PROPRIETORSHIP REGISTRATION

A sole proprietorship is an unregistered business entity owned, managed, and controlled by a single individual. Sole proprietorships are the most common business structure in India, accounting for the bulk of micro and small businesses in the unorganised sector. Proprietorships are straightforward to establish and administer, with low regulatory compliance obligations. However, proprietorships do not provide the promoter with a variety of desirable features such as limited liability, corporate status, separate legal entity, self-sufficiency, transferability, and eternal existence after the founding phase. As a result, proprietorship registration is suited only for unorganised, tiny businesses that intend to stay unorganised and/or exist for a limited period of time.

The Indian government does not provide a mechanism for registering proprietorships. As a result, the existence of a proprietorship must be established by tax registrations and other business registrations required of a corporation by law. To establish that the Proprietor is conducting business as a lone proprietor, the Proprietor may obtain a VAT, Service Tax, or GST Registration in his or her name. As a result, all proprietorships will be registered in the Proprietor's name, making the Proprietor personally liable for the Proprietorship's obligations.

Starting a Proprietorship in India

One-person organizations are those that are owned, managed, and controlled by a single person. Proprietorships are sole proprietorships that are owned, managed, and controlled by a single person. Proprietorships are straightforward to establish and require minimal regulatory compliance. Unlike other corporate structures such as limited liability partnerships and private limited companies, proprietorships do not provide a variety of additional benefits to the proprietor/proprietors, such as limited liability, independent existence, and transferability. We'll examine the stages required in starting a sole proprietorship in this piece.

Starting a Proprietorship

There are no legal prerequisites or registration requirements for starting a sole proprietorship. Business licences and tax registration are required by the federal and state governments, respectively. Additionally, trademark registration is recommended if the company's name is distinctive or brandable.

Business Licenses

All enterprises, regardless of their type, require a business licence. For example, a physician requires a State/Central Government License to Practice; similarly, a restaurant requires a Food Business Operator License from the Food Safety Standards Authority of India. As a result, it is vital to understand the regulatory framework governing the activity you wish to do in your proprietorship and to obtain necessary permits from the proper local, state, and federal government entities. Here are a few examples of business licences:

●        Food Business Operator License – Required for businesses handling food

●        Customs Broker License – Required to act as Customs Broker

●        Security Agency License – Required to provide security services

●        Shop & Establishment License – Required while operating shops and commercial establishments

Tax Registrations

Tax registrations must be obtained from the appropriate tax authorities based on the type of activity to be conducted by the Proprietorship. Several tax registrations would be necessary for a proprietorship, including the following:

●        GST Registration - Required in accordance with the GST turnover threshold for the kind of business.

●        Registration as a professional tax payer - Required for enterprises that employ professionals

●        Registration with ESI/PF - Required for the majority of firms with employees.

Trademark Registration

In India, there is no such thing as a Registrar or Registry of Proprietorships. As a result, a proprietorship may generally operate under any name so long as the name does not clash with any registered trademarks or other applicable rules and regulations. It is therefore recommended that you register a trademark if you intend to devote a significant amount of time and money in the proprietorship or if your business name must be used exclusively to identify the goods and services provided by your business.

Opening a Bank Account

Opening a bank account in the proprietorship firm's name is one of the first stages after establishing a proprietorship. Two of the following documents are necessary to open a bank account in the proprietorship's name, as per RBI's Know Your Customer (KYC) regulations:

●        Municipal authorities issue a certificate / licence pursuant to the Shop and Establishment Act, GST registration. Certificate Registration / licencing document issued by the Central Government or a State Government Authority / Department in the name of the private firm.

●        IEC (Importer Exporter Code) is a document provided by the DGFT office to a proprietary firm as identification for the purpose of opening a bank account.

●        Licenses are issued by the registering authority, such as the Institute of Chartered Accountants of India, the Institute of Cost Accountants of India, the Institute of Company Secretaries of India, the Indian Medical Council, and the Food and Drug Control Authorities.

Advantages and Disadvantages of Proprietorship

The single proprietorship is the most common form of business ownership in the world. As the name implies, it is a type of business in which a single individual owns the assets and operations of the business. This essay will discuss the advantages and disadvantages of a proprietorship business.

