Sole Proprietorship (Individual Human Being)
A sole proprietor is an individual venture who owns, manages and largely controls his business. The proprietary firm can be started by any person resident in India and who is legally entitled to contract. The individual carrying on the business would be identified by his permanent account number allotted by the income tax department and depending on the nature of business and on the considered proprietary firm name, registrations under Shops & Establishment Act, Service Tax, Vat (Sales Tax) may be obtained including opening of bank account. The unique features of a proprietary firm is as below:
- Ease of formation is its most important feature because it is not required to go through elaborate legal formalities. No agreement is to be made and registration of the firm is also not essential. However, the owner may be required to obtain a license specific to the line of business from the local administration.
- The capital required by the organization is supplied wholly by the owner himself and he depends largely on his own savings and profits of his business.
- Owner has a complete control over all the aspects of his business and it is he who takes all the decisions though he may engage the services of a few others to carry out the day-to-day activities.
- The firm has no separate legal existence of its own i.e., the firm and the partners are one and the same in the eyes of law.
- In the absence of any agreement to the contrary, all partners have a right to participate in the activities of the business.
- Ownership of property usually carries with it the right of management. Every partner, therefore, has a right to share in the management of the business firm.
- Owner alone enjoys the benefits or profits of the business and he alone bears the losses.
- The firm has no legal existence separate from its owner.
- The liability of the proprietor is unlimited i.e. it extends beyond the capital invested in the firm.
- Lack of continuity i.e. the existence of a sole proprietorship business is dependent on the life of the proprietor and illness, death etc. of the owner brings an end to the business.
Taxation
The sole proprietorship is not a separate legal entity in the eyes of law and its income is taxable in the same manner as provided for an individual.
Conversion of a proprietorship into a Company
Consequent to the growth in proprietary business, a need often arises to dilute the ownership, bring in distinction between operational control and ownership control and facilitate or contribute a feeling that working for organization is bigger than working for a individual. Corporatization also brings with it advantages such as Limited Liability, Perpetual Succession, Transferability of shares, Expansion etc. Conversion of a proprietorship firm to a company shall be done under the provisions of the Companies Act, 2013 and the Income Tax Act, 1961. The options available are:
- To dissolve the firm and incorporate a new company under the Companies Act, 2013; or
- Incorporate a company which can legally take over the business of the firm and continue the same business