The Adventure of Entrepreneurship and its Legal Aspects

This week’s focus: Sole Entrepreneurship

Let’s explore entrepreneurship with specific focus on sole Proprietorship, to help understand the ease of starting and managing a business.

In today’s business landscape, innovation is paramount. Whether in food, textiles, or service sector, distinguishing oneself is essential. Individuals who strive to make a difference through new business ventures are often seen as the achievers of our time. Their enthusiasm for creating or innovating drives them to establish startups, enabling them to grasp the needs of their businesses, identify target audiences, and determine optimal launch locations.

Currently, a significant number of young men and women are engaging in startups. Despite the numerous challenges and risks involved, they are motivated by the desire to introduce innovation into business practices, enjoy flexible working hours, foster personal growth, and contribute positively to society. The spirit of enterprise is alive and thriving.

The origin of the term “entrepreneur” can be traced back to the 13th century French word ‘entreprendre’ which translates to “undertake” or “do something”. By the 16th century, it had evolved into the noun “entrepreneur” and was commonly used to refer to individuals who embarked on business ventures independently.

In modern times, this concept is often referred to as a “start-up”. A start-up typically refers to a small business, either in partnership or as a company in the small and medium-sized enterprise category. It also encompasses those who have acquired an existing business. This term applies to various types of businesses such as manufacturing, retailing, and services.

An entrepreneur is an individual who establishes and manages a business, taking on the role of both creator and owner. This person invests their own resources, including capital and ideas, and is willing to assume risks associated with business ventures. Entrepreneurs opt to be their own bosses rather than work for a salary, allowing them the autonomy to hire employees and exert control over their organizations.

The path to becoming an entrepreneur often involves traits such as passion, perseverance, and resilience. According to BDC economist Isabelle Bouchard, who co-authored a 2019 study on entrepreneurship in Canada, these characteristics are commonly associated with successful entrepreneurs.

Among the challenges faced in launching a startup are the decisions regarding the type of business—whether wholesale or retail, product-based or service-oriented. Entrepreneurs must also consider what unique innovations they can offer that set them apart from competitors. Additionally, securing financial investment is a critical hurdle, encompassing the amount needed, potential sources of funding, and the patience required to see a return on investment. Another vital challenge is building a network of connections within the industry to facilitate market access.

A business cannot exist without adhering to legal obligations. For a startup, the legal process begins with selecting a name, followed by registering the business with either the MSME or as a Company. Additionally, it is essential to acquire the necessary licenses based on the nature of the business and obtain permits from both State and Central Government authorities. Furthermore, registering the trademark and ensuring compliance with various regulations, including labor laws, are also critical steps.

Establishing a legal entity is crucial for initiating a business venture. Various types of business structures are available including:

Sole Proprietorship
Partnership
Limited Liability Partnership (LLP)
Company

Sole Proprietorship: This discussion will focus on the business structure of a sole proprietorship, including its characteristics, the process of establishment, registration with MSME, and the legal documentation necessary for this endeavor.

This business structure enables an individual to act as the sole founder. It is one of the most prevalent and straightforward forms of business in India, requiring minimal formalities to establish. The individual operates and manages the business independently, known as a sole proprietor or, in the case of a female, a sole proprietrix.

In this setup, the owner maintains complete control over the enterprise, encompassing all responsibilities from hiring staff to enjoying profits, thereby granting total autonomy to the business. This structure is particularly favored for small-scale industries. However, a notable disadvantage is that in cases of losses or disputes, the owner assumes full liability, which may include the risk of losing personal assets.

Legally, the owner faces unlimited liability, as there is no distinction between the individual and the business entity, making them personally accountable for all debts incurred and actions taken. The owner has the capacity to initiate legal proceedings or be subject to lawsuits.

This business structure does not require registration under any legal framework; however, it does necessitate specific registrations, licenses, and permits based on the type of business. The establishment of a sole proprietorship requires the following legal documents:

PAN Card: The PAN card may be issued in the name of the proprietor or, if the business operates under a registered name, it should be obtained in the name of the business entity. The application process for a PAN card can be conducted online.

To apply for a PAN card, visit the UTIISL or Protean e-Gov Technologies Limited (previously known as NSDL) portal. Click on the NEW PAN option and select PAN CARD FORM -49A, regardless of whether you are an Indian citizen, NRI/NRE, or OCI. Complete all required details and pay the applicable fees, which are approximately Rs. 93 excluding GST for Indian applicants and Rs. 864 excluding GST for foreign applicants. Payment can be made online or via demand draft. An acknowledgment slip will be generated upon submission. Subsequently, it is essential to provide certain documents, including a scanned copy of proof of identity, address verification and a photograph of the proprietor.

Address proof for a business may include the following: For rented premises, a rental or lease agreement that is duly signed by both the property owner and the landlord, along with a No Objection Certificate from the landlord. For owned property, a copy of the sale deed or any utility bill can serve as proof.

GST Registration: It is essential to register for Goods and Services Tax (GST) only when the business turnover surpasses the limits established by the Act. The Act specifies different thresholds for registration.

Applications can be submitted online at www.gst.gov.in. To commence the GST registration process, access the “services” section, select “new registration,” and fill in the necessary information. An OTP will be dispatched to the mobile number and email address provided by the applicant.

Please ensure that the following documents are scanned and available for registration:

Proof of identity: PAN card and Aadhar card of the proprietor.
Business proof: MSME registration certificate or other pertinent business documentation.
Proof of residence: Sale deed in the proprietor’s name, rental agreement, utility bills, or tax receipts.
Once these documents are prepared, they should be uploaded as required.

MSME Registration: Registration under the Micro, Small, and Medium Enterprises (MSME) Act is not mandatory; however, it can be completed online. Previously known as UDYOG Aadhaar until July 1, 2020, it is now referred to as UDYAM registration. The application form can be accessed via the following link: https://www.inditab.com/msme/msme-udyam-registration-online. The documents necessary for MSME registration include:

PAN Number of the entity
GST Number of the entity
Bank Account details of the entity (If a bank account is not yet opened, the personal account of the owner may be provided)
Address Proof of the business

It is important to note that none of these documents need to be uploaded on the portal.
Upon submitting the online application, executives will reach out via phone and email to verify the information provided. They will send several OTPs to the mobile number linked to the Aadhar for confirmation purposes. Following successful verification of the Aadhar, the Udyam Registration application will be submitted.

The registration certificate will be sent via email within a timeframe of 7 to 30 days. The Udyam Certificate is an electronic document, and no physical copy will be issued. The online certificate received by email will remain valid throughout its designated period.

Registering with MSME provides numerous benefits, such as access to business loans at low interest rates, and in some cases, loans without collateral. Additionally, businesses can receive financial assistance for participating in international expos to promote their products, enjoy a streamlined process for opening current accounts in the business’s name, and apply for government micro business loans along with other advantageous schemes.

A sole proprietorship can transition into a partnership by introducing new partners who are willing to invest in the business, or it can be converted into a Private Limited Company by adhering to the appropriate procedures. Furthermore, the owner maintains the authority to sell or transfer the business to another party or to dissolve the business at their discretion.

We will be exploring other business structures such as Parterships, LLPs and Companies next.

Maheshwari Mohan
Advocate Founder of Co-draft Academy of Law