Rules and regulations for Sole Proprietorship Businesses in India

A sole proprietorship firm is an entity that is owned by a single individual. It is different from a company; partnership firm, or a one-person company. None of the legislation in India defines a sole proprietorship firm. It is considered to be the simplest form of organization structure in terms of registration and compliance. With the introduction of One-person Company in Companies Act, 2013, the legislature has taken up a step towards regularizing and protecting the interest of entrepreneurs who wish to do business solely. “One person company” and “Sole proprietorship firm” are two different concepts. A sole proprietorship firm is not a separate legal entity, unlike a Company. The identity of the proprietor and that of the firm is essentially the same.

In Miraj Advertising Corporation v. Vishaka Engineering 115 (2004) DLT  it was held that;

“A proprietorship firm has no legal entity like a registered firm.   A suit cannot be instituted in the name of an unregistered proprietorship firm and the said suit is to be instituted in the name of the proprietor.”

Registrations and Compliances for Sole Proprietorship:

The necessary documentation for a proprietorship firm shall essentially depend upon the area in which the said business intends to operate. A tentative checklist for a person intending to incorporate a sole proprietorship firm shall be as follows:

  • Licensing and registration under the Shop and Establishment Act: The shop and establishment act comes under the state list of legislation. In essence, any “establishment”, which can be in the nature of shop; commercial establishment; residential hotel; theatre; any place of public amusement or entertainment, etc have the Shop and establishment act applicable to it. Registration under this act is mandatory. The license under this act is generally mandatory for all business entities, even if you are working from home. An establishment generally is required to register itself within 30 days of commencement of operations.
  • Registration under the Micro, Small, Medium Enterprises (MSME) Act, 2006: The registration under this act is not mandatory. However, the act provides considerable benefits for the MSME sector and in order to reap the benefits under the act, the registration is required. The registration process can be provisional or permanent.
  • Intellectual Property Registration (IPR): According to the requirements the business can register to get exclusives right by registering under any or selected types of (IPR) i.e. Trade Secrets, Trademarks, Copyrights, and Patents.
  • GST registration: Chapter VI of Central Goods and Services Tax Act, 2017 mentions the entities required to get registration under GST. Central Excise Duty, Additional Excise Duty; Service Tax; Countervailing Duty; Special Additional Duty of Customs; State Value Added Tax/Sales Tax; Entertainment Tax (except for tax levied by local bodies); Central Sales Tax; Purchase Tax; Octroi and entry tax; Luxury Tax;  Taxes on lottery and betting are taxes subsumed under the GST Act. 
  • Opening a current account is a necessary requirement for most businesses.

Income tax treatment for Sole Proprietorship Business:

Sole proprietorship business is not taxed as a separate legal entity. The owner files the business taxes on their personal tax returns. i.e. business income gets added to the individual income of the sole proprietor. Since a sole proprietorship is not a legal entity a separate PAN cannot be issued in the name of the sole proprietorship firm. PAN of the owner is the PAN of the business.

A sole proprietorship firm based on its annual turnover is also exempted from maintaining books of accounts of the business and its auditing. The taxation in such cases is done on the basis of the “presumptive income” method and the scheme is applicable to an individual, a HUF or a partnership firm (not available to a Company). The turnover of the business for which an individual/ sole proprietor can avail this scheme should be less than Rs 2 crore. The scheme cannot be adopted by the taxpayer, if he has claimed deduction under section 10, 10A, 10B, Section 10BA, or Section 80HH to 80RRB in the relevant year. The scheme is also not applicable “Income from commission or brokerage”; “Agency business”; “Business of plying, hiring or leasing goods carriage”; “Professionals”.

Highlights of Sole Proprietorship:

The structurization of a business entity as a “Sole Proprietorship Firm” requires less legal formalities, in comparison to other entities. However, since they are not categorized as a separate legal entity, therefore, the liability of the proprietor is unlimited in case of such business structures.  Also, the continuity of the organization is entirely dependent upon the life of the owner.

— Advocate Ravindra Vikram, Ph: +91-94100-22521

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One person company (OPC) – Registering in India

The Companies Act 2013 has introduced a new concept of “One person company”. One person company (OPC) provides an avenue for a person who wants to venture into a business under the guise of organized business structure. Such a company will be in the nature of a private company. This article shall focus on the formation of a “One Person Company”.

