WHAT IS IT
A proprietorship is a business entity that is owned and managed by a single person, called a proprietor. This is the simplest form of business and is easy to set up. In India, most independent professionals conduct business as proprietorships - examples are doctors, chartered accountants, lawyers and local shops and outlets.
THE FORMATION PROCESS
Unlike other forms of business, there is no specific procedure prescribed for setting up of a proprietorship. A proprietorship does not have an income tax identity separate from its owner. The existence of a proprietorship is shown by its registrations in its name. Registrations under the Shops and Establishment Act, the Service Tax Act, under the MSME provisions, etcetera are sufficient as proof of existence of the proprietorship.
Step 1: Identify the various registrations that are required to be obtained by the proprietorship
Step 2: Apply for the various applicable registrations
+ Very easy to set up
+ Minimal compliance requirements
- Unlimited liability of the proprietor
- No scope for raising equity from other than proprietor
- Creditworthiness linked to the owner's credit standing
FREQUENTLY ASKED QUESTIONS
Q. Are there any special qualifications for starting a proprietorship?
A. No. Any Indian resident above the age of 18 years can form a proprietorship.
Q. What is the minimum amout of capital required to start a proprietorship?
A. One can start proprietorship with any amount of capital. There is no minimum requirement as such.
Q. What are the documents required for setting up a proprietorship?
As stated above, the proprietorship gets legal recognition through the various registrations with the government. Documents required for most registrations include owner's PAN, proof of identity and proof of address.
Q. Can a proprietorship hold a bank account in its own name?
Yes. The Reserve Bank of India (RBI) has specified the documents that are required to be submitted by the proprietor for opening a bank account for his concern. The relevant guidelines of the RBI are available here. To open a bank account, any two of the following documents in the name of the proprietory concern are required:
(a) Proof of the name, address and activity of the concern, like registration certificate (in the case of a registered concern), certificate / licence issued by the Municipal authorities under Shop & Establishment Act, sales and income tax returns, CST / VAT certificate, certificate / registration document issued by Sales Tax / Service Tax / Professional Tax authorities, Licence issued by the Registering authority like Certificate of Practice issued by Institute of Chartered Accountants of India, Institute of Cost Accountants of India, Institute of Company Secretaries of India, Indian Medical Council, Food and Drug Control Authorities, etc.
(b) Any registration / licensing document issued in the name of the proprietary concern by the Central Government or State Government Authority / Department.
(c) The complete Income Tax return (not just the acknowledgement) in the name of the sole proprietor where the firm's income is reflected, duly authenticated / acknowledged by the Income Tax Authorities.
(d) Utility bills such as electricity, water, and landline telephone bills in the name of the proprietary concern.
Q. Can I transfer the proprietorship to any other person in the future?
No. The proprietorship is linked to the identity of the proprietor i.e. the owner. It's ownership cannot be transferred. However, the proproetorship may sell its assets to another entity.
Q. Can I add a partner in the proprietorship in the future?
No. By definition, a proprietorship is owned by a single person. So you are not permitted to introduce a partner in the business.
Q. If I want to expand my business in the future, can I do it under my proprietorship?
Yes, it may be possible for your business to grow. However, proprietorships suffer from some severe limitations. For example, the proprietor is liable for debts of the business and his personal assets may be attached for meeting his business obligations. These factors would limit the growth that the entrepreneur may achieve through a more organised format of business. While you may convert the proprietorship into a partnership or a private limited company, the procedure is tedious.
Proprietorship are suitable if the business proposed is small in scope and scale. Examples are independent website designers, graphic artists, interior designers, real estate intermediaries. For businesses which plan to expand, this form presents many serious limitations.