The advantages of a sole proprietorship are very significant. It is the reason for it continuing to be the most common kind of business structure for over 70% of small businesses in India. The major factor of the sole proprietorship appeal is its level of simplicity. You are your business when you operate as a sole proprietor.
That means you are the sole decision-maker, you take away all the profit (i.e.), and you hardly meet the government representatives except a few times on tax matters, etc. However, a private limited company needs filing of annual reports, maintenance of statutory registers, etc. whereas a proprietorship does not necessitate such compliance requirements.
What Are the 10 Advantages of Sole Proprietorship?
This is a very valid question for entrepreneurs, no wonder – because entrepreneurs just want to be sure that they are making the right structural decisions. Following ten are amongst the most important advantages of sole proprietorship that are main reasons for it being the option of first-choice for novice business owners:
- Complete ownership control — You don’t get stuck with getting approvals from partners, waiting for the board to say yes or dealing with any shareholder disagreement. The independence you enjoy means you can react quickly to what happened in the market or what your customers want.
- Taxing profits as personal income — Business profits are not subject to any company tax, they are treated as the owner’s earnings immediately. Unlike companies whose profits are taxed at 25-30% and then taxed again on the dividends distribution, there is only one level of taxation of proprietorship income.
- Few regulations and compliances at governmental level — Sole proprietorship is a business form that is not subjected to any government regulations. Companies and LLPs are regulated and governed by such governmental regulations but sole proprietors need not do ROC filings, statutory audits (at smaller level), board meeting minutes, or keep a separate business income tax return.
- Quick tax filing — Business income is merged with the taxpayer’s tax return and the taxpayer files a single form as ITR-3 or ITR-4. No need for a separate corporate tax filing means that many small proprietors find it easy to file their tax themselves and save a lot of the cost they have to pay to the accountants.
- Making decisions on your own, instant — You have to decide, like changing your product offering, lowering or increasing prices, or discontinuing a service, by yourself instantly. This kind of flexibility is a huge plus for businesses whose markets are constantly fast-paced, where speed is a key to success.
- Your finances and operations are your private affairs — When you are the sole proprietor, neither the partner nor the shareholder comes into the circle of people who know your financial position, strategic plan, and profit per unit sales. There is not a single annual report released and no disclosure made to stakeholders or competitors by you.
- You run the business with the lowest cost possible — There is no requirement for a registered office and no annual fee. Also, no compliance consultancy fees. The result of cost cutting directly goes to your net income, mainly from the first year of operation.
- Profits and personal satisfaction are one and the same through a proprietorship — The owner is entitled to 100 percent of the earnings as soon as they are made. Psychologically, this feels good as one is proud of the work done without having to share recognition or wealth with anyone else, leading to great personal satisfaction that, in turn, motivates one to put in more effort consistently.
- Shutting up shop is quite an easy job if you own a sole proprietorship — In India for instance, you can simply close the business just where you opened it if it did not go well for you. No legal procedures, no petitions to wind-up the business, and no cost for closing. You just stop operations and take care of your debts.
Advantages of Sole Proprietorship for Indian Entrepreneurs
Although the listed advantages apply generally to any sole proprietorship, an entrepreneurial environment like that of India makes sole proprietorship even more competitive as a business vehicle. India’s tax laws have provisions under which a proprietor earns tax benefits, for instance, business income being subjected to personal slab rates rather than the higher rates normally applicable to corporate bodies. And, a sole proprietor enjoys more tax benefits than the corporate sector because of certain provisions.
For example, a proprietor is eligible to take the advantage of claiming deductions from the total income in the form of a reduction on tax liability. These claims are usually made under Chapter III (S.30 to S.37) of the Income Tax Act. The business expenses for which deductions can be claimed include such items as rent, salaries, utilities, and depreciation charges on plant and machinery, etc.
The flexibility brought about by optional registration of the business adds to the advantages of a sole proprietorship. As far as registration of a trader for paying tax at a higher rate on consumption through the Goods and Services Tax Act is concerned, it is not compulsory unless the turnover exceeds the maximum allowable level of turnover as specified by the Government which is currently for commodities ₹40 lakh and for services ₹20 lakh per year at which point GST registration is mandatory. Small traders are not subject to such thresholds, so are able to conduct their operations without being subjected to the additional obligations of complying with such registration.