In the case of a one-person company at the time of registration, a second person’s name is also required to be registered who shall become the member of the company if the first member dies or become incapacitated to contract. The second member in this respect is required to give written consent of his willingness.

The “One Person Company” may, by intimation in writing to the company, change the name of the person nominated by him at any time for any reason. (Form No INC.3 is required to be filed).

Requirements of a One person company:

1. Only Indian citizen and resident* in India (for both the member and the nominee). (*resident refers to a person who has resided for 180 days or more in the country in the preceding year.)

2.  A person can incorporate more than 1 “one person company”. The same relaxation is available for a nominee as well.

3. Such a “one person company” cannot be formed for a charitable purpose, neither can such a company carry out Non-Banking Financial Investment activities (including investment in securities).

4. Such “one person company” can be converted into any other kind of company. However such conversion is not possible unless two years have expired from the date of incorporation of “One Person Company.”

Application For Incorporation Of “One Person Company”.

The Name Reservation, Allotment of Director Identification Number (DIN), Incorporation of New Company, Allotment of PAN and Allotment of TAN by in one form by applying for Incorporation of a new company through SPICe (Simplified Proforma for Incorporating Company electronically) form (INC-32; 33;34) in addition the name of the nominee as mentioned above is also required to be filed.

When Ceases To Operate As “One Person Company”

When the paid-up share capital of a One Person Company exceeds fifty lakh rupees or its average annual turnover during the relevant period exceeds two crore rupees, it shall cease to be entitled to continue as a One Person Company.

The company then within 6 months from the date the threshold was crossed has to mandatorily convert itself into a public company (minimum of 7 members and 3 directors) or a private company (2 members and 2 directors).  The “one person company” is also required to reflect such a change in its MoA and AoA.

Notice to Registrar of Companies in Form No.INC.5 informing that it has ceased to be a One Person Company

Penalty

  1. Failure to mention the name of the nominee or re-nominate a nominee: Fine which may extend to Rs.10,000 and with a further fine which may extend to Rs. 1000 for every day after the first during which such contravention continues.
  2. Failure to convert to a public company or private company: Fine which may extend to Rs.10,000 and with a further fine which may extend to Rs. 1000 for every day after the first during which such contravention continues. 

— Advocate Ravindra Vikram, Ph: +91-94100-22521

The content here is for educational purposes only. User access at your own volition. Click the link to read the full Disclaimer.

Registering a Business in India

How To Form A Business Establishment.

A business establishment can be incorporated in the form of a company, partnership firm, limited liability partnership, one person company, and proprietorship. Though it is not mandatory to register a company before starting a business in India however, the nature of the business establishment depends upon the requirement of the individual, such as tax exemption, funding requirements, liability assessment, membership, etc.

Formation of a Company

The incorporation of a company in India is primarily governed by the Companies Act 2013.  A company formed under the companies act can be either

  1. A company limited by shares; or
  2. a company limited by guarantee; or
  3. an unlimited company

The companies can further be divided into public companies; private companies; one-person company. For a public limited company, the act prescribes in section 3 of the act that the minimum number of members should be 7 or more. Two or more persons are required for making a private limited company.

Other modes of registering the business in India:

  1. Proprietorship: A sole proprietorship firm is an entity that is owned by a single individual.
  2. Partnership Firm: The Partnership Act, 1932 defines partnership in Section 4 of the Act as – “An agreement between persons who have agreed to share profits of the business carried on by all or any one of them acting for all.”
  3. Limited Liability Partnership (LLP): A LLP is a partnership that allows the partners to have limited liabilities. An LLP has a legal entity separate from its partners and perpetual succession. The LLP Act, 2008 is separate legislation, and the provisions of the Indian Partnership Act, 1932 are not applicable.
  4. One Person Company (OPC): OPC provides an avenue for a person who wants to venture into a business under the guise of an organized business structure.
  5. Section 8 Company (Non-Profit Company): The Companies Act allows an association of persons to register under this Act a limited company for purpose of fulfilling objectives promote fields of arts, commerce, science, research, education, sports, charity, social welfare, religion, environment protection, or other similar objectives.

Establishing a new business is always a challenging and exciting process in India. To build the business and gradually to upgrade is a continuous process and one must be familiar advantages and disadvantages of the available options before starting your business in India.

— Advocate Ravindra Vikram, Ph: +91-94100-22521

The content here is for educational purposes only. User access at your own volition. Click the link to read the full Disclaimer.

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