Any citizen of India can start a Sole Proprietorship Business without any registration or legal procedures. Such business type is wholly managed and operated by the sole owner, and legally, there is no difference between the business and the founder.
Unless annual revenues exceed Rs 20 lakh, there is no need for GST registration as well, and the income tax is calculated on the income of the business or the sole owner under normal income tax slabs.
Hence, there is hardly any legal difference between the sole owner of a Sole Proprietorship business and a salaried employee at an organization from a broader perspective.
However, in the case of a sole proprietorship, there are a few business licenses and permits required, as per the laws of conducting that business.
Depending on the nature of the business, some of the permits and licenses can be:
- Shop and Establishment Act registration
- MSMED (Micro, Small and Medium Enterprises Development) Act registration
- GST (in case of business turnover exceeds Rs 20 lakh, or Rs 10 lakh in some states)
- Drug license
- Food Safety and Standards Authority of India(FSSAI)
- RTO permits
Having said that, both advantages and disadvantages exist for a sole proprietorship business, which you, as an entrepreneur, should be aware of.
By knowing both the pros and cons, you can make a better decision about your business’s future.
Advantages Of Sole Proprietorship Business
Sole Owner Is In Complete Control Of The Business
There are no business partners or Partnership Agreements, or approval of the Board of Directors to make any decision: The sole owner is in complete control over his business and can steer its way the way he/she deems fit.
This high level of independence and flexibility in running a sole proprietorship business is one of its major USPs, and attract entrepreneurs who wish to carve their path.
Easy Barrier Of Entry
There are no legal protocols and business registration process for a sole proprietorship enterprise, and you can start this business right away.
There is no legal framework or compliance list that needs to be followed to start a sole proprietorship business in India.
Scope For Tax Saving
A sole proprietor can save taxes, using legal and practical means, making a lot of difference to the bottom line, with increased profits.
For example, they can hire family members as employees and claim tax benefits. Tax rebates based on the depreciation of assets and bad debts can be availed. Tax saving on insurance products, smart usage of Sectio 80C, and more are some of the provisions for saving tax.
The cost associated with filing Income Tax returns is also saved.
Privacy Is Maintained
Unlike a public or partnership firm, a business’s sole owner need not share company details and records with the Govt or any authority.
This helps the business to maintain privacy and protect their business secrets. The sole proprietorship business need not even reveal the number of employees or business associates.
No Audit Required
There are no legal requirements for any tax-related audit for sole proprietorship businesses in India. However, depending on the business’s nature and the annual turnover, tax audits can be made under the GST and MSME rules.
If business turnover is more than Rs 1 crore, then a tax audit can happen, and Rs 50 lakh invoices in professional services. In the case of GST, an audit is required if the turnover exceeds Rs 2 crore.
But unless these thresholds are breached, the sole proprietor is not required for any audits.
Disadvantages Of Sole Proprietorship Business
Unlimited liability is one of the biggest disadvantages of a Sole Proprietorship. Since legally, there is no distinction between a Sole Proprietorship business and the Sole owner, all liabilities associated with the business are the owner’s liability.
In case the past dues are not paid, and the lenders press charges, then the business owner may need to sell or mortgage his/her private assets as well.
Getting Business Loans Can Be A Challenge
In general, financial institutions and banks are wary of allocating business loans to owners of Sole Proprietorship businesses.
The reason is that such a business’s existence and sustainability are directly tied to the business owner. In case of any mishap with the sole owner, the company will suffer, and it can impact the recovery of the loan.
Unlimited liability associated with the sole owner is another reason for the difficulty in getting a loan.
Tax Benefits Are Denied
There are some tax benefits associated with LLPs or Private Limited, and Partnership firms, which are not allowed for a Sole Proprietorship business.
Although the income tax liability for the sole owner is the same as that of an individual person/salaried person, the income tax dues can increase if the taxable income goes beyond Rs 10 lakh.
The issue of taxes for a Sole Proprietorship business is like double-sword: There are some benefits, but there are disadvantages if the tax structure planning is absent.
No Concept Of Business Continuity and Business Succession
A Sole Proprietorship business cannot legally pass on the ownership to an heir or nominated person. Once a sole owner retires or dies, then the business he/she started also retires and dies.
Hence, business continuity and business succession for a Sole Proprietorship based business doesn’t exist. This can deter several entrepreneurs who are making plans for scaling up their business and making it larger.
This also deters good, smart employees from joining such a business, since they may plan to own a business share later, which is not legally possible here.
Still, undecided on your new business structure and wish to know more about the Sole Proprietorship business and other business structures?
Consult with business coaches and experts from MSMEx, and take your entrepreneurial journey to the next level.
Book an appointment right here at MSMEx.