An entrepreneur will always want to establish his business for more profit. But when it comes to legal documents and records, the work involved can be very overwhelming. One is easily confused between the type of company that wants to incorporate and then how to proceed with its registration. It takes a lot of hard work. In the midst of all this, the concept of sole ownership arises. It is the simplest form of business. It is not considered a separate legal entity. This can be considered as one of its advantages or disadvantages depending on the individual perception. All business income and losses are taxed on the owner’s income tax return, sounds scary? Well again, perceptions! What exactly is sole proprietorship is described in detail below.
Its main characteristic is that it does not have a separate legal identity. It is completely in the owner’s name, which is all debts under the owner. This can put the owner’s personal assets at risk. Property registration is very easy and straightforward. All you need to get is some local licenses and permits (such as PAN card, bank account, TAN, store establishment license, etc.) and then you need to register your name as sole proprietor. It does not follow complex voting and meeting procedures as mandatory as in other forms of business. The taxation procedure due to this characteristic is also simple since everything that the company earns is considered as Sole Proprietary income. There is no unemployment tax involved.
There is also the option of mixing different businesses that is entirely up to the sole proprietor. There is no requirement for a separate name for the business, as everything is in the name of a single owner. However, there are no restrictions for the different names and no registrations or filings as such are required. However, it is a very common practice to convert a sole proprietorship into an LLP or other corporations to overcome the risk of losing everything. One downside of owning a sole proprietorship is receiving equity funds. Obtaining loans and obtaining funds is a very difficult job, as the company does not have a separate identity according to the law.
Therefore we can say that the advantages of sole proprietorship are:
· Total control -Since the business belongs to the owner, he has full control over his business without much legal intervention.
· Easy and inexpensive setup – Not many legal formalities are needed, except few permits and licenses.
· Easy tax filings – Since the owner and the business are the same, the tax returns are made in the owner’s name and the capital earned by the business is shown as the owner’s income.
Furthermore, the disadvantages are:
· Personal responsibility – Although having full control over the business seems like a great idea, it doesn’t sound so good when the company is suffering losses.
· Capital fundraising – It is easy to establish, no doubt. But it is really difficult to raise funds or obtain loans.
Due to all these characteristics, sole proprietorship is considered an incorporated business form as it is not registered. Therefore, before deciding to establish a sole proprietorship, you must fully know its characteristics, requirements, pros and cons.