Advantages of Proprietorship

The following are some of the major advantages of proprietorship firm.

1.       Easy to Establish

A sole proprietorship has no special registration procedures and uses the proprietor's legal identity. No registration is so required to start a business. Optionally, Udyog Aadhaar and Trademark Registration can be obtained using the promoter's PAN and Aadhaar.

2.       Easier to Operate

It is easier to run when only one person is in charge because he is the lone decision maker and does not need to consider several perspectives. A proprietorship has no sense of a board or permission from others.

3.       Sole Beneficiary of Profits

Except in a sole proprietorship or one-person corporation, the owner is the sole beneficiary of profits. A partnership, LLP, or company requires at least two people to form.

4.       Compliance & Taxation

Unlike a corporation, a proprietorship has less compliance responsibilities. Also, the owner only needs to file income tax returns if the firm's taxable income exceeds Rs.2.5 lakhs per year. For owners aged 60 or above, income tax filing is necessary only if the taxable income exceeds Rs 3,000,000. For entrepreneurs aged 80 or above, income tax filing is necessary only if the taxable income exceeds Rs 5,00,000.

Finally, the sole proprietor can also reduce the income tax liability by availing the following deductions:

●        Contributions to provident fund, life insurance premium, subscription to certain equity shares or debentures etc.

●        Contribution to certain pension funds.

●        Contribution to notified pension scheme of the Central Government.

●        Medical insurance premium.

●        Caring for a dependent who is ailing with disability.

●        Medical expenses.

●        Repayment of loan availed for higher education.

●        Payment of rent.

●        Income from royalty.

●        Royalty on patents.

●        Handicapped persons.

5.       Privacy

Because sole proprietorships are unregistered, the government does not maintain a database of all proprietorships. The MCA website does not disclose the details of proprietorship firms, which makes them more private.

Disadvantages of Proprietorship

The following disadvantages must be taken into perspective while deciding to start a sole proprietorship firmBecause sole proprietorships are unregistered, the government does not maintain a database of all proprietorships. The MCA website does not disclose the details of proprietorship firms, which makes them more private.

1.       Unlimited Liability

This is one of the most confusing aspects of a sole proprietorship. In the event of a loss, the proprietor is expected to satisfy the liabilities at any costs, which may include using personal assets.

2.       Difficulty in Obtaining Funds

A sole proprietor cannot indulge in sale of business interest or shares, which deprives the entity from the receipt of any type of equity funding.

Further, banks are also wary of lending large sums of money to a proprietorship firm as the existence of the proprietorship firm is tied to the proprietor. On the other hand, in a company or LLP, more than one person would be responsible for the liability and business continuity would be assured in the event of death or insolvency of one of the promoters. Hence, it would be easier for a company or LLP to raise bank loan when compared to a proprietorship firm.

3.       Higher Tax Incidence

Proprietorship businesses are taxed in the same way that individuals are. As a result, the income tax rate on a proprietorship firm is slab-based. While the income tax rate on revenue up to Rs.10 lakhs is lower than that on a business, proprietorship firms cannot take advantage of the various perks available to an LLP or corporation. Additionally, for taxable revenue above Rs.10 lakhs, the proprietorship firm's income tax rate is higher than the company's income tax rate. Thus, in the long run, it would be advantageous to incorporate in order to minimise income tax liabilities.

How to Open Sole Proprietorship Bank Account

Sole Proprietorship is the practise of conducting business under one's own name. Proprietorships are classified as unregistered businesses because they are not registered with the Central Government as a separate business organisation. Proprietorships are ideal for very tiny unorganised sector firms with an annual revenue of less than Rs.10 lakhs. Often, the Sole Proprietor will conduct a business under a different name (for example, Chennai Metal Trading, Kumar Groceries, and so forth). Sole Proprietorship business names are not rigorously checked or regulated, and the majority of Entrepreneurs choose a common business name that does not infringe on a popular trademark. Finally, a bank account must be established to show legality for the Sole Proprietorship and to accept payments in the name of the Sole Proprietorship firm. This post will walk you through the process of opening a solo proprietorship bank account.