Even so, those who opt for the voluntary registration get the benefit of recovering taxes from the suppliers on their behalf i.e. input tax credits. Also, registration of business through a national portal (e.g. under Government’s MSME and now in a single platform as Udyam) gives a way for entrepreneurs to access schemes and benefits meant for Government agencies, priority sector loans and other support, which can only be availed once a business is registered.
For proprietorship, the current account for proprietorship business purposes can be opened with minimum KYC documents mainly requiring PAN, Aadhaar, and proof of business like certification of GST or business registration of MSME.
What Are the Disadvantages of a Sole Proprietorship?
In a fair-minded assessment of the sole proprietorship form, its disadvantages must be recognized. It is best to evaluate the merits and demerits of sole proprietorship before settling on a form of business operation. Here are the top seven drawbacks connected to a sole proprietorship:
- Unlimited personal liability — The primary risk is your personal assets like the house, the savings, and your investments that would be fully exposed to business loans and potential legal actions. If the business fails financially, the creditors will look to your personal assets to recoup their losses from you.
- Hurdles in securing loans or funding from third parties — The financial sector often has a higher perceived risk of proprietorship as their financial statements are more informal. That means equity investments cannot happen as there are no shares, and proprietorship is limited mostly to raising finance by the owner’s own contributions and retained earnings.
- Restricted managerial knowledge — The proprietor has to do the work in different fields like operations marketing finance, customer service, and laws compliance all at once. Unlike a partnership or a company where a number of people bring their expertise into the running of the business, proprietorship is solely according to the owner’s skills and his time availability.
- A lack of business continuity — The law regards the existence of the business being connected with the life of the owner. When the proprietor dies, gets disabled or gets very ill, the owner has to be there for the running of the business and so if that person cannot do the job the business will most probably terminate. Succession is very difficult as there is neither a legal entity nor the documents to prove the ownership.
- Greater tax burden at higher levels of income — With the income exceeding ₹24 lakhs p.a., the slab rate applies to the highest marginal tax rate of 30% plus cess. However, companies have more beneficial effective tax rates at higher levels of profits and because of this, incorporation becomes a more tax-efficient route for expanding companies.
- Problem in hiring high-potential or experienced people — You need not buy shares with equity or you will have no ESOPs, so how will the owner attract senior-level people? It is not rare for well-trained employees to be the first to leave when they know the place where they are working does not offer them opportunities for growth and career advancement besides the lack of proprietorships.
- Concentration of all personal, financial and other risks — All the risks of the business are borne by one person only. There is no mechanism of risk-sharing. There is no partner who could shoulder your business losses, nor you would have a board who could provide counsel, so the emotional and financial strain is mainly burdensome.
Tax Benefits of Sole Proprietorship in India
Maybe the tax benefits of sole proprietorship is the top factor that would influence someone to choose this kind of structure. If a private limited company makes profit, it is first taxed at a rate of 25-30% and then, if such profit is given to shareholders as dividends, the dividend income attracts another level of tax for the shareholders – this is known as “double taxation”.
Through a sole proprietorship, “pass-through taxation” completely removes the need for “double taxation” since income is taxed only in the hands of the owner(s). A proprietorship allows the owner to write off numerous business expenses against his/her income like – office renting, paying salaries, the cost of travelling advertising professionals fees paid, as well depreciation of equipment used.
Besides that, there are very few limits on the amount of expenses a proprietorship could deduct whereas a company director has to justify and document salary through the board resolution before they can be considered as legitimate business expenses.
Characteristics and Real-Life Cases of Sole Proprietorship
Sole proprietorship’s key characteristics explain the reasons behind this form of business which will be able to serve very well for a particular type of business. Characteristics like sole ownership, unlimited liability, having no separate legal entity, formation is quick, and the sole control over the operations of the business. These features combine to make a sole proprietorship type of business form which suits Mostly freelancers and consultants, small retailers, and local service providers.
We can find many examples of sole proprietorship in India. At least one, your nearby food shop, the blogger who makes content for payment, the self-employed accountant, the beauty therapist or a mechanic who runs the business all from his own are mostly sole proprietors. These businesses have certain points in common besides being sole proprietorship: they are operated by the owners themselves, they require low capital, their markets or customers are generally located in their area, their success mostly stems from knowing their customers personally, e.g. the customer knows the owner in a local Kirana store, and this is why there is great repeat business, etc. etc.).
