A sole proprietorship means a single-member business that is never included with a state submission. Sole proprietorship firm registration can be done with the required documents and other specific registration such as GST and shop and establishment license.
There is no particular law to govern the sole proprietorship firm registration in India. One can also register their business as a one-person company. One-person company registration can be done with required documents under the companies act, 2013 via visiting the MCA website.
A sole proprietorship’s prime advantage is that it is relatively easy to establish. It also reduces the cost of start-up. Irrespective of how you structure your business, it is crucial to make a distinction between your business and personal finances. Combining both the funds can cause immense tax, accounting, and liability headaches.
Advantages of a sole proprietorship business.
A sole proprietorship is one of the easiest forms of business to establish. It needs no formal setup, no allocated business taxes, no annual administration, and no formal record keeping. In this business structure, you can start selling goods and services, where all the debts and bills are your responsibilities. All the income generated through the business is considered pass-through and submitted on your personal tax returns.
Now, let’s look into some of the advantages of the sole proprietorship.
– Easy setup with low-cost.
As sole proprietorship is not a formal business structure, there is no need for filling or paperwork for you to be done before you get going. You can initiate business operations and tasks. You are not required to pay any incorporation or submission fees. Depending upon your industry’s nature, you are required to acquire a special license, permission, business insurance policy, or surety bond. Still, you do not have to complete fillings with the state.
Such a type of easy setup and low-cost management and administration makes the sole proprietorship suitable for seasonal businesses and cottage industries. If you want to start a new venture that does not have any liability, it is pragmatic to use a sole proprietorship until your business is firmly established and growing.
The reason behind such an easy setup is that owners are not initiating the steps to incorporate, especially steps that would offer liability protection formally. They do not have to initiate these steps but consequently give in the liability protection that comes with the formal business structure. If you want to protect your liability, it is best to incorporate it as an LLC with the help of Rocket Lawyer’s services.
– No double taxation and corporate business taxes.
In the sole proprietorship, you will not have to pay 21% in corporate taxes on the business’s profit. Instead, you will have to submit your personal tax returns and claim any new income from the business operations as pass-through taxes, which means all the income would be taxed at your ordinary-income tax rate. You will also be exempted from the state franchise and excises taxes.
Such concessions would make taxes cheaper and more straightforward for sole proprietors than C-corps. In C-corps, revenue is taxed at the company level and then again when profit is distributed in dividends. Currently, the dividend tax rate is betwixt 15-20%, which means you can pay as much as 41% on your business’s taxation profit, which does not involve the income tax you pay on your salary.
Nonetheless, S-corps and LLCs are also considered pass-through entities like sole proprietorships and avoid double taxation and the corporate tax rate on profit. Regardless, LLCs are generally charged excises and franchise taxes, relying on where and how they function. That means taxes still can be higher than a sole proprietorship, depending on the level of profit.
The general taxes you will have to pay as a sole proprietor includes;
– Ordinary income tax – you do not pay yourself a salary as a sole proprietor. Instead, all profits are submitted on your personal tax return and will be taxed at your ordinary-income tax rate.
– Self-employment tax – if you are running your business even with one person company registration, then you are obliged to pay self-employment tax on any income generated from that business; that is the employer-portion of FICA tax. That means you will have to pay an additional 7.65% in taxes or the whole 15.3-16.2% in FICA taxes.
– Sales tax – as per the nature of your business, suppose you are selling goods, then you will have to collect and pay sales tax that differs state by state but generally ranges from 6-9%.
– No need for annual filings or reports.
You do not have to file annual reports or filings with the state to stay up-to-date in a sole proprietorship. In fact, you will have only to file personal tax returns. Contrary to S-corps, or C-corps, and LLCs, they are usually needed to submit annual reports after they are established. Generally, these reports need updating lists of members or managers.
If you have made your mind to use an LLP, LLC, C-corps, or S-corps instead of a sole proprietorship, then you will have to make more fillings as listed below;
– Initial fillings – when you set up a company.
– Annual fillings – state-generated to keep companies up-to-date.
– Change of manager – if you change director or managers, you will have to notify the state.
– List of members – many companies are obliged to notify the state about the change of members.
– Annual audit – some companies are obliged to file annual audits.
– Company tax returns – some companies are needed to make corporate tax returns and pay separate taxes on business profits.
Such arrangements would save your time and money.
– Not restrained by formal business structure.
Many business structures face challenges in terms of the limitations in operations that have to be met, while there are no such requirements in a sole proprietorship. As a sole proprietor, you can make all the decisions as long as it is legal. Also, there is no approval process and formal review.
Some desideratum of other business types that a sole proprietor can skip;
– Annual meetings – LLCs are needed to convey annual meetings to review lists of members and directors.
– Board meetings – some companies are needed to make business decisions in board meetings approved by directors of the company.
– Recorded minutes – formal minutes have to be kept for these meetings for corporations and LLCs.
– Shareholder votes – the company’s formal actions such as appointing a manager or adding new members require to be voted.
– Formal reviews – the company’s specific actions are needed to be reviewed, such as managers’ re-appointment.
– Easy and detailed record keeping.
In some structured business such as LLC, you are obliged to segregate your business and personal finances. Or else, you would be in trouble for opening unlimited liability for yourself; this can be termed as ‘piercing the corporate veil.’ Many sole proprietors have unlimited liability, and they do not even segregate their finances as mentioned above. They deposit their business income to a personal account, pay debts and bills personally, and operate their business as an extension of their personal finances. This can make business operations easier.
Nonetheless, it is not advised to keep the personal and business finances together. Maintaining the records distinct would help you to monitor the cash flow of the business. This can be done via creating a separate business checking account.
Separating the finances will not safeguard you against the liability in a sole proprietorship, but it can assist you with bookkeeping as a business expands and grows. It would also make the business structure transition easier for you.
