Looking to start a company all by yourself? You have two options: opening a sole proprietorship or a one-person company. Read this article to make the right decision.
Until a few years ago, a sole proprietorship was the only option for a person who wanted to start a business alone. Now you have an alternative option: a one-person company. The concept of one person company (OPC) allows a single person to run a company limited by shares. A sole proprietorship is an entity run and owned by one individual without distinction between the owner and the business. Learn more about One Person Company Vs Sole Proprietorship.
One Person Company
The Companies Act of 2013 introduced the innovative concept of One Person Company (OPC). As the name implies, an OPC is a company initiated and managed by a sole individual. Possessing all the characteristics of a traditional company such as perpetual succession, limited liability, and distinct legal entity, an OPC marks a departure from the previous norm where a single person couldn’t establish a company. Prior to the enactment of the Companies Act in 2013, individuals seeking to set up their own businesses were limited to sole proprietorships due to the requirement of at least two directors and two members for company formation.
Unlike Private Companies, which necessitate a minimum of 2 Directors and 2 Members, and Public Companies, which mandate a minimum of 3 Directors and 7 Members, the Companies Act 2013, under Section 2(62), allows for the formation of a company with just 1 Director and 1 member, who may be the same individual. This setup offers a hybrid structure combining the features of a company with the advantages of a sole proprietorship, with reduced compliance requirements compared to private companies. Hence, an OPC enables a single individual, whether a resident or non-resident Indian (NRI), to establish a business that embodies the characteristics of a company while enjoying the benefits akin to a sole proprietorship.
Difference between Sole Proprietorship and OPC
| Criteria | Sole Proprietorship | OPC |
| Definition and Legal Framework | A business owned and operated by one person. It is the simplest and most common business structure. | A form of business entity introduced in India in 2016. It is a hybrid between a sole proprietorship and a company, offering limited liability protection to the owner. |
| Ownership and Liability | The owner has unlimited liability for the debts and obligations of the business. | The owner’s liability is limited to the extent of their investment in the OPC. This means that their personal assets are generally protected from creditors of the business. |
| Formation and Compliance | Relatively easy and inexpensive to form. There are few formalities involved. | Requires more formalities than a sole proprietorship, including filing incorporation documents with the Registrar of Companies (ROC). However, it is still simpler and less expensive than forming a company. |
| Continuity and Transferability | The business ceases to exist when the owner dies or becomes incapacitated. | The OPC can continue to exist even if the owner dies or becomes incapacitated. The ownership and management of the OPC can be transferred through a nomination process. |
| Fundraising and Expansion | Limited access to funding as lenders are hesitant to provide loans due to the unlimited liability of the owner. | May have better access to funding compared to a sole proprietorship due to the limited liability protection offered to the owner. However, it may still be challenging to raise large amounts of capital. |
Sole Proprietorship
A sole proprietorship is a suitable option for small businesses that wish to avoid accumulating debt or obtaining funding. Even if you do not intend to expand your business in the future, starting as a sole proprietorship is still a viable choice. You can always choose to register your business as an OPC at a later time.
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Advantages of Sole Proprietorships
- Easy to set up. No lengthy registration process.
- Takes lesser investment
- Compliances are less compared to OPC (most minor among all other forms of business)
- Tax is more secondary as long as the income is more secondary than the income tax slab for individuals
- Financial statements and audit reports are not public, while an OPC you have to submit these details as an OPC
- No mandatory audit is required for a sole proprietorship if the type of business doesn’t warrant it.
Disadvantages of Sole Proprietorships
- While the sole owner enjoys all the profits, they also have to bear all the loses
- Comparatively hard to get funding or loan as banks and other lenders are hesitant to invest in this type of business
- As the income grows, one might have to pay higher taxes according to the tax slab, while OPC is taxed differently
Advantages of OPC
- Limited liability for the business owner
- It is a separate legal entity
- The company registration gives more credibility to the business
- Easy to get loans or funding for the business as lenders trust the registered business
- Perpetual succession
- In case the owner becomes incapable of running the business or dies, the nominee can take over the business
- A sustainable business structure, even when you want to scale
Disadvantages of OPC
- One Person Company takes more money to set up and run compared to a Sole Proprietorship
- More compliances
- Must have a nominee to incorporate an OPC
- A person cannot have more than 1 OPC at a time
FAQ’s
Which is better OPC or sole proprietorship?
