When you are about to kick-off a new business alone, but confused among different choices which are available, one always thinks what is better, so here you will get all difference between One Person Company and Sole Proprietorship.
Read the article below to find about One Person Company vs Sole Proprietorship and what you can do in that situation. We bring you major differences in both types of businesses so as to make it easy for you to decide what to choose between the two of them. Here are some advantages and disadvantages of Sole Proprietorship and One Person Company (OPC) and examples of when they’re commonly used by business owners.
What is sole proprietorship?
The word ‘sole’ stands for single and ‘proprietorship’ signifies ownership. Sole proprietorship is accepted as one of the most common, simplest and oldest form of business entity. It is controlled and owned by one person only and the person running it is known by the name of ‘sole proprietor’ or a ‘sole trader’.
A sole proprietorship is an unregistered business with a sole owner who pays personal income tax on profits earned from the business. It is the easiest form of business with very less government regulation, forming sole proprietorships is popular among individuals, self-contractors, consultants, small business owners etc.
A sole proprietorship has no difference between the business entity and its owner, i.e., the owner of the business is also known as sole proprietor. It is therefore very different from limited partnerships and corporations, as there is no creation of separate legal entity. As a result, the owner of a sole proprietorship has unlimited liability acquire by the entity. For instance, the creditors of the sole proprietorship are also the creditors of the owner.
However, sole proprietorship has an added advantage too, that is all profits flow directly to the owner of a sole proprietorship.
What is a One Person Company?
One Person Company is a mixture of Sole-Proprietorship and Company form of business. The Companies Act, 2013 introduced the new concept of One Person Company, thereby enabling a Person who is carrying on the business in the Sole-Proprietorship firm to enter into a corporate outline with concessional requirements under the Act.
In the former Companies Act 1956 a minimum of two shareholders and directors were required to form a private limited company. However, with the Companies Act 2013, as per Section 2(62), a company can be formed with just 1 Director and 1 member. OPC is a form of a company where the compliance requirements are lesser than that of a private company.
The concept brought in absurd prospects for sole proprietors and individual entrepreneurs who can take the advantages of Limited liability and corporation.
Which one to select between Sole Proprietorship and One Person Company?
Check out the difference between Sole Proprietorship and OPC given below and decide!
While starting any business you need to get certification but in case of sole proprietorship the formal registration is not a prerequisite. However, in case of the One Person Company, Registration is an important aspect and the process for the same is lengthy. A One Person Company should have to be registered with the Registrar of Companies and requires the following things to be done by the Director of the company:
(a) Obtain DIN and DSC
(b) Get the Name Approval
(c) Articles of Association and Draft Memorandum of Association
(d) Apply for Incorporation with the RoC and
(e) Complete post-incorporation formalities.
2. Legal Status:
Sole proprietorship needs separate legal identity unlike a partnership firm or corporation. A sole proprietorship is a limited business structure that connects the business and the business owner. From a tax and legal viewpoint, the two are indistinguishable. One Person Company on the other hand is a business that has the advantage of a corporate status in society, this helps in drawing high-quality employees. The presence of OPC is not affected by the death or incapacity of member.
3. Limited liability protection to directors and shareholders:
A sole proprietorship’s liability is unlimited that is, all the assets of the individual will be attached and there is no limitation on the liability. Liability extends to his personal belongings as well. As a One Person Company is a separate legal entity, hence the owner has a limited liability, in case the business suffers a loss. This is the most attractive reason why many individuals are opting for an OPC.
In Proprietorship, Tax liability of Proprietorship firm is carried by the Proprietor whereas for OPC, tax liability of the company and single member is independent.
In the case of sole proprietorship, sequence takes place through an execution of a Will. In a One Person Company, appointee designated by its member, who shall, in the event of the death of the member, become a member of the company and shall be responsible for the running of the company.
In a sole proprietorship, the owner only wants to case the annual returns. While a One Person Company has to register annual returns, get its accounts audited and meet other compliances of a Private Limited Company.
Conversion of Sole Proprietorship to Private Limited Company is a dull process as compared to conversion of OPC to Private Limited Company. OPC has to convert itself into Private Limited Company if its Paid-up share capital exceeds Rs.50 Lakhs and if it’s average turnover of any three consecutive financial years exceeds Rs.2 Crores.
8. Brand Value:
As the one person company gets registered under the New Companies Act and gets the registration certificate, it automatically creates brand value which a sole proprietorship lacks.
9. Separate Property:
As there is no difference between the owner and business in sole proprietorship therefore any creditor of the proprietorship can also claim on all the assets of the owner. However, in One Person Company there is an added benefit as a company has a separate legal entity. Any equity purchased by OPC will be the asset of that OPC. The member does not have an insurable activity in the property of the company.