What is proprietorship and how it is different from private limited company

proprietorship Firm registration

What is proprietorship and how it is different from Private Limited Company

Do you often go in the evenings to buy registers, pens, chart papers, etc., from a small neighborhood stationery store? Well, in all probability in the course of your transactions, you have interacted with unregistered small sole proprietor.

Sole proprietorship is a popular form of business organization and is the most suitable form for small businesses, especially in their initial years of operation. Sole proprietorship refers to a form of business organization which is owned, managed and controlled by an individual who is the recipient of all profits and bearer of all risks. This is evident from the term itself.

The word “sole” implies “only”, and “proprietor” refers to “owner”. Hence, a sole proprietor is the one who is the only owner of a business. This form of business is particularly common in areas of personalized services such as beauty parlors’, hair salons and small scale activities like running a retail shop in a locality.

Sole proprietorship is the business, where the hold is only into single hands there is no second person in the legal records. There is no partner and no other member. It is also one of the simplest ways of doing business; the owner is not answerable to any one other in the company. Since the owner is single income tax would also be paid once.

Also Read: What is partnership firm and process to register it in India

Merits of Sole Proprietorship:

  • Quick decision making
  • Confidentiality of information
  • Direct incentive
  • Sense of accomplishment
  • Ease of formation and closure

As said that every coin has 2 faces, sole proprietorship faces some limitations too, some of which are:

  • Limited resources
  • Limited life of a business concern
  • Unlimited liability
  • Limited managerial ability

Let’s just have a quick comparison of private limited company and proprietorship firm:

Basis of Comparison

Sole Proprietorship Private Limited Company
Formation and registration Registration not mandatory and Minimum Legal Formalities, easiest formation Registration mandatory, lengthy and expensive formation process
Name of the business No need to take approval for name Approval for name mandatorily required to be taken by CRC
Members Only owner Min- 2 and Max- 200
Capital Contribution Limited Finance Large financial resources
Taxation According to the owners income Private Ltd company is taxed as per 25-30% tax rate (small and large company basis) of profits excluding surcharges and cess are also applicable
Liability Unlimited liability Limited liability
Control and management Owner takes all the decision, so quick decision making Separation between ownership and management
Continuity Unstable, business and owner regarded as one Stable because of separate legal status

In case you wish to analyze that which form amongst company or proprietorship is beneficial please go through table below:-

Availability of capital Company Sole Proprietorship
Cost of formation Sole Proprietorship Company
Ease of formation Sole Proprietorship Company
Transfer of ownership Company Sole Proprietorship
Managerial skills Company Sole Proprietorship
Regulations Sole Proprietorship Company
Flexibility Sole Proprietorship Company
Continuity Company Sole Proprietorship
Liability Company Sole Proprietorship

For proprietorship firm registration there are some set of documents which is required:

  • Pan card , Aadhar Card (ID / Address proof of proprietor)
  • Business address proof (such as electricity bill in your name, or electricity bill + registered rental agreement, etc.)
  • Bank account (a Sole Proprietorship Firm require minimum 2 Legal Entity Proof for open a Current Bank Account)
  • Office Registered proof

It is beneficial if you have following registrations (recommended)

  • Registering as SME
  • Shop and Establishment Act License
  • GST Registration

For registering the proprietorship firms there are some steps that need to be followed:

  • Open a current bank account on the name of business which is allocated only when you have two legal entities which would be,
    • MSME registration certificate and Chartered Accountant business certification
      • Required only when deal within the state only
      • Sales and turnover less than 20 lakh rupees that too within the state or Rs 10 lakh in special category states.
    • GST registration certificate as proprietorship entity, these would be required if below one condition is there
      • If the dealing is inter-state of the business.
      • If the business is on internet.
      • If business is of trader, retailer, aggregator

If all the conditions are satisfied and covered then proprietorship firm would be registered easily.