A sole proprietorship is a form of business organization where a single individual owns, manages, and controls the entire business. Legally, there is no distinction between the owner and the business, as they are considered one and the same entity. In this article, we describe the process of opening a sole proprietorship in India and details you should not miss when opening it. Our agents can help you register a company in India, including a sole proprietorship.
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What is different about the sole proprietorship in India?
The individuals that open a sole proprietorship in India are usually new entrepreneurs, freelancers, consultants, small businesses and home businesses. Persons who want to test a business idea with minimal upfront legal commitment and cost will benefit from opening a sole trader in India.
This business form available in India is very similar to the sole proprietorship in any other country, however the most significant differences for an Indian freelancer revolve around two major tax laws, the Goods and Services Tax (GST) and the Income Tax Act. When you open a sole proprietorship in India, you have the option of choosing the Presumptive Taxation Scheme. According to this scheme, you don’t need to track expenses, because the government automatically assumes 50% of your total income is your profit.
The GST is the VAT equivalent in India and while there is a ₹20 lakh interstate threshold, once you sell your products or services outside the Indian state where your company is located, you need to already be registered for GST. The same applies when you open a company in India and want to deliver products or services outside of the country. This is why it is important to analyze your business before and establish if you will sell outside your state or outside the country when opening a sole trader in India.
What is the process of company formaton in India?
Since the sole proprietorship and the idividual are the same entity, the business does not have to be registered with the MCA, as regular businesses do. To open a sole proprietorship in India, the owner will only need the MSME/Udyam Registration, a GST Registration Certificate, the Shop & Establishment License (if it is the case) and a new bank account for the business.
When you start a company in India, the process is the standard one, as for every country. You need to choose a name for your business and reserve it, then register with MSME/Udyam. You should then open a separate bank account in the name of your proprietorship. You must also evaluate your turnover and client base to determine your GST registration requirement. If you set up a sole trader in India and will operate a physical shop or office, you must obtain the local Shop and Establishment License. If you need help with any step of the process, our company formation experts can help you successfully set up the sole proprietorship in India.
Taxes applicable for a sole proprietorship in India
There are a few taxes that freelancers pay in India, however their tax burden is generally lower than that of other businesses. Sole proprietorships don’t need to pay the corporate income tax, however they are subjected to income tax and GST where applicable. Here are some taxes and spendings that freelancers who set up a company in India should take into account:
- The Professional Tax – this is a small, state-level tax levied on individuals engaged in a profession or trade. It is only applicable in certain states and the maximum annual amount is ₹2,500;
- Income Tax – when you open the company in India, you can choose from using the normal method of paying taxes, by tracking expenses or you can choose the Presumptive Taxation Scheme, where you can declare 50% of your gross receipts as your taxable income;
- If you choose a company formation agent to open the company in India for you, you can expect to pay around ₹1,500 – ₹8,000 for their services.
Setting up a sole trader in India is a fast, economical, and flexible way to start a business here. As the business grows, and financial risks or capital needs increase, entrepreneurs are often advised to convert to a Private Limited Company or LLP to gain the benefits of Limited Liability. It is always easier and safer to set up the sole proprietorship in India with a professional and our experts can provide great value for your business. Contact us for an offer today!