Proprietorship

4 Points You Must Know About Proprietorship

1. Unlimited Liability :

The liability of the proprietor is unlimited. Unlike a company, the proprietor is personally liable for all the liabilities of the business.

2. No Legal Identity:

In the eyes of the law, proprietorship has no separate legal identity.

3. Evaluation of Alternative Business Constitution :

Before forming the proprietorship business, you must carefully evaluate the other business forms such as OPC, LLP, Private Limited Company, etc. This is necessary for making an informed decision regarding the suitability of the business constitution concerning the nature of your business.

4. Minimum Government Regulation :

In the case of proprietorship, there is minimum government interference and regulations compared to other forms of the business constitution.

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FAQ`s Regarding Proprietorship

The acronym evc stands for Electronic Verification code. It is a 10-digit alphanumeric code which the income tax department sends to your registered mobile. In the context of itr, it is used for electronically verifying your income tax return. You do not need to sign the income tax return acknowledgement and send it by post after verifying by this method. It makes the verification process simple and effective.

A Proprietorship business needs no registration like a partnership firm or a company. However, shop and establishment or GST registration are necessary for opening a bank account in the business name.

A sole proprietorship can exist as long as its owner is alive and desires to continue the business.

A sole-proprietorship has no legal identity separate from that of its owner. The law makes no distinction between the proprietor and his business. So, there is no separate PAN in the name of the proprietorship business. The individual PAN of the proprietor works for the proprietorship business also.

Points of difference

Sole Proprietorship

One person company

1. Legal Status

No Separate Identity

Separate legal entity

2. Registration

Not Necessary

It must be registered.

3. Liability of the owner

Unlimited

Limited

4. Setting-up

Easy and minimum paperwork

Complex and time-consuming process.

5. Formalities

No legal formalities

Formalities concerning board meetings, audits, etc., make it difficult to run

Merits: –

1. Easy to start and dissolve:
A sole-proprietorship can be set up easily and quickly. Similarly, a sole-proprietorship can be closed down very easily and quickly.

2. Motivation to work:
The sole-proprietor alone is entitled to receive all the business profits, and he alone has to bear all losses. So he has motivation for his work.

3. Quick Decisions:
The sole proprietor is entirely free to take decisions and implement them.

4. Independent Control:
The sole proprietor enjoys complete freedom and control over his business.

5. Retention of business secrets:
The sole proprietor can keep the business secrets to himself.


6. Personal Contact:
A sole- proprietor is in a position to maintain personal contact with his customers and employees.

7. Flexibility:
A sole proprietorship can be adapted easily to suit the changing conditions in the market.

8. Economy:
As the proprietor himself is the manager, the cost of management is meagre.

Demerits: –

1. Limited Capital:
The financial resources of a proprietor are minimal. His funds are not adequate to start large-scale operations.

2. Lack of specialisation:
The proprietor has a limited managerial ability. He is also overburdened with too many tasks. The sole proprietorship cannot afford to employ professional experts.

3. Instability:
A sole proprietorship does not enjoy continuity of existence. It is dependent on the life of the proprietor.

4. Unlimited Liability:
The proprietor is himself liable for all the losses of the business.

5. Limited scope for expansion:
Due to limitations of capital and management, proprietorship businesses can`t grow and expand to a significant size.

Basis of comparison

Sole Proprietorship

Partnership

1. No. of members

One

Minimum 2

Maximum 50

2. Agreement

No agreement required

A partnership agreement is required

3. Registration

No need to get registered except under the shop and establishment act and GST act.

It should get registered to enforce its rights in a court of law.

4. Capital

Entire capital is contributed by one person, the owner of the entity.

Several persons contribute capital.

5. Management

It lies exclusively with its owner.

All partners have a right to take part in the management.

6. Secrecy

Secrets are known only to their owner.

Secrets are shared

between the partners.

7. Quick decisions

One man takes all the decisions. So, the decisions are reckless and hasty.

Decisions are taken by mutual consultation between the partners. So, the decisions are less reckless and hasty.

8. Governing law

There is no specific law.

The governing law is Partnership Act, 1932.

There is no government registration fee for proprietorship registration.

Features of Sole Proprietorship: –

1. Single ownership:
A sole proprietorship a wholly owned by one individual.

2. One-man Control:
The proprietor alone takes all the decisions of the business.

3. No legal entity:
A sole proprietorship has no separate legal identity.

4. Unlimited Liability:
The proprietor is entirely liable for all the debts of the business. If the assets are insufficient to meet its obligations, the proprietor’s personal property can be attached.

5. No-profit sharing:
The sole-proprietor is entitled to all the profits and losses of the business.

6. Small Size:
The business size of the sole proprietorship business is generally not significant.

7. No Legal Formalities:
Minimal legal formalities are required to start, manage, and close a sole trader business.