The choice between an OPC (One Person Company) and a sole proprietorship depends on various factors such as the scale of operations, legal requirements, and the need for limited liability. Both have their own advantages and disadvantages, and the decision should be based on individual circumstances.
How does OPC differ from a single proprietorship?
OPC is a separate legal entity distinct from its owner, providing limited liability to the owner, while a sole proprietorship does not have a separate legal existence, and the owner has unlimited liability. OPC is governed by the Companies Act, 2013, while a sole proprietorship is not.
Can a sole proprietorship be converted to OPC?
Yes, a sole proprietorship can be converted to an OPC by registering the OPC and transferring the assets and liabilities of the sole proprietorship to the OPC.
What is the disadvantage of sole proprietor?
The main disadvantage of a sole proprietorship is that the owner has unlimited liability, meaning they are personally responsible for all the debts and obligations of the business. Additionally, it may be difficult for a sole proprietorship to raise capital or expand the business.
Is OPC a good option?
OPC can be a good option for small businesses and entrepreneurs who want limited liability and the benefits of a corporate structure while being the sole owner of the company. It provides a separate legal entity, perpetual succession, and limited liability to the owner.
What are the tax benefits of OPC?
OPC is taxed at the corporate tax rate, which may be lower than the individual tax rate for the owner of a sole proprietorship. Additionally, certain tax deductions and benefits available to companies may be applicable to OPCs.
How is OPC taxed?
OPC is taxed as a separate legal entity, and its income is subject to corporate tax. The tax rate for OPCs is determined based on the applicable tax laws and the company's income.
Why is OPC a private company?
OPC is considered a private company under the Companies Act, 2013, because it is intended to be operated by a single person. It has features similar to a private company, such as limited liability and restrictions on the transfer of shares.
Can OPC do multiple businesses?
An OPC can engage in any lawful business or activity, subject to the restrictions and regulations applicable to the specific industry or sector. However, an OPC cannot be incorporated for non-profit activities, and certain businesses may require specific licenses or permissions.
Can I convert OPC to private limited?
Yes, an OPC can be converted to a private limited company by following the procedures and requirements specified in the Companies Act, 2013. The conversion may involve changes to the company's structure, shareholding, and compliance with regulatory provisions.
Is it mandatory to convert OPC to private limited company?
It is not mandatory to convert an OPC to a private limited company. An OPC can continue its operations as long as it meets the eligibility criteria and complies with the regulatory requirements specified for OPCs.
What is the biggest disadvantage of a sole proprietorship?
The biggest disadvantage of a sole proprietorship is the unlimited liability of the owner, which means that the owner's personal assets are at risk in the event of business debts or legal claims.
What is the next biggest disadvantage of sole proprietorship?
Another significant disadvantage of a sole proprietorship is the limited ability to raise capital, as the owner's personal finances are typically the primary source of funding for the business. This can restrict the growth and expansion of the business.
Can a sole proprietorship have employees?
Yes, a sole proprietorship can have employees. The owner is responsible for hiring, managing, and paying employees, and the business must comply with employment laws and regulations applicable to the jurisdiction and industry.
What is the major problem of sole proprietor?
The major problem of a sole proprietorship is the lack of separation between the owner and the business, which can lead to personal liability, difficulty in raising capital, and challenges in business continuity in the event of the owner's absence or incapacity.
What are 10 disadvantages of a sole trader?
Some disadvantages of a sole trader include unlimited liability, limited access to capital, difficulty in raising funds, potential for burnout, lack of expertise in all areas of the business, limited growth potential, difficulty in attracting top talent, challenges in business continuity, and the burden of managing all aspects of the business alone.
What is a real life example of a sole proprietorship?
A real-life example of a sole proprietorship is a local bakery owned and operated by a single individual. The owner is responsible for all aspects of the business, including baking, sales, marketing, and financial management. The business is not a separate legal entity, and the owner has unlimited liability for its debts and obligations.
Conclusion
The OPC is best for people who want to start a business with a corporate structure but still want to retain effective control over all the business operations. You can scale the company and still enjoy limited liability.
If you are still unsure which one to pick for your business, feel free to reach out to us, and our experts at Vakilsearch will guide you in making the right decision for your company registration.
