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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Advocate Ravindra Vikram

Ravindra Vikram Law Associates

Ph: +91-94100-22521

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