Sole Proprietorship

In a Sole Proprietorship, no separate legal entity is created. A single owner with maximum liabilities manages the business. Preferred by small business owners, it is the most accessible type of incorporation one can opt for. However, some activities, such as those related to banking, insurance, finance, lending, defence, and telecommunication, call for specialised authorisation. A firm must, by law, get various government approvals in such circumstances. Hence, the proprietorship business structure only works for business activities that are small-scale in nature.

Benefits

The pass-through tax advantage
Your business isn't taxed separately as a sole proprietor. This practice is called “pass-through” taxing since your business's profits go directly to you. This demonstrates a specialized tax status, which effectively dissolves the burden of double taxation, i.e., your income isn’t subjected separately to corporate & individual taxes.
Ease of creation
A sole proprietorship does not have any formal incorporation or dissolution process - as it's the same as the Proprietor. The process is instantaneous and inexpensive.
Low maintenance and cost
This form of business is economical as it is relatively less expensive to start than any other type of incorporation.
Fewer compliances
Minimum compliance is required to be adhered to get a company incorporated as a Sole Proprietorship firm. As most proprietorships are only registered with government departments like Income Tax & GST, the compliance burden is lower and manageable.
Undivided authority
The business owner takes all business decisions in a proprietorship. There are no partners, shareholders, or directors, and the proprietor can efficiently operate this business with minimal documents and consent requirements.

Limitations

Unlimited liability
There is absolute liability on the sole proprietor. The sole proprietor is personally liable for all business transactions. They bear the whole loss out of their estate if any loss occurs. Unlike in a company or LLP, a proprietorship cannot have some of the tax deductions, which may possibly increase the tax liability.
No perpetual succession
There is no endless succession, which means it might come to an end if the lone person in charge of the business passes away. This makes the company unreliable and difficult to gain public trust for entering into agreements or contracts to expand the business.
Challenge in raising funds
This business structure relies solely on one person's savings, borrowings, and credit history. As no other persons are involved in this type of business structure, raising funds from banks will be very hard. The sole proprietorship firm has no separate legal entity status from the owner. Raising equity funds is not be possible - as this type of business entity does not allow for-profit sharing or shareholding.
Stunted growth
A proprietorship has various fundraising, liability, and business continuity restrictions. Hence, only tiny businesses in the unorganized sector operate as a proprietorship.

Documents Required

Either as an individual or a firm, sole proprietorship registration requires the below-mentioned set of documents.

PAN Card of the proprietor.
Aadhar Card
Name and address of the business
Registered Address Proof ( If it is a Rented Property, Rent agreement and NOC from a landlord while Electricity bill or any utility bill or sale deed for a self-owned property)
Bank Account in the name of the company.
Registration under the Shop and Establishment Act of the respective state.
Registration under GST if the business turnover exceeds Rs.20 lakhs.

Registration/ Incorporation Process

Following is the procedure for incorporating a sole proprietorship firm-

Apply for a PAN card in case you don’t have one.
After obtaining a PAN card, create a sole proprietorship business name.
Open a bank account in the business's name to direct all the business transactions through this bank account for ease.
Though no specific registration is required for starting a sole proprietorship firm, specific essential registrations are required to be obtained by a sole proprietorship firm for doing business. Here are the basic registrations needed for a sole proprietorship:

Registration Certificate under the Shop and Establishment Act of the state in which the business is located.
GST Registration if the business turnover exceeds Rs.20 lakh.
Small and Medium Enterprise (SME) Registration under MSME Act, though it is not mandatory.

Post-Incorporation Compliances

Following compliances are applicable for a sole proprietorship:

Income Tax Filing
The business owner of a proprietorship will have to file a personal income tax return using the form ITR-3 or ITR-4.
Business Income
Only the ITR-3 and ITR-4 income tax forms allow for the declaration of business income. As a result, all sole proprietorships will be required to file Form ITR-3 or Form ITR-4 in order to comply with income tax requirements.
GST Return Filing
If a sole proprietorship is GST registered, monthly and quarterly GST returns must be filed according to the scheme under which the business is registered.
TDS Returns
The tax must be deducted at the source if the proprietorship has employees or purchases goods/services above a specific threshold, and TDS forms must be filed every quarter.

In addition to the above, various other compliance requirements may apply to the proprietorship based on industry and location.

Closure of Sole Proprietorship

Since Proprietorship doesn’t involve any compulsory legal registration, the dissolution of such a firm is relatively easy.

Pay off all the debts and liabilities.
Cancel the GST registration, PAN, TAN, and Shop and Establishment Registration if any.
Surrender other licenses and terminate the agreements.
Close the bank account opened for the Proprietorship Firm.