Guide to file Sole Proprietorship Income.

What is sole proprietorship ?

Sole proprietorship denotes single ownership of business irrespective of its volume. Even though its incorporation is not envisaged anywhere, the business requires bank account, other empanelment etc. which requires a registration. In most of the sole proprietorship businesses the proprietor may be a skilled person essential for the business and he is acting as the key person. Here the profit and loss sharing specialty differs from any other form of business constitutions.

Statutory Registrations

In the initial stage, bank account is enough to start the business. But once you get into a certain level you need to do registrations like VAT, Service tax, Shop Establishment Licenses and certificate and so on.

Is there any difference in taxing individual business and sole proprietorship?

Sole proprietorship has no separate legal entity; owner and the business are treated as one. Therefore the income from business is to be incorporated in the personal income tax return along with other income and deductions. Tax filing is mandatory for all individuals whose income exceeds 2,50,000 before allowing deductions under Chapter VI A for a financial year.

Usually tax is calculated on their net taxable income. The net income is calculated by deducting all business expenses from the gross total income of the business. The deductions (80C to 80U) and exemptions are also taken into account for the net taxable income.

This net taxable income comes under the head Income from Business or profession. The Tax due must be calculated & paid on or before the due date (July 31st every year). If the tax amount exceeds Rs.10,000 the assesse is liable to pay advance tax as per the schedule prescribed, otherwise 1% interest will be levied.

Is proprietorship more beneficial according to the taxability of business ?

Yes. The tax on income from proprietorship business is computed on a slab rate fixed for ordinary individuals. Again age factor is another sort of benefit from availing more tax reduction. A firm or company is liable to pay 30% flat tax on the net taxable income generated. But here it starts from a range from 10% to 30%. Many deductions available under Chapter VIA is only limited to individuals only.

Therefore comparison of benefit reveals more worth from proprietorship form of business. Then another question will arise, why people prefer other legal entities. It is simple that the other entities hold only less personal risk and liability is either shared or limited by shares.

What is the difference in taxing a sole proprietorship and a company?

Slab rate of tax is adopted in the case of proprietorship, but 30% flat rate is adopted for companies. An additional 12% surcharge is also applicable in the case of company. Minimum Alternate Tax (MAT) is also applicable to company form of business. Only one disadvantage for sole proprietorship is when the expenses are claimed a portion of it may be of personal nature and it shall be added back to income while computing tax.

Computation of income from sole proprietorship

Gross Income
Less: Expenses
Net Income from business
Add: any other income
Less: Deduction under Chapter VI A
Less: Interest on housing loan of self-occupied property
Net taxable income
Total income tax (on slab basis)
Less: Rebate u/s87A
Add: education cess @3%
Tax payable