India is a country with small businesses at every corner. Their owners mostly just want to do business without having to deal with the complex nature of “business registration”. For that very reason, starting a sole proprietorship is their business structure of choice.
But should you choose the same? In this article, we are going to look into the pros and cons of Sole Proprietorship Registration and after that, you can make a choice on your own.
What is Sole Proprietorship?
A Sole Proprietorship means being a lone proprietor of any property. In this case, the property is something that you use to generate revenue. It can be a general store, a jewellery store, a confectionary or anything that doesn’t require traditional way to register your business.
Pros of Sole Proprietorship Registration
People who choose to start their business as a proprietorship firm, make the choice because of the following reasons:
- It’s easy to establish: Starting a sole trader-ship (a form of proprietorship) doesn’t require you to establish a separate identity for your business. As a proprietor, you and your proprietorship are considered one entity. For that very reason, it’s very easy for you to start a sole proprietorship as compared to say, a company.
- It’s easy to operate the business: Because registering a proprietorship doesn’t require any complex legal method, it doesn’t have many rules and restrictions – making it easier for you to run your business as you see fit.
- It allows you to not share your profits: Most legal business entities, especially companies and LLPs require you to have partners/directors to share your profits and make your decisions with. With proprietorship firm registration, you’re bound by none of them. Only you can make the decisions of your business and only you have the right of the profits that come out of those decisions.
- It has minimum compliance requirements: A proprietorship firm is not a “registered firm” per se i.e. it doesn’t have to be watched over by Ministry of Corporate Affairs. As a result, the rules and regulations that you have to adhere to are bare minimum. Other than filing regular income tax returns, and GST returns (if your annual revenue is over INR 20 Lac), you don’t have to any special compliances that you have to follow.
Cons of Sole Proprietorship Registration
You can’t have pros without the matching cons. Unfortunately for sole proprietorship firm, the cons are too many to ignore:
- You would have Unlimited liability: As you are indistinguishable from your registered proprietorship firm, your personal assets aren’t secure if your firm loses any money. It means that in case your firm either suffers losses or goes bankrupt, people are going to come for your personal assets for their repayment.
- Difficulty in obtaining funds: A sole proprietorship firm is not a legal business entity – making it ineligible from getting preferential treatment from the startup India initiative. As a non-legal business entity with no oversight of the Ministry of Corporate Affairs, banks would find it hard to lend you money. Similarly, venture capitalists won’t bother investing in your venture at any point.
- Similar taxation as the individual: A sole proprietorship is you. As such, it is taxed in the same way as you. Even if that tax rate is lower, you won’t be able to enjoy the perks of taxation like those with LLP or private limited company. Additionally, if your proprietorship firm earns more than INR 10 Lacs per annum, you’d have to pay higher taxes than that of a company or an LLP.
Don’t be too much attracted to the simplicity of a sole proprietorship registration. Yes, it does provide you a way grow without dealing with complexity. Yes, it’s good for when you’re just starting. However, for a long run, having a proprietorship registration means having to pay more taxes, asking for peanuts in the name of funds and dealing with losses of personal assets if your business doesn’t succeed. That’s why, heed to both the advantages and disadvantages before you make a decision of your chosen business entity.