Proprietorship is the most preferred Business structure in India. More than 50% of the total Indian Businesses operate as a Sole Proprietorship firm in India. Small & Micro Businesses, Cottage industries, Family shops, Small Traders, and other such Businesses prefer working as a Sole Proprietorship.
So it is understandable if you, too, are inclined to launch your Business as a Sole Proprietorship firm. But before you do so, it is essential to understand all the Pros and Cons of registering a Business as a Sole Proprietorship firm.
In this blog, I have explained all the major Pros and Cons that you should know before registering your Business as a Proprietorship firm.
Advantages of Sole Proprietorship firm
- Minimal Cost of Establishment
Unlike other Business structures where the establishment cost can go up to 15,000 to 50,000, the cost of Establishment is negligible in the case of Sole Proprietorship. You will not have to go through any complex registration process, too, making the Establishment quick and straightforward.
Depending on your Businessbusiness’s nature, you might have to get some registrations done like GST registration or FSSAI registration. But these registrations too will cost you very little, and you can avail them easily.
- Easy to Start
Like an LLP or any Company registration, a Proprietorship firm does not need any pre-registration. So all you need is your PAN, and you can start your Business quickly. There is no need for any other registration, yet it is advisable to get a GST registration or Udyam registration (MSME Registration). This registration can help your Business avail yourself of many benefits during the Business.
- Complete Authority
In a Sole Proprietorship, the Proprietor and the firm are treated as one. All the power to make decisions lie with the Proprietor. This makes the decision-making process extremely efficient. The Proprietor has an ultimate say in the decision, giving him/her complete Authority over the Business.
So if you want to start a Business where you need ultimate control over your Business, the Sole Proprietorship is the perfect choice for you.
- Simple Taxations and Compliances
As any act does not govern the Sole Proprietorship firm, the compliances are minimal. You don’t have to file any separate Business returns every month or every year.
As the Business and the Proprietorship are treated equally, the Income Tax Return of the Proprietor suffice.
- Benefits of Tex deductions
As mentioned in the above point, Sole Proprietorship & its Proprietor are treated equally. So the Income Tax Return of the Proprietor is treated as the Return of the firm.
This has many benefits as the individual Taxpayer can claim numerous Tax benefits under section 80C, and the same can be applied to the Business.
Let’s take at some beneficial deductions under section 80c.
- Any investment in PF, LIC, bonds, or ELSS made is made by the Proprietor.
- Investments in the medical insurance of the Proprietor himself/herself and his/her family, including parents.
- Repayment of Home Loan, Payment of rent, or any Royalty income.
The Sole Proprietorship firm can claim all these deductions as per the rule.
- Better Privacy
Unlike LLPs and Private Limited Companies that are mandated to share their complete Business details on the Public platform, a Proprietorship firm enjoys better Privacy. There is no such Government record form where the information about the firm can be obtained.
- Easy to wind-up
The Winding-up of a Sole Proprietorship is also easy. All you have to do is clear all outstanding liabilities & surrender licenses like GST registration, MSME registration, or FSSAI registration if you have any.
Disadvantages of a Proprietorship firm
- Unlimited Liability
As the Proprietor & Sole Proprietorship are treated one, the liability of the Proprietor is unlimited. This is a significant disadvantage as if the firm goes bankrupt or defaults on repayments, the Proprietor’s assets can be used to clear the dews.
So this type of firm is suitable where there is negligible risk of creating liabilities. Otherwise, you might end up losing your personal assets too.
- Higher Tax rates
The tax rate for Sole Proprietorship with an income of more than 10 lakh is 30% which is considerably higher. This rate is 22% for registered companies, and for new manufacturing units, it’s only 15%.
So if you are planning to set up the Business that can generate higher income, it is advisable to stay away from the Proprietorship firm.
- Difficulties in fundraising
Financial institutions are often reluctant to lend funds to Sole Proprietorship firms. And even if they lend funds, the interest rates are pretty high. Also, there is no option to raise funding via equity or from the Partner.
So if you think your Business will need more funding in the future, it is advisable that you go for a Private Limited Registration instead of a Sole Proprietorship firm.
- No perpetual existence
As the Proprietor and the firm are one, in case of the Proprietor’s death, the Business will cease to exist automatically. Although this issue can be solved through the will, it is advisable to avoid this structure if the Business’s perpetual existence is essential.
- Limited Growth
Sole Proprietorship is suitable for micro & small Businesses with limited Business operations. If you want a Business that can grow immensely, it is better not to choose this Business structure.
After taking a look at all the Pros & Cons of a Sole Proprietorship firm, we hope you have a clear picture. It is clearly understood that this business structure is suitable for Small & Micro Business with limited Capital requirements.
Still, consult your Business advisor before your make any decision.
For any further details, feel free to reach out.
Global Consulting Group is a leading Taxation, Accounting, and Compliance firm that helps individuals, MSMEs, and other businesses manage their accounting, taxation regulatory compliance affordably.