In recent years so many Chinese clients have been deceived by sole proprietors in India, to believe that they are conducting a business with a Company rather than Sole Proprietorship Firms. These sole proprietors are either fraudster or have got no registered Sole Proprietorship Firm in India.
Hence, many Chinese clients have difficulties in trying to get their money back, after realising that the Sole Proprietorship does not operate in a same way as a Company. Consequently, this article discusses everything a client needs to know before dealing with a Sole Proprietorship Firm in India.
Firstly, what is the Sole Proprietorship Firm and how is it different from a company, especially a One Person Company of India?
Sole Proprietorship Firm is an unincorporated business owned and run by one individual with no distinction between the business and the owner. Hence, it is often considered as an extension of the person conducting the business, without a need of legally valid proof of its existence. Besides, Sole Proprietorship Firms are not regulated under any one law of India and does not have mandatory registration requirement of registering the firm.
However, One Person Company is completely different then Sole Proprietorship Firms, as they are incorporated businesses which are regulated by Companies Act 2013. The One Person Company are not recognised as an extension of the person conducting the business, instead they have their own separate legal entity. Thus, the Company has mandatory requirement of registering their company with Registrar of Companies.
Yet, both the Sole Proprietorship Firm and the One Person Company can only be formed by a one person who is an Indian resident. Therefore, this makes some sole proprietor believe that they run a company instead of a small firm and they mislead their clients into believing the same. Consequently, most of the clients get easily fooled by these sole proprietors.
Secondly, how does this increase the risks for the clients when they are dealing with a Sole Proprietorship Firm instead of a Company in India?
It is necessary to emphasize what was mentioned above, that ‘the Sole Proprietorship Firms are an unincorporated business.’ Hence, they portray certain risks to clients.
One of the major risks is that you can never sue a Sole Proprietorship Firm in the name of the firm, instead you can only sue the sole proprietor. Whereas, if the client was dealing with a company, then client could have easily sued the company in its own name rather than trying to sue the director of the company.
In Miraj Advertising Corporation v. Vishaka Engineering it was held that;
"A proprietorship firm has no legal entity like a registered firm. A suit cannot be instituted in the name of an unregistered proprietorship firm and the said suit is to be instituted in the name of the proprietor."
Moreover, it is very hard to do the due diligence process on the unregistered Sole Proprietorship Firms in India to find out whether they are authentic or not. Currently, there is no mandatory requirement in India for proprietors to register their proprietorship firms, and therefore it is so easy to commit fraud in the name of the proprietorship firm. As a result, many of our clients have faced a risk of dealing with an unregistered proprietorship firm who is undertaking a fraud business.
While if the client was dealing with a company then the due diligence process can be done very easily, and the legality of the company could have been proved easily. The incorporation certificate of the company can be found with the Registrar of the Companies and therefore can simply establish the legality of the company, unlike the Sole Proprietorship Firms who have no such registration certificate.
Therefore, in summary two of the most common risks which our clients face with Sole Proprietorship Firms are:
1.Cannot sue the firm in its own name
2.Very hard to prove the authenticity of the firm, and therefore client can be expose to the fraud Sole Proprietorship Firm which is not registered and has no valid proof of existence.
Finally, how can clients protect themselves against such Sole Proprietorship Firms of India?
One of the easiest ways to check the authenticity of the Sole Proprietorship Firms in India is to check if they have a valid proof of existence.
In order to examine the valid proof of existence of Sole Proprietorship Firm in India, the client needs to check if the firm has opened a bank account in the name of the Sole Proprietorship Firm itself. This is because, the bank would have examined the documents which prove the existence of the business in the name of the Proprietorship Firm, according to the Know Your Customer (KYC) Master Directions 2016, before opening such bank account in the name of the Sole Proprietorship Firm.
Besides, a genuine sole proprietor would have also registered the Sole Proprietorship Firm under different acts and rules of India, in order to prove its valid proof of existence, despite it not being mandatory.
Some of the ways sole proprietor can register their business are by obtaining one or more of the following things in the name of the Sole Proprietorship Firm:
1.Shop & Establishment Certificate under Shop and Establishment Act
2.Goods and Services Tax Identification Number and Registration
3.IEC (Importer Exporter Code) issued to the proprietary concern by the office of DGFT or Licence/certificate of practice issued in the name of the proprietary concern by any professional body incorporated under a statute.
4.Certificate/registration document issued by Sales Tax/Service Tax/Professional Tax authorities.
5.Intellectual Property Rights Registration
As a result, client can carry the due diligence of the Sole Proprietorship Firms which are registered under different acts, by asking the sole proprietor to issue the authentic copy of the documents and cross checking the documents with the relevant government authority. Consequently, this will prove the that Sole Proprietorship Firm has the valid proof of existence in India.
Therefore, in conclusion the Sole Proprietorship Firms which have their own bank account, in the name of the firm, and have been registered under different acts and laws of India, have a valid proof of existence and a fixed place of business. The clients can be assured that the firms are authentic by conducting the due diligence of the bank account details and registered documents with the relevant authorities.
Whereas, the Sole Proprietorship Firms which are not registered in India tend to be more suspicious of their activities, and the clients can easily be exposed to the fraud Sole Proprietorship Firms.
Sole Proprietorship Firm，英文直译过来是“单一 所有权 商行”。按印度法律规定， Sole Proprietorship Firm是由一个自然人拥有和经营的非法人企业，该企业与所有者之间没有区别。因此，它通常被认为是开展业务的人的延伸，而无需法律上有效证明其存在。此外，独资公司不受印度任何一部法律的监管，也没有强制性的注册要求。该怎样理解印度的“单一 所有权 商行”？中国有两个相似的概念与之类似：个人独资企业和个体工商户。
虽然印度的“单一 所有权 商行”与中国法律中的个人独资企业或个体工商户概念都不完全符合，但综合上述三个区别考虑，先将其理解为个人独资企业再进行细致分析较为妥当。
4.不是独立的法律实体。个人独资企业不是法律意义上的“法人”，因此企业本身无法独立承担责任。不能作为独立的被告被起诉，而只能在印度起诉该独资企业的所有者。这一点在判例Miraj Advertising Corporation诉Vishaka Engineering案裁定中有所体现：“独资企业没有像注册公司那样的法人实体。不能以未注册独资企业的名义提起诉讼，而该诉讼应以所有人的名义提起。”
（d）CST / VAT / GST证书（临时/最终）。