Deliberating the right business structure for a solo businessperson is a complicated task that requires information about the limitations and benefits of both OPCs and sole proprietorships.
Typically, new business owners are perplexed when it comes to deciding on the best business structure for establishing their company. OPC and sole proprietorships appear to be nearly the same, but there are certain variances that are discussed below. Based on the following information, you can select the best business structure.
If you want to start a business and are keen on having complete control, you have two options: a one-person company or a sole proprietorship. They both have their advantages and disadvantages and one can’t assert that one is better than the other, just which one is more suited for one’s particular requirement.
In a nutshell, one-person enterprises are better for medium-sized organisations, but sole proprietorships are preferable for smaller businesses. So let’s examine the differences between the two to determine which is better for your business.
Because their liability is limitless, a sole proprietor is entirely unprotected. This means that if the company is unable to fulfil its debts, creditors can force the proprietor to sell their personal assets to pay back the business’s debts. This is so 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. As a result, if your company does not have much risk, a sole proprietorship may be appropriate, if the contrary is true, a one-person company is preferable.
A sole proprietorship is naturally the cheaper option, given that there is no formal registration involved. GST registration and a license under the Shops & Establishments Act will suffice if you’re a sole proprietor. The costs of these anxicallary registrations are small and won’t burn a hole in your pocket.
A one-person company on the other hand, in addition to the above registrations, will be required to undergo incorporation procedure and adhere to various compliances. This involves a significant amount of expenditure which is worth it, considering the numerous other benefits of the structure.
When a sole proprietor dies, the assets and liabilities of his or her business are transferred to his or her children/heirs, and their business licence expires. If the children/heirs want to keep the business going, they must obtain a new business license.
However, on the other hand, even if the owner of an OPC dies the business survives on account of perpetual succession. In the event of an OPC owner’s death or incapacity, their nominee will take over to continue business activities until they can be transferred to his/her heirs. The heirs can then continue to run the business without having to form a new entity.
Sole proprietorships are required to just submit income tax returns and keep their books in order, whereas one-person companies must also have their books and balance sheet audited, file yearly reports, and notify the RoC of any changes in their structure. Compliance costs of at least ₹10,000 per year should be earmarked for one-person businesses.
In the end, your choice should be dependent on your industry. Become a sole proprietor if you are a one-person show facing low to no risk in your business adventures. However, if there is a considerable amount of risk attached to your business and you want a more official and credible setup, start a one-person company. All in all, make sure to make the choice based on the nature of your business.
A professional legal service provider such as Vakilsearch can offer you the right advice on choosing the right business structure for your business. Get in touch with our experts today!