What Business entity should I start? A Look at Sole Proprietorship Businesses

[Editorial notes: This is a 4-part series that will walk you through the company incorporation process.]

In the previous article, we discussed about strategic points you should look at before taking a call as to what business entity suits your business. Let’s look at various business options available in India and discuss more details on them:

  • Sole Proprietorship
  • General Partnership
  • Limited Liability Partnership
  • Private Limited
  • Public Limited

Sole Proprietorship (Propx)

This is the most basic form of doing business. Propx business needs no company registration with any authority. Depending on what business you are in, you may need various business licenses e.g. If you are into e-Commerce or trading you will VAT registration, if you provide services, you may need Service tax registration etc. (we shall cover about which license is needed in what scenario in another article as it requires a series again to know in details).

Since there is no company registration involved, it is actually possible to run a Propx business without any other license also (if you are in a boot strap mode, or your transactions are very-very low). This is a major reason why lot of entrepreneurs wish to opt for Propx business when they are prototyping or just want to run an idea validation campaign or even if they are not a serious entrepreneur but want to run some freelance assignments.

Propx business have only single owner. It is not a separate legal entity. It has lower compliance like no audit up to certain turnover, low frequency for filing some of the returns etc. One major disadvantage is unlimited liability nature. Anything that goes wrong, shall impact the proprietor directly.

With RBI’s new KYC (Know your customer) guidelines, it has become little challenging to open a bank account for Propx business. The bankers currently insist on having some registration (many insist on having 2 also) before opening an account. This means, even if it is possible to run a small business without any registration (as mentioned above); you need to take 1 or 2 just to open the bank account. This puts in extra cost pressures on the entrepreneur and also creates overheads in maintaining these licenses. So if you are planning to run this for a short period or for some validation purposes, take a call whether is it really worth it to spend money on taking un-necessary registrations and then surrender it back after few weeks/ months.

Propx businesses are generally associated with very small businesses or traditional businesses like trading, professionals (doctors, lawyers, insurance agents etc.). New age industries like IT, mobile, web do not go well with Propx model.

We shall discuss about Partnership forms of business in next article. Stay tuned for the same.

[Guest article contributed by eLagaan team. eLagaan offers end to end CA, CS, Business Legal & Payroll services for businesses. It specialises in formulating investor friendly structures & terms, staying compliant, setting up best practices desired by founders, investors & employees. This facilitates businesses to grow & scale with ease and stay fundable, saleable and compliant.]

» Read: Resources on company incorporation.