Income Tax Guide – To be or Not to be a Sole Proprietor

A sole proprietor is an independent service provider working for self. The whole business is owned by an individual.

Provisions of Income Tax Act as applicable to Sole Proprietorship

Most Sole Proprietors work in their own name or a name which is not registered. Sole proprietor businesses are not taxed as a different legal entity but taxed as an individual taxpayer in accordance with the Income tax rules and provisions.

All business expenses are deducted from gross receipts to find out the business income, considered as “Profits & Gains from business or profession”. They are entitled to all the deductions and exemptions available to an individual assesses under direct taxation provisions and taxed alike.

Applicability of PAN

Permanent Account Number (PAN) is a mandatory requirement for all kinds of business models as per the existing income tax laws. And since a sole proprietor is not a separate legal entity in the eyes of law, a separate PAN is not issued in the name of the business. Thus, PAN details of the individual are used for all tax-related issues.

The procedure of registering as a sole proprietorship

1. Applying for PAN. If you already have it, focus on the next step
2. Formally naming the business
3. No formal registration required, but the next step is to open a bank account in the name of the business
4. Registering as a Small and Medium Enterprise (SME) under MSME Act, though not mandatory, it can be beneficial
5. One can also get a Shop and Establishment registration done

Income Tax Returns & Compliances

Income Tax Return Form 4S has been explicitly prescribed for sole proprietors engaged in the business of plying, hiring or leasing of goods carriage, while ITR 4 for all other sole proprietors. Any proprietor engaged in online business must mandatory get a GST number; otherwise, GST registration is mandatory only if the annual turnover exceeds INR 20 Lakhs.

Further, the direct tax laws make audit mandatory if the turnover exceeds INR 1 crore or professional gross receipts exceed INR 50 Lakhs during a financial year. Additionally, if the proprietorship has opted for the presumptive scheme and the income earned is lower than the deemed profits and gains.

Also read,

Contents hide

Why Do We Pay Income Tax in India?

How to Save Tax using Demat Account

Why Do We Pay Income Tax in India?

How to Save Tax using Demat Account

Does a sole-proprietor call for any benefits?

1. It can be started and managed by an individual alone, rather than a whole team
2. Minimal compliance’s
3. Requires comparatively lesser capital/funding
4. Ease in decision-making, control and winding up

Disadvantages of being a sole-proprietor

1. Unlimited liability of the proprietor i.e. he stands personally liable for all his transactions
2. Business isn’t perpetual like a One-person company
3. Due to the one-man show, expansion and fundraising are difficult
4. No governing laws to protect the laws of a proprietor

One of the highlights of a sole proprietorship business structure is the simplicity of formation. Experts suggest strong evaluation of each and every aspect of this model with your own business aspirations before accepting it, though no formal filing or event is required to form a sole proprietorship, it’s better to be thoughtful than an unprepared and hasty proprietor lacking directions.

Summary

Hope you come to know few pros and cons of being a sole-proprietor under the Indian Income Tax laws

Worthview