Features of sole proprietorship
1. Formation and Closure
A sole proprietorship is started by the owner himself.
No official legal process is needed to begin this type of business.
However, in some cases, the owner may need a specific licence or certificate to run the business.
The owner is free to close the business whenever he wants.
Example: A goldsmith or medical shop owner may need a proper licence to operate.
2. Liability
In a sole proprietorship, the owner has unlimited liability.
This means the owner is personally responsible for all business debts.
If the business takes a loan and cannot repay it, the owner must pay from his personal assets.
Example: If a sweet shop owner takes a loan, he alone is responsible for repaying it to the bank.
3. Risk and Profit
The sole proprietor alone bears all the business risks.
At the same time, he also enjoys all the profits or faces the losses from the business.
4. Control
The sole proprietor has full control over the business.
He alone takes all decisions and runs the business as he wishes, without any outside interference.
5. No Separate Legal Identity
In accounting, the business and owner are treated separately.
But under the law, there is no difference between the owner and the business.
Without the owner, the business does not exist, as he is the only one running it.
6. No Continuity
If the owner dies, becomes seriously ill, goes to jail, or is declared bankrupt, the business may stop or close down.
However, a legal heir or successor can continue the business on the owner's behalf.
How to start a sole proprietorship
Here are the basic steps that help in creating a sole proprietorship:
How to create a sole proprietorship
Starting a Sole Proprietorship
A sole proprietorship is very simple to set up. If you are the only owner and start doing business, your business is automatically treated as a sole proprietorship. You don’t need to register it legally or submit any official documents to start operating.
Business Licences and Permits
Depending on the type of business and where you are running it, you might need to apply for a business licence or permit. In some places, you can’t begin operating until you get the proper approvals.
To know what’s required in your area, contact your local municipal or panchayat office. They will guide you and provide the necessary forms.
Using a Business Name (Different from Owner’s Name)
If you plan to run your business under a name that is not your own, you may need to register that business name. This is often called a “DBA” – Doing Business As. It helps inform the local government and public that the business is operating under a different name and who the real owner is.
Choosing whether to use your own name or a different name is up to you. If you are well-known in your area or industry, using your own name can help build trust.
But there is also a risk. If the business faces legal or financial problems, your personal name may get a bad reputation. This can affect your future businesses.
Getting an EIN (Employer Identification Number)
You will need to apply for an EIN (Employer Identification Number) if you:
- Plan to hire employees
- Need to file excise tax returns (for items like alcohol or tobacco)
- Will submit pension-related tax documents
If you are running the business alone without employees, you can usually use your PAN or Aadhaar number as your tax ID.
You can apply for an EIN online or by submitting Form SS-4 to the tax authorities.
Legal requirements for sole proprietorship businesses
- No separate registration is required for a sole proprietorship.
- However, obtaining the necessary licenses and permits as per local regulations is essential.
The proprietor's PAN card is often used for taxation purposes.
Types of sole proprietorship businesses
Sole proprietorship businesses can encompass various industries and sectors:
- Service-based sole proprietorship businesses
- Retail-based sole proprietorship businesses
- Technology sole proprietorship businesses
- Manufacturing-based sole proprietorship businesses
- Consulting-based sole proprietorship businesses
1. Service-based sole proprietorship businesses
Service-based sole proprietorship businesses cater to providing specialized services to clients. They focus on delivering expertise in specific areas, often tailored to individual or organisational needs. Examples of service-based sole proprietorship businesses include:
- Freelance writing: Offering writing services for various purposes such as content creation, copywriting, or technical writing.
- Consulting: Providing professional advice and guidance in areas like management, marketing, finance, or human resources.
- Tutoring: Offering personalised academic support or skill development in subjects ranging from academics to music or languages.
- Event planning: Organising and coordinating events such as weddings, conferences, parties, or corporate functions.
2. Retail-based sole proprietorship businesses
Retail-based sole proprietorship businesses engage in selling goods directly to consumers. They typically operate through physical stores, boutiques, or online platforms. Examples of retail-based sole proprietorship businesses include:
- Small shops: Local stores offering a variety of products like groceries, clothing, or household items.
- Boutiques: Specialised stores focusing on specific items such as fashion apparel, accessories, or handmade goods.
- Online stores: E-commerce platforms selling products across various categories, accessible to customers through the internet.
3. Technology sole proprietorship businesses
Technology sole proprietorship businesses center around providing services or products related to technology. They often involve expertise in software development, web design, or IT consulting. Examples of technology sole proprietorship businesses include:
- Software development: Creating custom software solutions for businesses or individuals, ranging from applications to websites.
- Web design: Designing and developing websites tailored to meet clients' specific needs or preferences.
- IT consulting: Providing advice and assistance on technology-related issues such as network setup, cybersecurity, or software implementation.
4. Manufacturing-based sole proprietorship businesses
Manufacturing-based sole proprietorship businesses focus on producing goods for sale to consumers or other businesses. They may involve crafting artisanal products, small-scale manufacturing, or custom production. Examples of manufacturing-based sole proprietorship businesses include:
- Artisanal craft makers: Creating handmade or customised items such as jewellery, pottery, or artwork.
- Small-scale manufacturers: Producing goods on a limited scale, often with a focus on niche markets or specialised products.
- Custom production shops: Offering tailored manufacturing services for specific client needs, such as furniture making or garment production.
