Accounting
LLP vs Pvt Ltd – Which Business Structure is Right for You?
Introduction Choosing the right business structure is crucial for long-term success. Two of the most popular structures in India are the Limited Liability Partnership (LLP)
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Most businesses in India are initially started by individuals without any partners. An individual conducting business activities is considered a sole proprietor, and the business is referred to as a Sole Proprietorship Firm. In this structure, the identity of the individual and the business are legally the same. Due to benefits such as lower tax rates, operational flexibility, and other advantages, many entrepreneurs prefer this structure in the early stages of their business.
Introducing partners reduces individual control over operations. Therefore, many entrepreneurs choose to run their business independently through Sole Proprietorship registration. While there is no specific legislation governing this structure, there are multiple ways to register a Sole Proprietorship Firm. This model is particularly suited for small businesses seeking lower risk and simplified management.
In a sole proprietorship, the proprietor retains full control over all decisions and operations, without the need to report to anyone. With minimal external interference, compliance and disclosure requirements are significantly lower compared to corporate firms, resulting in limited government involvement throughout the financial year.
Setting up and registering a sole proprietorship is simple and straightforward, with minimal procedural requirements. The registration cost is significantly lower compared to other business structures. The business operates under the proprietor’s personal identity, allowing it to be run either under the owner’s name or a distinct brand name.
The proprietor is the sole owner of the business and retains all generated profits. Business assets are treated as personal assets of the proprietor, and vice versa. The proprietor has complete control over profit withdrawal or retention decisions.
A sole proprietorship is not considered a separate entity for income tax purposes. The business income is taxed under the individual tax slabs applicable to the proprietor, often resulting in lower tax rates compared to companies or partnerships. Additionally, the proprietor can claim eligible deductions, filing a single Income Tax Return (ITR) for both personal and business income.
A proprietorship can operate under the individual’s name, but choosing a distinct business name is preferable as it helps in building a strong brand identity.
The proprietor must be an Indian citizen and a resident of India. No prior approval is required to start the business. However, Non-Resident Indians (NRIs) and Persons of Indian Origin (PIOs) can only invest in or start a sole proprietorship business with prior approval from the Government of India.
A Sole Proprietorship is an unstructured business model, and there is no specific law mandating its registration. LegalWiz.in offers Sole Proprietorship registration services under the MSME (Micro, Small, and Medium Enterprises) Development Act, 2006, as per the Central Government regulations. The business entity must meet the necessary registration requirements to qualify.
A Sole Proprietorship can be started with any amount of capital, as long as it is sufficient to begin operations. There are no restrictions on infusing or withdrawing funds, allowing the proprietor to adjust the capital whenever needed. The decision to introduce or alter capital in the business rests entirely with the proprietor, as they are the sole owner of the firm.
To open a bank account in the name of a Sole Proprietorship, the Reserve Bank of India requires the proprietor to submit two forms of registration, along with the PAN card, identity proof, and address proof of the proprietor.
The two forms of registration can include any of the following: MSME registration, GST registration, registration under the Shop & Establishment Act, professional license, Chartered Accountant certificate, or other documents specified under the RBI’s Know Your Customer (KYC) norms or the requirements of the respective banks.
There is no formal registry or regulation for registering the name of a Sole Proprietorship firm. As a result, the firm can choose any available name, as long as it doesn’t infringe on existing trademarks. To ensure exclusive use of the business name, the best option is to obtain trademark registration. This provides legal protection and prevents others from using the same or similar name.
A sole proprietorship does not have a separate legal identity from its proprietor, even after registration. As a result, the firm and the proprietor share the same PAN card. Additionally, the assets and liabilities of the proprietor are directly tied to the business, meaning they are considered the same for both.
A registered entity under the MSMED Act can access subsidies, incentives, and government schemes tailored to specific businesses, based on its registration certificate.
Any business entity is eligible to apply for registration under the MSMED Act. However, the Central Government has recently excluded trading activities from this registration. Businesses engaged in trading activities can instead apply for registration under the Shop & Establishment Act.
A Sole Proprietorship firm is characterized by being owned and controlled by a single individual, meaning it cannot have any business partners. If your business requires the involvement of partners, you may consider opting for a Partnership Firm, Private Limited Company, or Limited Liability Partnership (LLP), depending on your needs.
A Sole Proprietorship business is entirely owned, managed, and controlled by a single individual. As a result, proprietorship firms cannot issue shares or attract investors.
A Sole Proprietorship must file its annual tax return with the Income Tax Department. Depending on the nature of the business activities and any applicable registrations, other filings such as GST returns may also be required. However, unlike Limited Liability Partnerships or Companies, there is no need to file annual reports or accounts with the Ministry of Corporate Affairs for a Sole Proprietorship.
A proprietorship can be converted into a company or LLP, but the process is often complex, costly, and time-consuming. For this reason, many entrepreneurs choose to start an LLP or company right from the beginning, after consulting with experts, to avoid the challenges of conversion later on.
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Kickstart your own business with a Sole Proprietorship registration!