March 26, 2010

The Chairmen and Chief Executive Officers

All Scheduled Commercial Banks excluding RRBs/
All India Financial Institutions/Local Area Banks

Dear Sir,

Know your Customer (KYC) guidelines – accounts of proprietary concerns

A reference is invited to Para 2.4(a) of the Master Circular on KYC/AML/CFT/Obligation of banks under Prevention of Money laundering Act (PMLA), 2002 issued to banks vide DBOD.AML.BC.No.2/14.01.001/2009-10 dated July 1, 2009. It has been advised to banks that internal guidelines for customer identification procedure of legal entities may be framed by them based on their experience of dealing with such entities, normal bankers’ prudence and the legal requirements as per established practices. If the bank decides to accept such accounts in terms of the Customer Acceptance Policy, the bank should take reasonable measures to identify the beneficial owner(s) and verify his/her/their identity in a manner so that it is satisfied that it knows who the beneficial owner(s) is/are

2.  For sake of clarity, in case of accounts of proprietorship concerns, it has been decided to lay down criteria for the customer identification procedure for account opening by proprietary concerns. Accordingly, apart from following the extant guidelines on customer identification procedure as applicable to the proprietor, banks / financial institutions  should  call  for and  verify  the  following documents before opening of accounts in the name of a proprietary concern:

i) Proof of the name, address and activity of the concern, like registration certificate (in the case of a registered concern), certificate/licence issued by the Municipal authorities under Shop & Establishment Act, sales and income tax returns, CST/VAT certificate, certificate/registration document issued by Sales Tax/Service Tax/Professional Tax authorities, Licence issued by the Registering authority like Certificate of Practice issued by Institute of Chartered Accountants of India, Institute of Cost Accountants of India, Institute of Company Secretaries of India, Indian Medical Council, Food and Drug Control Authorities, etc.

ii) Any two of the above documents would suffice. These documents should be in the name of the proprietary concern.

4. These guidelines will apply to all new customers, while in case of accounts of existing customers, the above formalities should be completed in a time bound manner and should be completed before December 31, 2010.

5.   Please acknowledge receipt.

Yours faithfully,

(Vinay Baijal)
Chief  General Manager

No registration is required for a sole proprietorship. You simply have to open a bank account with the name & style you want to work. But if you are liable for state VAT or service tax registration, then you have to obtain VAT and/or service tax registration. Further, for sole proprietorship, no separate income tax PAN is required. The PAN of the proprietor will be the PAN of the firm and proprietor will have to file income tax return in his personal name.

Advantages of a Sole Proprietorship

Perhaps the greatest advantage of this form of business is its simplicity and low cost. You are not required to file with the government, nor are any legal charter required. The sole proprietorship form of business has other advantages:

• The owner or proprietor is in complete control of business decisions.
• The income generated through operations can be directed into the proprietor’s pocket or reinvested as he or she sees fit.
• Profits flow directly to the proprietor’s personal tax return; they are not subject to a second level of taxation. In others words, profits from the business will not be taxed at the business level.
• The business can be dissolved as easily and informally as it was begun.

These advantages account for the widespread adoption of the sole proprietorship in the India. Any person who wants to set up shop and begin dealing with customers can get right to it, in most cases without the intervention of government bureaucrats or lawyers.

Disadvantages of the Sole Proprietorship

This legal form of organization, however, has disadvantages:

• The amount of capital available to the business is limited to the owner’s personal funds and whatever funds can be borrowed. This disadvantages limits the potential size of the business, no matter how attractive or popular its product or service
• Sole proprietors have unlimited liability for all debts and legal judgements incurred in the course of business. Thus, a product liability lawsuit by a customer will not be made against the business but rather against the owner.
• The business may not be able to attract high-calibre employees whose goals include a share of business ownership. Sharing the benefits of ownership, other than simple profit-sharing, would require a change in the legal form of the business.
• Some employee benefits, such as owner’s life, disability, and medical insurance premiums, may not be deductible, or may be only partially
  deductible from taxable income.
• The entity has a limited life; it exists only as long as the owner is alive. Upon the owner’s death, the assets of the business go to his or her estate.