5. Consulting-based sole proprietorship businesses
Consulting-based sole proprietorship businesses specialise in providing expert advice and guidance to clients in various fields. They offer professional services ranging from legal consulting to financial advisory or business coaching. Examples of consulting-based sole proprietorship businesses include:
- Legal consulting: Offering legal advice and assistance to individuals or businesses on matters such as contracts, regulations, or dispute resolution.
- Financial advisory: Providing expertise in financial planning, investment management, or wealth preservation strategies.
- Business coaching: Guiding entrepreneurs or business owners in areas such as strategy development, leadership skills, or organisational growth.
Advantages and disadvantages of a sole proprietorship
Advantages
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Disadvantages
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Easy and low-cost to start. Very little paperwork is needed, and startup expenses are minimal.
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Unlimited personal liability. The owner and business are legally the same, so the owner is personally responsible for all debts and obligations.
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Full control. As the sole owner, you make all decisions without needing approval from anyone else.
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Hard to raise funds. It is difficult to attract investors or get bank loans because you cannot sell shares in the business.
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Simple taxation. Profits and losses are reported on your personal income tax return, avoiding the double taxation faced by companies.
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Higher self-employment tax. You must pay both the employer and employee portions of Social Security and Medicare taxes on your earnings.
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Direct access to profits. You keep all the money your business earns.
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No continuity. The business is tied to you, and it may end if you retire, become ill, or pass away.
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Less regulation. Sole proprietorships face fewer government rules and reporting requirements than other business types.
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Limited expertise. You are responsible for all aspects of the business, from operations to marketing, and may not have skills in all areas.
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Privacy. You are not required to publicly share financial or business information, unlike corporations.
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Lower credibility. Some customers, suppliers, or lenders may see the business as less professional or established.
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Examples of a sole proprietorship
Examples of a sole proprietorship are businesses owned and run by a single person, such as freelance writers, small bakery owners, personal trainers, and independent photographers. This type of business is common among small ventures like boutiques, online stores, and consulting services.
Service-based
Freelance writer: Provides writing services for clients.
- Personal trainer: Offers one-on-one fitness coaching.
- Consultant: Gives professional advice in business or other areas.
- Tutor: Teaches academic subjects or practical skills.
- Graphic designer: Creates visuals for branding or media.
- Photographer: Takes photos for events or commercial use.
- Web designer: Designs and maintains websites.
Product-based
- Small bakery owner: Sells baked goods locally or online.
- Online seller: Offers handmade or resale products through online platforms.
- Boutique owner: Sells specialized clothing or accessories.
Other examples
Event planner, catering service, independent accountant.
Tax and filing requirements for sole proprietorship
A sole proprietorship must follow specific compliance requirements to operate lawfully in India. These include:
- Income tax return filing: The proprietor must file a personal income tax return using either Form ITR-3 or ITR-4, depending on the nature and scale of business.
- Reporting business income: Since only ITR-3 and ITR-4 allow for business income declaration, all proprietors must use one of these forms to meet income tax regulations.
- GST return filing: If the proprietorship is registered under GST, the business must file monthly or quarterly GST returns based on the applicable GST scheme.
- TDS return filing: If the business employs staff or makes payments exceeding specified thresholds, it must deduct tax at source (TDS) and file quarterly TDS returns accordingly.
Difference between a sole proprietorship and a one-person company
While both a sole proprietorship and a one person company (OPC) are business entities managed by a single individual, they differ primarily in terms of their legal structures and the liability borne by the owner.
Aspect
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Sole Proprietorship
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One Person Company (OPC)
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Legal Structure
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Unregistered entity managed by an individual
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Formally registered company
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Liability
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Unlimited liability; personal assets at risk
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Limited liability; personal assets protected
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Financial Risk
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Business debts can affect personal finances
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Financial risks are confined to the business
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Continuity
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Ceases to exist on the death of the owner
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Continues to exist even after the death of the owner
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Legal Obligations
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Owner is personally responsible for all legal obligations
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The company is a separate legal entity and responsible for its own obligations
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Sole Proprietorship vs. LLC vs. Partnership
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Sole Proprietorship
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LLC
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Partnership
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Establishment
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Easy to establish, no paperwork unless required by the state
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Must file articles of incorporation with the state
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This might require contracts for each partner
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Business Name
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Can operate under owner's or fictitious name or formally register under Doing Business As
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Established and secured
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Can operate under owner's or fictitious name or formally register under Doing Business As
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Liability
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No legal protection, owner is fully liable
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Protection for owners
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No legal protection, owner fully liable
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Taxation
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Filed under owner's personal taxes if there is no EIN
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Filed under owner's personal taxes for one owner
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Filed under partnership
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Treated as partnership for two or more owners
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Partners declare income and losses from partnership on personal returns
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Is a sole proprietorship right for you?
A sole proprietorship suits individuals aiming to start a small business with low investment and limited risk. For instance, a freelance graphic designer operating from home may prefer this model to steer clear of complex company formalities. Likewise, a neighbourhood bakery owner might choose a sole proprietorship to retain full control of daily operations while benefiting from the ease of setup and management.
Can sole proprietors get a business loan?
Yes, a sole proprietor can apply for a business loan to finance business operations, expansion, or other needs. Explore Business Loan Interest Rates with Bajaj Finance.
Conclusion
A sole proprietorship is a straightforward and flexible business structure, perfect for small-scale entrepreneurs. It gives you full control over operations and profits, but the downside is unlimited personal liability, which means your personal assets are at risk. While it is easy to set up and run, there are challenges, such as limited access to capital and slower business growth. If you prefer simplicity, it is a great option to start your business.
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