If you’re starting a business, keen on having full control, you have two options to choose from: a one-person company and sole proprietorship. As you would expect, they both have their advantages and disadvantages and you can’t say, without exception, that one is better than the other. The short answer is that one-person companies are better for mid-sized businesses, while sole proprietorships are better for small businesses. So let’s examine the differences between the two to find out which suits your business.
A sole proprietor is completely unprotected as his liability is unlimited. This means that if the business is unable to repay its debts, the creditor can have your personal assets sold off to recover the amount. This can happen because a sole proprietorship is not a separate legal entity from its owner. On the other hand, the director of a one-person company is fully protected in such a situation. As the entity is legally distinct from its director, his/her personal assets are always protected. Therefore, if your business hasn’t much money to risk, a sole proprietorship might do; if the opposite is at all true, go for a one-person company.
A sole proprietorship is naturally the cheaper, given that there is no registration involved. If you, as an individual, get a VAT registration and license under Shops & Establishments Act, you’re a sole proprietor. The costs of these registrations are small, usually around Rs. 5000 each. A one-person company is in addition to these above registrations, which are compulsory if you are a manufacturer or trader (if you are in the services business, you would need service tax, not VAT, registration). This would cost around Rs. 15,000.
Neither has any tax benefits, so let’s leave those aside. With an OPC, you need to pay taxes at a flat rate of 30% on profits. You need to pay Divident Distribution Tax and Minimum Alternate Tax. Sole proprietors must pay at the individual slab rate, but do have some conveniences; for example, if your turnover is less than Rs. 1 crore, you can declare profits at a flat 8%.
There’s no question here: sole proprietorships need only file income tax returns and maintain their books, while one-person companies must additionally have their books audited, do annual filings and inform the RoC in case of any changes in its structure. One-person companies will spend at least Rs. 10,000 annually on compliances.
Ultimately, you don’t have a choice between the two, really. It depends on your business. If you’re a one-man business with little risk, be a sole proprietor. But if there’s risk and you would like a more formal set-up, register a one-person company.