Picking up an appropriate legal structure for a business organisation is one of the initial steps one has to take when any type of company has to be registered. In some sense, it can be said that a proprietorship firm is not a legal entity as it refers to the individual who owns the business firm and is personally responsible for each and every aspect of it. This popular business firm or company can work under the name of the owner pr even a fictional name as long as the abide by the law for all the actions that they take. It is very easy to set up and has a low amount of capital investment. This is the reason proprietorship firms are one of the most important types of comps existing in India today.
CHARACTERISTICS OF A PROPRIETORSHIP FIRM
1. Setup :
The setting up of a proprietorship firm is very easy as compared to set-up procedures of other types of companies and firms. The individual who wants to set up his/her own proprietorship can do so without filing any tiresome applications or submitting any documents. In some states, the process is even more simpler as other types of companies like a private limited company, public limited company or a limited liability partnership have a long procedure. The processing of the applications, approval of the name of the company, the cross-checking of all the information provided through the official documents including PAN, Passport, Aadhaar Card, Electricity bill etc. can take a lot of time sometimes going up to months. It can be very tiresome and even frustrating for the applicant for a company. The business of a proprietorship firm can run under the legal name of the individual without any problems and much work.
2. Liability :
The ownership of a proprietorship firm lies in the hands of a sole owner. This means that he/she has unlimited liability regarding the legal processes and working of the proprietorship firm. Any funding loss, capital loss, debt cases etc. all are the personal problems of the owner. He/she is noy answerable to anyone whatsoever as his/her liability is unlimited in a proprietorship firm.
3. Managers/Partners :
A proprietorship firm can only have one owner and no partners whatsoever in all legality. There are no additional directors, managers or partners in a proprietorship firm as according to the law, the owner of this kind of firm is the sole director and manager himself/herself. The owner need not have to answer to any higher power which is one of the most distinguished characteristics of a proprietorship firm.
PROCEDURE AND DOCUMENTS REQUIRED FOR THE SETTING UP OF A PROPRIETORSHIP FIRM
1. Aadhar Card :
Aadhar card is the most important document for proving one’s identity in India. To set up a proprietorship firm, one needs to submit their Aadhar card along with other documents. Either you can submit a hard copy of your Aadhar card or you can get a print out of your E-Aadhar card and submit it. Both these forms are legal and a necessary documentation for filing for a proprietorship firm.
2. PAN card :
After complete verification of a PAN card, it is to be submitted to the officials when filing for the registration of a proprietorship firm. PAN card is so important because it is a necessary document for filing of Income Tax Return. Every firm and company including the proprietorship firms have to pay their income tax annually and for this, PAN card is a must. So, the owner of the proprietorship firm has to submit his PAN card along with his Aadhar card when registering for the same.
3. Registered office address :
The first step towards starting a proprietorship firm is to have a registered office space to work in. If your work space is a rented one, you need to get a No Objection Agreement from your landlord and submit it along with the correct address details to the concerned office. If you own the place in which you are going to start you business, you need to produce some kind of address proof before the law. Electricity bill, phone bill or ration card can work as an address proof but it should not be more than 2 months old. After successfully submission of these address proofs of the registered office, verification is done by the officials before giving you a nod to exercise your business activities.
4. Shop and establishment act licence :
This is a document which is not mandatory in many places in India. The shop and establishment act licence is based on the number of employees the firm has and it is provided to the proprietorship firm by the municipal party of the state. This license can benefit your proprietorship in getting loans easily.
5. Small and Medium enterprise :
The certificate of the small and medium enterprises provided under the MSME act of the government can also be attained. It is not a compulsory document to make a proprietorship firm up and working but it might aid a firm owner when he/she has to apply for any form of loan for their proprietorship firm.
ADVANTAGES OF A PROPRIETORSHIP FIRM
1. Affordable set-up process :
A proprietorship firm is easy to set up because all the other types of companies and firms have long procedures and these procedures might take a lot of time from weeks to months. The other forms of business structures require a decent amount of money to start off the set-up process but this is not the case for a proprietorship firm. A firm with a sole proprietor is very cheap and easy on pockets to set up and it can be up and running within a short span of time. Less paperwork, less amount of time involved and even low initial capital investment.
2. Tax benefits :
The proprietorship firm does not need to file its own income tax returns claiming to be a separate company. Instead, the owner can show the capital benefits and gains to be his personal as he/she is the sole owner of the firm. This way the income tax that is levied upon is less than the tax which gets levied upon the other forms of business structures and firms. The sole proprietorship is always taxed for income tax on the basis of individual tax rates and not according to the income tax rates of a business corporation and firm.
3. Control :
The owners of a proprietorship firm are in full control of their company and its management and working. There is no partner of such a firm and the owner is responsible for every action of the company and its growth and fall. He/she does not have to share their power and management powers with anyone else. This ensures that the owner of a proprietorship firm makes all the decisions without any problems or involvement of any third party. They can shape up their business in whichever way they want and they are not answerable to anyone.
DISADVANTAGES OF A PROPRIETORSHIP FIRM
1. Liabiltiy :
The individual owner’s financial assets are directly affected if his/her business suffers from any debt or financial problems. It is a risk to apply for a proprietorship because in order to pay for any debts that are up against your firm, your personal assets like savings, house, property and even cars etc. can be used to pay up your firm’s debts. In case a proprietorship firm is in danger and is about to lose its assets, the owner of this firm can also lose his personal assets.
2. Raising Capital :
The initial capital raising and the money that has to be invested in the initial stages has to be done by the owner of the proprietorship firm. Loans are also very difficult to get sanctioned for a proprietorship firm as they will only be sanctioned in the name of the owner and not the firm which is a difficult process altogether. It requires enough credit on the part of the owner of the proprietorship firm to get a loan for the initial capital investment in the firm.
3. Business continuity :
If the owner of the proprietorship dies or depats, the continuity of the business ends. The business ceases to exist when the owner who is also the sole proprietorship of the firm dies, the money and all the assets related to the business also cease to exist on their own. The money which is subjected to the inheritance taxes can also have a great impact on the people working under the proprietorship firm.