Bank Account for Sole Proprietorship

The Reserve Bank of India has established Know Your Customer (KYC) guidelines for creating a current account in the name of a sole proprietorship, and all banks have established procedures for opening a sole proprietorship current account in the business's name. The RBI has extensively mandated the following as KYC standards for sole proprietorship current accounts:

●        Proof of the name, address and activity of the concern: Proof of the name, address and activity of the concern, like registration certificate (in the case of a registered concern), certificate/licence issued by the Municipal authorities under Shop & Establishment Act, sales and income tax returns, CST / VAT certificate, certificate / registration document issued by Sales Tax / Service Tax / Professional Tax authorities, Licence issued by the Registering authority like Certificate of Practice issued by Institute of Chartered Accountants of India, Institute of Cost Accountants of India, Institute of Company Secretaries of India, Indian Medical Council, Food and Drug Control Authorities, etc.

●        Secondary Proof: Any registration / licensing document issued in the name of the proprietary concern by the Central Government or State Government Authority / Department. NBFCs/RNBCs may also accept IEC (Importer Exporter Code) issued to the proprietary concern by the office of DGFT as an identity document for opening of account.Proof of the firm's name, address, and activity: Proof of the name, address and activity of the concern, like registration certificate (in the case of a registered concern), certificate/licence issued by the Municipal authorities under Shop & Establishment Act, sales and income tax returns, CST / VAT certificate, certificate / registration document issued by Sales Tax / Service Tax / Professional Tax authorities, Certificate of Practice granted by the Registrating Authority such as the Indian Medical Council, Food and Drug Control Authorities, etc.

●        The whole Income Tax return (not only the acknowledgement) in the sole proprietor's name, officially authenticated/ recognised by the Income Tax Departments.

●        Utility bills in the name of the private firm (electricity, water, landline phone).

A sole proprietorship current account can be opened with two of the preceding documents. These documents must also be in the proprietorship's name, per RBI KYC rules.

Document Required for Opening Proprietorship Bank Account

Based on the above RBI guidelines, various banks have enacted procedures and list of documents required for opening current account in the name of a Sole Proprietorship firm. The following is a Bank’s list of documents required for opening Proprietorship Bank Account.

First Sole Proprietorship Proof (Any one of the following documents)

●        Any certificate issued in the name of an entity/firm by a local/state/central government/government agency/SEBI/IRDA/ICAI/ICSI/ICWAI/Office of Registrar of Newspapers for India. TIN/ VAT/ TAN, etc.

●        Professional Tax Registration Certificate Trade Mark Registration Certificate APMC/Mandi License/Certificate

●        Certificate of Liquor Registration

●        Excise & Customs Department Drug License Registration Certificate

●        Insecticide/Pesticide Registration Certificate granted under Weight & Measurement Act Police Department Permission/License/Certificate

●        Regional Transport Office License/Registration

●        Sales Tax Registration Certificate/TIN Certificate/ VAT Certificate/ Service Tax Certificate/ TAN Certificate provided by State/Central Pollution Control Board.

●        License/certificate for shops & establishments The certificate's validity can be prolonged up to the grace period for renewal.

●        EHTP, DTA and EPZ issued certificates in the entity's name with the assigned address.

●        PAN Card with Importer–Exporter Code Certificate (if PAN is quoted on the IEC Certificate).

●        Gram Panchayat Seal (should be on letterhead and not more than 3 month old).

●        Trade License under entity's name.

●        District Industries Center (DIC)/ Small Scale Industries (SSI) Certificate – Acknowledgment Part -II issued by DIC/ SSI containing Entrepreneur’s Memorandum Number. Duly stamped and signed by issuing authority.

●        Factory Registration Certificate in the name of entity.

●        SEBI Registration Certificate in the name of the entity.

●        Certificate of enlistment/license/shop allotment letter issued by Municipal Corporation

Second Sole Proprietorship Proof (Any one of the following documents)

●        Registration of firm with Employee Provident Fund Organization.

●        Registration of firm with Employee State Insurance Corporation.

