A proprietorship, also known as a sole proprietorship, is the simplest and most commonly used business structure in India. In this model, a single individual owns and manages the business. From a taxation perspective, there is no legal distinction between the proprietor and the business—meaning the business income is treated as the individual’s personal income for tax purposes.
Under the Income Tax Act, proprietors are taxed as individuals or Hindu Undivided Families (HUF), depending on the case. The income earned by the business is added to the proprietor’s total income and taxed as per the applicable income tax slab rates. No separate tax is levied on the proprietorship firm itself.
Key compliance requirements for a proprietorship include maintaining books of accounts, filing income tax returns (ITR-3 or ITR-4, depending on whether the business opts for presumptive taxation), and registering for GST if turnover exceeds the specified threshold. However, proprietorships are not required to get registered under the Ministry of Corporate Affairs (MCA), making them easier and more cost-effective to start and operate.
This tax structure is ideal for small business owners and freelancers who are just beginning and prefer minimal regulatory burdens. However, it's important to note that the proprietor bears unlimited liability, meaning personal assets can be used to settle business debts.
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In summary, a proprietorship offers flexibility and simplicity but requires diligent income reporting and compliance with individual tax obligations.