For them, sole proprietorship business form offers just the right blend between being very convenient for the business and allowing a lot of freedom in business operations.
Your Final Checklist: Quick Look at the Major Advantages of Running a Sole-Proprietor Firm
In a few words, before selecting the nature of your business, you will do well to keep in mind the following points and see if they match the requirements expectations resources, goals etc of your business:
- Think about your need for capital – if the initial investment needed is around or less than a million rupees, a proprietorship will be fine but once it goes beyond that, a proprietor might get capital from external sources, investors in particular.
- Know about what kind of risks you can bear – it is not recommended to carry on your business in this way of business if you find exposure to personal liability risk quite difficult to accept. Then you go a step higher, a company like LLP and private limited etc. that have limited liability of their members.
- Your plan for expansion – The proprietorship is most suitable for the businesses that work and live like their owner. A self-contained, small-scale, self-sufficient, low growth business and maybe a consulting practice would work great with this business form whereas for a rapidly growing company it is better to incorporate as a company.
- Tax-wise, if the income is not too high, a pass-through taxed arrangement like proprietorship will probably give the best advantage to you. If then again, you are running very large businesses then corporate taxation will be more suitable for you.
- See whether there are certain industries or professions where you have to follow a particular business form in the context of obtaining a license or complying with regulation etc.
Yes, sole proprietorships are an excellent form for the persons who want to keep things simple, make their own decisions, and still have very low tax liability. It is the lowest point of entrance in the Indian business system, because it takes very simple and minor compliance with legal provisions and yet gives you full control of your business operations.
Foxtax assists entrepreneurs in various stages of proprietors’ compliance from a legal perspective while the latter will be dealing with the physical side. So you make sure at least one of your business decisions at an earlier stage is a good choice. If you are considering this structure, exploring sole proprietorship firm registration services can help you get started on the right foot.
FAQ Section
Is it possible to have a proprietor taking salary from the business?
The owner of a sole proprietorship cannot take a salary from the company through payroll, since the individual and the company are considered the same legal person. Any drawings or cash withdrawals of business funds are simply deductions from profits made by the owner. The business profit will still be reported and taxed at the owner’s personal tax slab, no matter how much was withdrawn.
What are the required papers that you need to submit to register a sole proprietorship in India?
These following documents are usually needed to register a sole proprietorship in India: the individual’s PAN Card, Aadhaar card, photographs of passport size, details of the bank account, and proof of business address. Additional documents may include bank account details, MSME/Udyam registration information, and Aadhar-linked cell numbers.
Does GST registration apply to all sole proprietorships?
Once your turnover hits the threshold of ₹40 lakh for goods or ₹20 lakh for services, GST registration becomes compulsory. Besides, if you make sales to businesses (B2B clients), and they want input tax credit for their purchases you make, then it would be helpful for them that you are registered. In such a scenario, you may opt to register voluntarily even if your turnover is still below the threshold.
What makes a sole proprietor distinct?
The key aspects are: the sole owner, unlimited individual liability, no separate legal being, easy setup, the owner has full autonomy in running the business, and all profits belong to the owner. These factors make the entity different from a partnership firm and incorporation.
What’s the distinction between a sole proprietorship and a private limited company?
Compared to a company, a sole proprietorship is a simpler business structure and offers fewer protections to the trader. There are also significant differences in the aspects like formation, liability and legal status of a sole proprietorship and a private limited company. A single proprietorship does not have a legal personality separate from the owner.
The owner has unlimited liability which means that any business debt or loss would come off the owner’s private assets. Besides, the compliance involved is minimal for sole proprietorships. But, a private company has a separate legal identity and shareholders’ liability is limited to the amount of shares they hold.
Still, the compliance involved in this type is far greater than in a single proprietorship and corporate tax rates do apply. In this case companies may provide a better environment for scaling-up and attracting external investment.
Do you get additional tax-related benefits by opting to register a sole proprietorship under a Udyam or MSME?
One of the main reasons for an MSME/Udyam certification is the opening of a number of government schemes that you become eligible for, availability of easy and cheap bank loans, you may get subsidies and have better chances of obtaining credit. But, there is not a legal or tax requirement to do such a registration. That said, it still will help you gain credibility for your business that you can exploit in some cases to gain tax benefits.