●        Letter or Certificate (should be on letterhead and not more than 3 month old) confirming existence of business issued by Chairman/ President/ CEO/ Head of the Nagar Panchayat/ Parishad, and not by local councillors/ corporators

●        Complete Sales tax return in the name of the firm duly acknowledged. Note: The portion of the sales tax return showing the name of the firm should be duly acknowledged by the accepting authority

●        Last available Income/ Wealth Tax Assessment order in the name of firm.

●        Latest copy of Electricity Bill, not more than 3 months old.

●        Latest copy of Telephone Bill from Telecom operator, not more than 3 months old.

●        Certificate issued by Municipal Corporation/ Local Self Government Bodies confirming address of the firm.

●        True copy of gas connection book in the name of entity along with latest gas receipt not more than 3 months old or Gas bill in case of pipe connection.

●        Water Tax bill paid to Municipal Body/ Corporations, not more than 6 months old along with the Tax receipt should stand in the name of the firm.

●        Property Tax bill should not be more than calender one year old from the bill issuance date along with Tax receipts for property tax paid to Municipal Body / Corporations. The Tax receipt should stand in the name of the firm.

●        Certificate of Verification issued under Weight & Measurement Act–This document will not be considered if Registration Certificate issued under the same act has being taken as 1st entity proof document.

Sole Proprietor Identity Proof (Any one of the following)

●        In the name of the Proprietor, a pan card is presented (Mandatory)

●        Driver's License, Passport, Voter ID Card

●        Unique Identification Authority of India issues the Aadhaar card (UIDAI)

●        State/Central Government-issued Senior Citizen Card Fisherman State/Central Government-issued identification card Arms License

Sole Proprietor Address Proof (Any one of the following)

●        Passport Voter Identity Card Driver License The Unique Identification Authority of India issues Aadhaar cards (UIDAI)

●        Senior Citizen Identification Card provided by the State/Central Government Fisherman Arms of State/Central Government issue identification cards. License

●        Bills for utilities (Electricity bill,Telephone bill) not more than three months

●        Water tax bill and receipt no more than six months old

●        Property tax bills that are less than one year old, together with receipts for tax payments

●        Latest Three months Bank Statement from scheduled commercial bank with account opening cheque/Bank passbook/Original letter from existing banker with account opening cheque

●        Consumer gas connection card/Passbook along with the receipt of gas supply not older than 3 months

●        Registered Lease & Licence Agreement along with utility bill not older than 3 months in the name of the landlord

With the above documents and information, a Banker can open a current account in the name of the Sole Proprietorship Business. For more information, get in touch with an DELTA TAX Business Advisor.

Why Should Proprietorship Firms File Income Tax Return?

The Income Tax Act requires all owners under the age of 60 to file an income tax return if their total income exceeds Rs. 2.5 lakhs. Income tax filing is necessary for entrepreneurs above the age of 60 but under the age of 80 whose total income exceeds Rs.3 lakhs. If the total income of the proprietor exceeds Rs.5 lakhs, proprietors over the age of 80 years are required to file an income tax return.

Additionally, only if the proprietor files his or her income tax return on time, will any business losses be allowed to be carried forward. Additionally, no deduction can be claimed under sections 10A, 10B, 80-IA, 80-IAB, 80-IB, or 80-IC unless the proprietorship income tax return is filed on or before the due date.

Audit for Proprietorship

If a proprietorship firm's total sales revenue exceeds Rs.1 crore throughout the fiscal year, an audit is necessary. If a professional's total gross receipts exceed Rs.50 lakhs during the financial year under review, an audit is needed.

Additionally, regardless of turnover, an audit would be necessary for every proprietorship firm subject to the presumptive taxation scheme if the income declared is less than the scheme's considered profits and gains.

For income tax purposes, a proprietorship audit must be undertaken by a licenced Chartered Accountant.

Due Date for Filing Proprietorship Firm Tax Return

The proprietorship's non-audited income tax return is due on July 31st.

If an income tax return for a proprietorship is required to be audited under the Income Tax Act, the return is due on September 30th.

Form No.3 CEB must be filed if the proprietorship enters into an overseas transaction with related enterprises or a defined domestic transaction. For proprietorship enterprises obliged to file Form No.3 CEB, the income tax return is due on November 30th.