Nowadays if you want to start a new business or a new startup in India then there is always a confusion regarding the business registration. The confusion resides in choosing the right legal entity for example – Firm, Company, etc. Let’s take a look as to why a Sole Proprietorship Firm is the best legal structure for the startups to test their ideas.
A sole proprietorship firm is one which has only one individual owner and hence it results in less legal complications.
As such, many businesses out there are sole proprietors without even knowing it. For example, a freelance writer or a photographer is a sole proprietor and as an independent contractor, he/she is providing service through freelancing websites and other platforms. Nowadays most of the small businesses choose sole proprietorship. Statistics show that in India, 40% of the small business are running as Sole Proprietorship Firms. But are they aware of the facts, advantages and disadvantages of a sole proprietorship firm? Let’s take a look at the details.
Requirements
Sole Proprietorship Firm requires only one person for the registration process and hence he/she can be the sole owner of the business. In India, there are a lot of businesses where the sole owner of the family is doing the job. In cases like this, the owner can register his/her family member’s name. Hence partners like Private Limited Company, etc are not required.
Incorporation
Incorporation of the Sole Proprietorship Firm is very easy. You do not require any business registration certificate. All you need is a bank account on the firm’s name for business purposes. With this you can directly apply for Tax Registration like VAT/CST Registration, Service Tax Registration, MSME Registration, Shop act License, etc. On this basis you can prove your solo proprietorship firm as a legal entity to bank or customers.
Tax relations
In a sole proprietorship firm the taxation charged are same as that on an individual. So you have to pay the taxes on the slab basis which saves your taxes on the net profit of business. Unlike the other legal entities where taxation rates are flat 30%.
Maintenance
As it’s owned by only one person, the maintenance cost is very low. In the other legal entities like the Private Limited Company, etc you have to hire a Chartered Accountant but in the sole proprietorship firm you simply have to maintain the filings of your income tax return and other VAT/CST or Service Tax Returns. It might be a slightly difficult task but it certainly is cheaper than Auditing and ROC Filings.
Advantages
The benefits of sole proprietorship firms are as follows:
- It is easy to set up.
- Business cost is very low.
- No need to fuss about business tax. It will be attached to personal tax return and hence there is no requirement to file separate business income tax return.
- Almost no legal complications like ROC Flings or Board Meetings.
- As it has only one owner, he/she will have full control of the business.
- Annual Maintenance costs are little.
- One can work from everywhere and anywhere. There is no need for a proper office. You can register at your Residential Address.
- The business structure is simple to understand.
- No need of a partner. Hence, free of any dependencies.
- There us always an option to turn it into a Private Limited Company or any other legal entities.
Disadvantages
There are disadvantages in sole proprietorship firms as well which are as follows:
- Personal liabilities can be a big problem because in this structure your liabilities are not limited.
- The business owner cannot bring any other investor or partner.
- On the whole, the burden is upon one person, it can turn into a costly affair.
- Not trustworthy among the customers
Though the concept of sole proprietorship firm runs with a lot of disadvantages, the advantages still overshadow the disadvantages. With two or more people, it is hard to start off a company. In that way, sole proprietorship is a better option. This is because the only owner of the business doesn’t have to worry about other people and other problems which are usually faced by typical startups. And sometimes, it is better to walk alone!
This is a guest post by Dev Patel who is a Legal Expert at MyOnlineCA (a Legal Tech Company) which made legal at your fingertips from Sole Proprietorship Firm Registration to legal documentation for startups and small businesses.
——————————————————————————————————————————Disclaimer: The views, opinions and positions expressed within this guest post are those of the author alone and do not represent those of Third Party Formations Limited T/A The Hacker Street Media. We accept no liability for any errors, omissions or representations. The copyright of this content belongs to the author and any liability with regards to infringement of intellectual property rights remains with them.
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