Sole Trader in India: Definition, Objectives & Formation

Instructor: Martin Gibbs

Martin has 16 years experience in Human Resources Information Systems and has a PhD in Information Technology Management. He is an adjunct professor of computer science and computer programming.

It is one of the most common and oldest business types around: The sole trader/proprietorship shop. In this lesson, we will define the business structure, its formation, advantages and disadvantages.

Sole Trader/Sole Proprietorship

Have you ever thought you would like to run your own business: either selling goods or offering professional services?

From Mumbai to the smallest town, we see people selling goods or plying their trade. They manage their entire business on their own. These businesses are called sole trader, or sole proprietorship.

In a sole trader operation, one person owns, controls, and manages ALL operations of the business. They earn all the money, and also face all risks on their own. All personal assets of the owner can be used to fund the business, and the owner is personally liable for all business debts as well.

People start sole trader shops for many reasons. The main reason is to generate revenue without the need of an employer. Or, you can pursue a hobby but turn it into a business (e.g., coin collecting). However, the overarching reason is that it allows a person to control all aspects of their business, set their schedule, and put as much effort as they are willing.

Registering the Business

Depending on the type of business you conduct you will also need a license or registration. For example, to set up an accountancy firm, you need to be licensed by the Institute of Chartered Accountants of India.

If you are selling goods, you need to register the businesses with the Municipal authorities and also register for Value Added Tax (VAT). This is because you will need to log and pay tax on goods sold.

Once you have the licenses needed, the next step in opening the bank account is to provide one of the following: Income tax returns showing all income earned/taxes paid, or utility bills that list the name of the owner of the business.

When you open the account, your own PAN number is the one tied to the business. You will use this to become licensed and to open bank accounts.

Advantages and Disadvantages

A sole trader shop allows you full control of the business. You get to keep all profit (but you also shoulder the burden of any losses also). We've said that it is easy to form a sole trader business, and it's easy to close up shop also. It doesn't take much money to start a business, but then you are also limited as to the capital you can raise on your own.

The following table highlights the advantages and disadvantages of a sole trader business.

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