Difference between a Sole Proprietorship and an One Person Company
- Posted By SuperCA
- On 11 March
About
Entrepreneurs in India have two popular options to start their businesses – Sole Proprietorship and One Person Company (OPC). Both are suitable for small businesses and can be started with minimum legal formalities. However, there are significant differences between the two structures that entrepreneurs should consider before choosing one.
A sole proprietorship is a type of business that is owned and operated by a single individual. The owner has complete control over the business and is responsible for all its debts and obligations. A sole proprietorship is the simplest form of business structure and requires very little legal documentation to start. The owner can start the business under his/her own name or choose a trade name. Whereas, an OPC is a hybrid structure that combines the benefits of a sole proprietorship and a private limited company. An OPC is a separate legal entity from its owner and has limited liability. It is suitable for entrepreneurs who want to start a business on their own but want the benefits of a private limited company, such as limited liability protection and the ability to raise capital.
Key Differences between Sole Proprietorship and One-Person Company
Let us delve into the differences between the two structures in detail.
| Parameter | Sole Proprietorship | One Person Company |
| Ownership and Management | The owner has complete control over the business and makes all the decisions. There are no legal requirements to appoint a board of directors or hold regular meetings. The proprietor is the sole decision-maker and is responsible for all the debts and obligations of the business. | an OPC is owned and managed by a single person, but the company has a separate legal identity from the owner. The owner can appoint a director to manage the day-to-day operations of the company, but ultimate control remains with the owner. The director must be a resident of India and can be the same person as the owner. |
| Legal Status | Proprietor and its business are indistinguishable from a tax and legal point of view | OPCs are treated as a private company having a separate legal entity. |
| Liability Protection | The owner is personally liable for all the debts and obligations of the business. This means that if the business is unable to repay its debts, the owner's personal assets can be used to satisfy the creditors. | In contrast, an OPC is a separate legal entity from its owner and has limited liability protection. This means that the owner's personal assets are not at risk if the business is unable to repay its debts. The liability of the owner is limited to the extent of his/her investment in the company. |
| Taxation | The income earned by the owner is taxed as personal income. The owner must file a personal income tax return and pay tax on the business income at the individual income tax rates. | In contrast, an OPC is taxed as a separate legal entity. The company must file a corporate income tax return and pay tax on its profits at the corporate tax rates. The owner is considered an employee of the company and is paid a salary, which is taxed as personal income. |
| Compliance Requirements | A sole proprietorship has very few compliance requirements. The owner must obtain a business license and any other necessary permits from the local authorities. The proprietor must also file a personal income tax return and pay tax on the business income. | An OPC has more compliance requirements than a sole proprietorship. The company must be registered with the Registrar of Companies (ROC) and file annual returns with the ROC. The company must also maintain proper books of accounts and comply with the Companies Act, 2013. |
| Capital Requirements | A sole proprietorship does not have any capital requirements. The owner can start the business with his/her own funds and does not need to raise capital from external sources. | An OPC, on the other hand, has a minimum capital requirement of Rs. 1 lakh. The owner must invest at least 1 lakh in the company and can also raise capital from external sources, such as venture capital or angel investors. |
| Transfer of Ownership | The ownership of the business cannot be transferred easily. If the owner wants to sell the business, he/she must sell all the assets and liabilities of the business. The new owner must also obtain a new business license and permits. | In contrast, an OPC is a separate legal entity, and the ownership can be easily transferred by selling or transferring the shares of the company. The new owner must comply with the necessary legal formalities to become a shareholder of the company. |
Conclusion
Both Sole Proprietorship and OPCs are beneficial in their own terms and also have their own shortcomings. A sole proprietorship is a simple and cost-effective way to start a business, but it does not offer limited liability protection. An OPC offers limited liability protection and has the benefits of a private limited company, but it has more compliance requirements and higher capital requirements.
Hence, it solely depends upon the motive and objectives of the individuals whether they go for Proprietorship or OPC. In general, people who want to start a business from home or on a premise with a minimum amount can go for proprietorship and if you want to start a corporation solely, then OPC is the best one for you. Entrepreneurs should consider their business goals, financial resources, and risk appetite before choosing between the two structures. At SuperCA, we are always here to offer full help with the registration process of your OPC/Sole Proprietorship. We guarantee a hassle-free quick & easy process with 100% accuracy in documents and files at minimum possible cost.
