A sole proprietorship is a business that is owned, managed and controlled by one person. It is one of the most common forms of business in India, used by small businesses operating in the unorganized sectors. Proprietorships are very easy to start and have very minimal regulatory compliance requirement for getting started. However, after the startup phase, proprietorship’s do not offer the promoter a host of other benefits such as limited liability, separate legal entity, independent existence, transferability, etc., which are desirable features for any business. Therefore, proprietorship’s are suited for unorganized, small businesses that will have a limited existence.
There is no mechanism provided by the Government of India for the registration or incorporation of a Proprietorship. Therefore, the existence of a proprietorship is established only by tax registrations and other business registrations that a Proprietorship is required to have as per the rules and regulations. At Tax Freedom, we can help you establish an identity for your Proprietorship by obtaining the relevant registrations.
What is a sole proprietorship?
A sole proprietorship is a company with only one owner and is not registered with the state, unlike a limited liability company (LLC) or corporation. Starting a sole proprietorship requires no paperwork – all you do to create a sole proprietorship is simply go into business. Although you do not have to file paperwork to set up a sole proprietorship, you do still have to acquire business licenses and permits, just like with any other form of business. Most people use the term “DBA” which stands for “doing business as” to indicate a sole proprietorship.
How does a sole proprietorship differ from other company forms?
A sole proprietorship differs from other forms of business in several ways. The chief ways a sole proprietorship is different include:
- Sole proprietorships are the least complex and cheapest form of doing business .
- Sole proprietorships require no formal paperwork to set up and don’t need to be registered with the state .
- Sole proprietorships do not shield individuals from liability for their business debts (see below)
- Sole proprietorships are treated as simple income for tax purposes, and do not need to have separate taxes prepared (see below) .
How are sole proprietorships treated for tax purposes?
Unlike corporations, sole proprietorships are not treated separately by the IRS. This means that any profit derived from your sole proprietorship is treated as your personal income and is accounted for on your individual tax return. Any such income is taxed to you in the year it was received.
Am I personally liable for my business under a sole proprietorship?
Yes, unlike other forms of incorporation, you are personally liable for any of your sole proprietorship’s debts or legal judgments against your business. This means that in order to satisfy debts owed by your business, debt collectors can come after your personal assets — homes, cars, etc. For this reason alone, you should be extremely cautious about setting up a sole proprietorship.