Act. The sole proprietor only has to file his own individual tax return and in that disclose the details related to his business profit/loss. In other cases, like partnership and company, the entities have to file a separate return for the business.
However, if the sole proprietor has registered under GST then has to file the returns for GST compliances. But for Income tax purposes no separate return filing is required.
Easy to start
There is no mandatory registration required to start a sole proprietorship. One can start a business on his own under any name as a sole proprietorship concern.
The cost of starting a business as sole proprietorship is almost nil. The only expense that may be required is to obtain a license for the business, if required. Also, since the compliance requirements are minimal, even that cost is saved.
A sole proprietor can start a business under any name as long as it is not infringing any trademark. The sole proprietor can initially start the business under a unique name and then when he thinks he has made a goodwill, he can get a registered trademark for his name.
However a business name is not a Brand Name and anyone can use it. If you want to register a brand name then you have to register your trademark. Sole Proprietorship registration is not Brand Name registration.
In a sole proprietorship there is only one owner and hence the control of the business is always with the owner. In all other entities there is a minimum requirement of at least two people to start the business, such as Partnership, Private Company etc.
Since in a sole proprietorship concern, the business and the owner are considered as one and not a separate entity, there is no special winding up process as in the case of other entities. The winding up of the business is easy and the only requirement is cancellation of tax registrations, if any, such as GST registration.
Sole Proprietorship Registration Benefits
Registering a sole proprietorship has two major benefits:
- Business Identity–
A separate identity of the business which is available in the case of other entities such as Partnership and Company.
- Ease in opening the bank account in the name of business–
The major concern in case of a sole proprietorship is getting a bank account in the name of the business. Since a sole proprietorship does not have a Government identity it becomes difficult to prove the existence of a business. After registration it becomes easier to open a bank account for a sole proprietorship since it gets a valid Government identity.
Disadvantages of a sole proprietorship concern
The biggest disadvantage of a sole proprietorship is unlimited liability.
A sole proprietorship does not have any governing law to protect the rights of a sole proprietor. The owner is personally liable for all the debts and liabilities of the business. If the business does not have enough assets to pay off the debts and liabilities then the owner will be personally liable for it. His personal can be taken to settle the external claims.
Tax on Sole Proprietorship
A sole proprietorship is not considered as a separate identity which is different from its owner. Therefore, the tax of the proprietorship business is assessed in the hands of the owner only as per the Income Tax Slabs. This means that the profit earned through the business will not be taxed separately as in case of partnership or company. But it will be taxed as an income of the owner.