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A sole proprietorship, also known as a sole trader or simply a proprietorship, is a type of business structure that is owned and run by one individual and in which there is no legal distinction between the owner and the business. The owner receives all profits (after tax) and has unlimited responsibility for all losses and debts. All assets and debts of the business in the proprietorship are owned by the proprietor. This means that the owner has no less liability than if they were acting as an individual instead of as a business.
A sole proprietor may use a trade name or business name other than his or her name. In India, there is no specific law for registration of sole proprietorship, but as per the Shop and Establishment Law (State Law), every establishment needs to get registered under the Act, which can be used as limited purpose sole proprietorship registration.
As the name reveals, a sole proprietorship is operated managed and run by a single individual. The identity of the organization is nothing but the individual himself. However, depending on the nature of business, it is required to obtain registration such as Service Tax, VAT, IEC, etc. A sole proprietorship can be registered under the MSME Act to avail benefits and protection.
The proprietorship business carries unlimited business risk as the business proprietor is individually responsible to settle all business liabilities. The proprietor’s personal assets are at risk to compensate the business liabilities.
How to start a Sole Proprietorship
Since no legal registration is required for sole proprietorship business, any individual can start such a business any time. Technically, this is the position, but the practical situation is different. To open a current account in the name of the Sole Proprietorship firm, it is obligatory to produce any one registration certificate such as service tax/vat/shops & establishment etc. It means that even if a Sole Proprietorship as such does not require any registration, but for starting a business account, a person needs any one registration as mentioned above.
Benefits of Sole Proprietorship
No registration: Sole proprietorship businesses need not be registered under any specific law in India. However, for opening an account with a bank, a person needs any two registrations under any law such as service tax or VAT, etc.
Tax: Since sole proprietorship is an individual business, all profits are taxed in the name of individual himself.
Management: Proprietor manages the business as per his will and wish.
Legal compliance: Since sole proprietorship is not created by law, no specific compliance or filing is required except for tax compliance and other legal compliance applicable for any business.
Business closure: It is easy to close a sole proprietorship business. The proprietor can sell the assets and settle the liability and close the business.
Disadvantage of sole proprietorship
Unlimited liability : The sole proprietor having unlimited liability in case of any loss or debts.
Cannot add a partner: In this structure, we cannot add a partner in any situation and it may affect the expansion of business.
No business continuity: The business of the sole proprietary firm cannot be converted to any other business structure, so there will not be any business continuity in case of transfer of business by sole proprietor.
