A business is one of the key decisions of life, and one of the most frequently used small business forms includes a proprietorship firm. It is easy to set up and involves minimal compliance burdens, and it is appropriate for one-man entrepreneurs or small trading and service entrepreneurs. Setting up a proprietorship firm is easy. However, formal registration yields many advantages, such as increased credibility, access to government schemes, and being eligible for business loans.
In this article, we will discuss the essential information that a proprietorship firm entails, such as meaning, benefits, documents needed, and step-by-step guides to help you register your business legally and efficiently.
Meaning of a Proprietorship Firm
A proprietorship firm, otherwise known as a sole proprietorship, is a business owned, operated, and managed by a single individual. It is one of the most simplified businesses in India because there exists no separate legal existence beyond the owner. This means that all the assets and liabilities of the business firm go directly to the owner.
In a proprietorship firm:
The owner solely accounts for all the profit or loss.
It is not mandatory to register a proprietorship firm but, proper registration will help later on.
There is no such separate legal entity; rather, it is the same. So, the assets of the owner and that of the firm are indistinguishable.
Advantages of Registering a Proprietorship Firm
A proprietorship firm provides ease, flexibility, and complete control for individual entrepreneurs. It is an ideal business structure for small ventures that require ease of operation and personal management with minimal compliance requirements, low costs, and straightforward formation.
The advantages of a proprietorship firm are:
Business Credibility: Registered firms are much more credible to clients, suppliers, and financial institutions.
Access to Bank Loans: A registered proprietorship can avail loans to increase business operations.
Government Schemes: The government runs several schemes for registered business, like subsidies and tax benefits.
Legal Identity: Though dependent on the owner, the registration itself confers a relative legality upon the business.
Easy Business Operations: A registered business can perform formal contracts, let out properties, and get licenses.
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How to Register a Proprietorship Firm?
The process of registering a proprietorship firm is relatively simple. Here’s a step-by-step procedure to get you started:
Step 1: Selecting a Business Name
Name your business with uniqueness, for such a name may not be used as the name of some trademark; this should define the business.
Whether your desired name already exists
Step 2. Get a PAN Card:
For a proprietorship, no one is legal so a PAN card would be considered the same while all sorts of uses are to be made.
If you do not already have a PAN card, apply for one as you cannot conduct financial transactions and ensure tax compliance without a PAN card.
Step 3. Open a Bank Account in the Firm's Name
You can open a current account in the firm's name by submitting the documents, which include the owner's PAN card, address proof, and business proof.
Most banks demand proof of registration, like a Shop and Establishment Act license, Udyam Registration, or GST registration, to open a current account.
Step 4. Register under the Shop and Establishment Act (if applicable)
A shop and Establishment Act license is generally required in most states if your business has a place of its own.
The Shop and Establishment Act license can be obtained from the local municipal authority by furnishing the owner's identity proof, address proof, and business address.
Step 5. GST Registration (if needed)
If your business turnover crosses the threshold limit or you are selling goods across state borders, then you have to register for GST.
Apply for GST by uploading a PAN card, business address proof, bank details, and photographs of the owner on the GST portal.
Step 6. Udyam Registration (optional but helpful)
Udyam Registration (earlier called MSME registration) is a recognition to small businesses that will help them get easy loans, government subsidies, etc.
The registration of Udyam is not compulsory, but it's very useful for a proprietorship firm because it will enhance credibility and also the scope for growth.
Step 7. Trademark Registration (optional)
Trademarking your business name or logo is not compulsorily required but saves your brand from other misuse.
You can seek trademark registration on the website of Intellectual Property India
Step 8. Professional Tax Certificate (if required)
Many states require a professional tax from proprietorships which only applies if you hire people in your business
It can be registered by the local municipal authority that ensures adherence to the requirements of employment taxes at the state-level
Step 9. Maintaining Business Records and Compliance
While a proprietorship needs less compliance, account-keeping and return filing is indispensable, especially if you have registered your business under GST.
Recording of accounts can also help in getting loans and preparing for business expansion
Documents needed for proprietorship firm registration
To register a proprietorship, you will need the following documents and details:
PAN Card Owner: It is required to maintain all financial transactions and income tax
Aadhar Card: This is very important for getting GST and other Government formalities
Address Proof of Owner: It may be utility bills, passports, voter ID, or driving license.
Business Address: Rent agreement, utility bill, or NOC from the landlord.
Bank Account Proof: Current account statement or other related financial statements of the business.
Photographs of the Owner: Required for GST and other registrations.
Other Licenses: Depending on the nature of the business, one would require further licenses such as FSSAI in the case of food businesses or Drug License in case of pharmaceutical businesses.
Important Points to Note
Following are some important points that shall be considered while the proprietorship firm registration:
No Legal Difference: Remember the owner is personally liable for all business liabilities.
Less Formality of Compliance: Proprietorships do not have to file annual returns or have statements audited like other corporate structures.
Less Formality: The process of registration is discretionary and provides several operational advantages
Not Scalable: Proprietorships are perfectly suited for small enterprises and cannot be scaled easily as they cannot raise funds from investors.
No Everlasting Existence: The business is closely linked to the owner's life and dies with the death of the owner.
General Issues Faced During Proprietorship Registration
Registration of proprietorship is simple until these issues come forward:
Limited Access to Capital: Proprietorships cannot raise equity capital, which limits their growth and expansion capabilities.
Unlimited Liability: The owners can be liable to personal liability in case the business goes into debt or makes losses.
Lack of Infrastructure in Compliance: In proprietorship, compliance management is a hassle, especially for GST or professional tax.
Conclusion
Proprietorship firm registration is an easy means of starting up any small business for a sole entrepreneur. Though there isn't any compulsion for such registration, specific registrations, such as GST, Udyam, and Shop and Establishment licenses, might confer a higher degree of credibility besides improving access to finance and scaling up the business further. This fits well with individual owner businesses seeking convenience in compliance and operations. However, since proprietorships are not scalable and liable to the owners, these are best suited for low-scale businesses with moderate prospects of growth.
Proprietorship Firm Registration FAQs
1. Do I need to register my proprietorship firm in India?
No, there is no compulsion for the registration of proprietorship firms in India. Though it is not necessary, there are benefits that are availed through the process, such as credibility, eligibility for loans, and accessibility to government schemes.
2. How much will I be charged for registering my proprietorship firm?
The cost differs for all these types of registrations: GST, Shop and Establishment Act license, and Udyam registration. In respect to basic registration, the variation lies between ₹500 to ₹3,000.
3. What are the tax implications for a proprietorship firm?
The owner's income is considered profit; however, it is on the personal income tax category, and corporate tax in that case is not distinguished.
4. Is this proprietorship changeable to a private company at a later date?
Yes, it can change, but only from an ordinary partnership to a private Ltd. Company and vice versa.
5. What is the main difference between a proprietorship and a partnership?
There is only one owner who owns the business in the case of a proprietorship. In a partnership, there are two or more owners who share ownership as well as liability.
6. Do I have to file annual returns for my proprietorship?
Proprietorships are exempt from filing annual returns with the Ministry of Corporate Affairs. In any case, income tax returns are compulsorily filed under the PAN of the owner.
