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Key Characteristics of a Proprietorship Firm and its Compliance Aspects

Key Characteristics of a Proprietorship Firm and its Compliance Aspects

Proprietorship is the simplest form of setting up a business, with minimum registration or formality requirement. Proprietorship is often termed as One Person Company since it is a one-man/woman show and has no partners or investors. Some of the key features of this type of business setup can be listed as follows:-

•          No capital threshold to start

In order to be a private limited or an LLP, you might have a minimum or maximum capital limit. However, for a Proprietorship Firm, there is no such ceiling for a minimum or maximum amount of capital.

•          Legal entity concerns

The proprietor and the proprietor firm are considered to be a single entity in the eyes of law. Any liability on the proprietor firm is a direct liability for the proprietor. The same is true with respect to the assets as well. For income tax purposes or Proprietorship Firm Compliance purposes, the PAN card of the proprietor is used for the proprietor firm as well.

•          Cannot issue shares or have investors

The proprietorship business is all about one person and hence, there is no scope for the issue of shares or pooling in of investors for excess capital needs. However, the proprietor can raise additional funds by borrowing money and listing it as liabilities for self as well as the proprietor firm.

•          Auditing thresholds

Proprietorship Firm Compliance has a very high turnover threshold for accounts to be audited by a Chartered Accountant. For proprietor firms engaging in professional services like lawyers, doctors, or similar professions, have a turnover threshold of 50L, beyond which, they will have to get the firm books audited by a chartered professional. The threshold raises to 1 crore for Proprietorship Firms who are not into professional services.

What would an Ideal One Person Company Compliance Plan consist of?

A typical plan or a package that could be suitable for a proprietorship firm could have certain mandatory and optional services. This list below has some essential aspects of compliance and filing for a one person company:-

•          Income tax filing and GST compliance

The Annual Filing for One Person Company has to be evaluated to ensure compliance. This might require the filing of a separate sole proprietorship return with the proprietor PAN and also GST compliance.

•          TDS returns

The sole proprietorship might have the day to day business activities that might require TDS returns. TDS is Tax Deducted at Source, which is a deduction to a payout to a customer/creditor or any other business entity, due to a business transaction. This deduction needs to be provided to the Income tax department by filing the TDS return. Usually, consultants or service providers cap TDS returns to 50 based on pricing.

•          Tax Audit if required

As discussed, if the proprietorship exceeds the threshold and needs an audit of accounts, the same has to be included in a comprehensive package.

•          Bookkeeping and help with financial statements

Bookkeeping is an integral part of compliance. Most packages allow for 100 invoices for bookkeeping assistance based on pricing. Similarly based on bank statements for the financial year and other financial statements like credit card statements, etc., are used to draft financial statements.

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