Any person while beginning a business is confused regarding the legal structure of the organization.
In a broad sense, there are four types of structure that a company can be set up with:
- Private Limited Company.
- Sole proprietorship.
- Limited Liability Partnership(LLP).
- Partnership Firm
- One Person Company(OPC).
New Companies Act 2013, has introduced a new concept called One Person Company which provides an opportunity for Indian entrepreneurs to enter the corporate world alone instead of adding a family member or friend.
One Person Company concept is very popular abroad including in countries like USA, Europe, and Singapore.
Many small or medium enterprises in India are doing business as sole proprietors which are now an unorganized sector. These people might enter into the organized version of the private limited company.
This article will provide you with the difference between Sole Proprietorship VS OPC. If you want to start a new business and you are not able to pick one form then here is a glance of differences between these two are as follows:
Overview Of Sole proprietorship
‘Sole’ means single and ‘proprietorship’ means ownership which means that sole proprietorship is a kind of business enterprise which is owned and controlled by one person who possesses the entire authority and responsibility in such a business. The benefit of such an ownership is that the owner is alone entitled to the entire profit of such an enterprise but the disadvantage is that he is personally liable also. This form of business is fit for those kinds of businesses where the nature of the business is simple and where the product’s market is small.
Pros of Sole Proprietorship
- There is an easy and informal manner in which a sole proprietorship can be created and dissolved.
- There is no cost at all in setting up a self or sole proprietorship as no formal registration is required.
- Since one person owns the business hence he has absolute control and can always make quick decisions and be flexible as well.
- The owner has the complete control over the finance of the business and the profits flow to him.
- Ensuring the safety of trade secrets is much easier in this form of business organization.
Cons of Sole Proprietorship
- It exists only as long as the owner exists.
- Expansion of the business beyond a certain point becomes tough as the proprietor cannot be an expert in every aspect of the business management and hence more employees are needed.
- Since single person owns the business hence there are many problems in raising the capital funds.
- Lastly, since it is a sole proprietorship hence he has unlimited liability and therefore in situations where a sole proprietor fails to meet his debts or business obligations, his personal properties could be disposed of to satisfy his debts.
Pros of OPC
There are many benefits of incorporating One Person Company in India. Below we have listed those benefits that are relevant in comparison to sole proprietorship business.
- Business Registration Certificate
One Person can easily form a company to get its business registered with the registrar of companies as a separate legal entity. Generally, sole proprietorship businesses are not registered with the government of India except few businesses which are registered under sales tax and service tax based on the type of business they do.
New companies act 2013, required all type of One Person Company to get it registered with the registrar of companies. After registration, a certificate of incorporation will be issued as a proof of registration.
Due to business registration, the credibility of One Person Company while working with customers and vendors will be high in comparison to the sole proprietorship business.
- Business Can Be Transferred To Nominee Shareholder
Generally, in a sole proprietorship business, the legal heirs get the percentage of proprietorship business. Sometimes legal battle to get hold of the property and other assets of business among legal heirs is difficult. Business gets affected if these issues are not settled soon.
In One Person Company, we have a concept of nominee shareholder. Nominee of a person is required to be mentioned by which company will be taken over by the nominee shareholder in case of death of the sole owner. The nominee can also be changed at any time by the sole owner of One Person Company. This means, in the case of One Person Company, ownership of business will be defined clearly.
- Personal Liability Not Effected – Limited Liability
In One Person Company, the liability of sole owner will be limited up to the amount invested as share capital. This means, in case of recovery of the company’s loan, personal assets like house, cars, and others will not be touched unless personal guarantee has been provided by directors. However, a proprietorship offers no such advantages i.e. business liability can be recovered from the personal assets of the owner.
- Independent corporate existence
An OPC will have its own existence having a separate entity from that of its directors or shareholders.
On the other hand in a proprietorship, there is no separation of identity between the individual and his business.
- Tax obligation
In spite of getting exempted from some taxes as it is seen as a company, an OPC is heavily taxed.
Whereas sole proprietors who want to incorporate may not be able to afford such heavy taxes hence there are chances of winding up soon after inception.
In an OPC there are many other taxes which the owner would have to pay such as corporate tax, dividend distribution tax etc.
Whereas a sole proprietor is obliged to pay only income tax in association with the profit he makes in the business.
- Separate property
Since OPC is a separate legal entity, hence any property acquired by it will be its own. In other words, it becomes capable of owning, enjoying and disposing of the property in its own name.
Whereas in a proprietorship. The proprietor is the owner and any property owned by him is his and vice versa. As a result, the creditors of the proprietorship will have a valid claim on all the assets of the owner.
- Transferability of shares
In the case of an OPC, the question of transferring a portion of shares does not arise because then an OPC shall cease to be a “one person company”. One cannot transfer all the shares because this will lead to alterations, including changes in the memorandum of association and moreover variations will also have to be made with respect to the nominee. Hence in the case of an OPC, transferability of shares is restricted.
Whereas in the case of sole proprietorship such questions do not arise.
- Capacity to sue and be sued
An OPC has the capacity to sue and be sued on its own behalf. Criminal complaints are filed by or against an OPC, but it has to be represented by a natural person, who could be a single Director or any Director if there are more than one. Any act which affects its reputation or is likely to cause damage to its business can raise a reasonable cause of action.
Such a question need not arise in the case of a sole proprietorship. The owner sues on his own behalf and on behalf of the proprietorship.
A One Person Company has to file annual returns etc just like a normal company and would also need to get its accounts audited in the same manner.
On the other hand, a sole proprietorship would only need to get audited under the provisions of Section 44 AB of the Income Tax Act, 1961 once its turnover crosses the certain threshold.
Difference between One Person Company and Sole Proprietorship in Tabular Form
|Parameters||One Person Company||Sole Proprietorship|
|Transferability||Allowed to 1 person only||Not allowed|
|Taxation||Tax rate is 30% on profits plus cess and surcharge||Taxed as an individual|
|Survival||Existence is independent on directors or nominee||Comes to end on death or retirement of the member|
|Registration||Can be registered under MCA and Companies Act 2013||Not Compulsory|
|Minimum number of member||Minimum number of 1 person||Sole Proprietor|
|Members liability||Limited to the extent of share capital||Unlimited liability|
|Maximum number of members||Maximum 2 person||Maximum 1 person|
|Loans||Not the Sole Responsibility of Owner||Sole Responsibility of Owner|
|Legal status of the entity||Separate legal entity||Not considered as a separate legal entity|
|Foreign ownership||Allowed if one is the director and other is the nominee. The Director and the nominee cannot be foreign citizens||Not allowed|
|Board Meeting||Required AGMs and Meeting of Board of Directors.||Not Required|
|Annual filings||Filed with the registrar of the company||Income tax returns only|
|Know More||Know More|
For the small business, the sole proprietorship is still more viable in comparison to One Person Company. If you are aiming for a long term solution with more credibility of your business and ready to take on the legal compliance requirements and cost then you can start with One Person Company.
Our Take For Startups
For startups whose main goal is funding then, OPC may not be fit for them. Because as a startup you may want to look for investment, so for the easy process it is recommended to go for Private Limited Company then OPC.
According to our research, many companies with OPC then convert into Private Limited Company when investors start showing interest.
According to the Companies Act, an OPC has to convert into Private Limited Company in case it paid-up capital exceeds 50 Lakhs or average turnover exceeds over 2 crores for 3 intermediate consecutive years.
It doesn’t take much time to convert OPC into Private Limited Company.
If you are starting out and have a goal of funding then go for Private Limited Company.
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