An Entrepreneur will always want to set up his business to earn more benefits. But when it comes to legal documents and registrations, the work included can be very overwhelming. One is easily confused between the type of company he wants to incorporate and then how to proceed with its registration. It calls in for a lot of hard work. Amidst all this comes the concept of Sole Proprietorship. It is the simplest form of business. It’s not considered a separate legal entity. This can be considered as one of its advantages or disadvantages depending upon the individual perception. All the income and losses of the company are taxed on owner’s Income Tax Return, sounds scary? Well again, perceptions! Described below is in detail of what exactly sole proprietorship is.
Its main feature is that it does not have a separate legal identity. It is completely under the owner’s name, which is all the debts are under the owner. This can put the owner’s personal assets at risk. Registration for proprietorship is very easy and simple. All you need to obtain are a few local licenses and permits (like PAN Card, Bank Account, TAN, Shop Establishment license, etc.) and then you need to register your name as the sole proprietor. It does not follow complex procedures of voting and meetings as mandatory like in other forms of business. The taxation procedure due to this feature is also simple since everything earned by the firm is considered as the income of Sole Proprietor. There is no unemployment tax involved.
Also there is a choice of mixing different business which is completely dependent upon the Sole Proprietor. There is no requirement of separate name for the business, since everything is under the name of Sole Proprietor. Although, there are no restrictions to different names and no registrations or filings are required as such. However, it’s a very common practice to convert a Sole Proprietorship into a LLP or other corporations to overcome the risk of losing everything. One disadvantage of having a Sole Proprietorship is receiving capital funds. Obtaining loans and getting funds is a very hard job since the company has no separate identity under the law.
Therefore we can say that advantages of the sole proprietorship are:
· Whole Control -Since the business belongs to owner, he has complete control over his business without much legal intervention.
· Easy and inexpensive set up – Not much legal formalities except few permits and licenses are needed.
· Easy Tax filings – Since the owner and business are the same, tax filings are done under the name of owner and capital earned by business is shown as the income of the owner.
Also, the disadvantages are:
· Personal Liability – Even though having whole control over business seems an awesome idea but it doesn’t sound that good when the company is suffering loss.
· Raising Capital funds – It is easy to establish, no doubt. But it is really difficult to raise funds or get loans.
Due to all these features, Sole proprietorship is considered as an incorporated form of business since it is not registered. Therefore, before deciding to set up a Sole Proprietorship you should be completely aware of its features, requirements, pros and cons.