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A sole proprietorship also referred to as a sole trader or a proprietorship, is an unincorporated business that has just one owner who pays personal income tax on profits earned from the business.
A sole proprietorship is the easiest type of business to establish or take apart, due to a lack of government regulation. As such, these types of businesses are very popular among sole owners of businesses, individual self-contractors, and consultants. Many sole proprietors do business under their own names because creating a separate business or trade name isn't necessary.
A sole proprietorship is very different from corporations (corp.), limited liability companies (LLCs), or limited liability partnerships ( LLPs), in that no separate legal entity is created. As a result, the business owner of a sole proprietorship is not exempt from liabilities incurred by the entity.
For example, the debts of the sole proprietorship are also the debts of the owner. However, the profits of the sole proprietorship are also the profits of the owner, as all profits flow directly to the business's owner.
The main benefits of the sole proprietorship are the pass-through tax advantage mentioned before, the ease of creation, and the low fees of creation and maintenance. The disadvantages of a sole proprietorship are the unlimited liability that goes beyond the business to the owner, and the difficulty in getting capital funding, specifically through established channels, such as issuing equity and obtaining bank loans or lines of credit.
The income tax rate for sole proprietorship firm is the same as that of the income tax rate of individuals. In Budget 2020, a new tax regime has been announced where the individuals shall have the option to pay taxes as per the new slabs subject to certain conditions from FY 2020-21 onwards.
The surcharge is payable over and above the income tax calculated as per the income tax rate provided above. The applicable surcharge for Financial Year 2020-21 is detailed below –
Health and education cess has to be calculated on the sum total of income tax and surcharge. Health and education cess is payable @4% on income tax plus a surcharge.
Recently, the tax rebate, under section 87A of the Income Tax Act, 1961, has been increased/revised. For the Financial Year 2020-21, maximum tax rebate available under section 87A is ₹ 12,500.
Tax rebate is available only to the resident individual / proprietor earning net taxable income up to ₹ 5 Lakhs. Tax rebate is applied to the total tax before adding ‘Surcharge’ and ‘Health and Education Cess’.
ITR filing forms, as applicable to the sole proprietorship firm, is detailed hereunder:
Tax audit is applicable in case of sole proprietorship firm under the following circumstances:
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