Have you recently decided to start your own business? As an entrepreneur, you must choose a structure to help you achieve your business objective.
If you are someone who wants to be in control of the management of your company and business affairs, you may choose between the following two options, Sole proprietorship and One Person Company (OPC).
In this article, we share an overview of Sole Proprietorship and OPC to help you decide which structure is more suited to meet your business needs.
What Is A Sole Proprietorship?
A Sole proprietorship is a type of business entity owned, controlled, and managed by a person (where you are your own boss). It is easy to register the business with limited compliances and easy to manage the day-to-day operations. As a result, it is one of the most popular forms of business structure.
What are the advantages and disadvantages of a sole proprietorship?
|1. Decision making:
The proprietor has complete control over all business matters, which ensures quick business decisions. It further leads to faster execution.
|2. Low cost of incorporation:
Easy to set up and lower registration costs compared to other business structures in India.
|3. Tax Savings:
You will file returns and pay taxes only in your name. There are no separate income tax returns to be filed by the firm. The business is taxed at the personal income tax rate instead of the corporate tax rate. This leads to enormous tax savings.
|1. No separate legal identity:
The proprietor and the business are considered as a single entity under the law. The business is dissolved upon the death of the owner (unless his will specifies that he has passed on the ownership to someone else).
|2. Unlimited liability:
In case the organisation does not have sufficient funds, the owner’s personal assets will be used to pay off the business debts.
|3. Raising Capital:
It is challenging to raise funds from banks and other financial institutions.
What Is An OPC (One Person Company)?
An OPC (One person company) is a company that has only 1 shareholder as its member. An OPC can be set up with only one person, who will act as a member, shareholder, and director. It is a one-person business organization.
An OPC combines the benefits of a Sole proprietorship and a company, where you can hire directors and employees to manage your business efficiently.
An OPC was introduced with a view to overcoming the shortcomings of the traditional sole proprietorship. The main attraction of an OPC is the advantage of limited liability offered to entrepreneurs.
What are the advantages and disadvantages of an OPC?
As an owner and shareholder, you have complete authority over all the business decisions. You do not have to answer to a third party.
|2. Limited Liability:
An OPC offers limited liability to its owner. The liability is limited to the extent of owner’s investment in the company.
|3. Legal status:
The member and the company enjoy are to be considered as separate legal entities.
|4. Perpetual succession:
The member can nominate another person (who must be a resident citizen of India) to continue the business operations.
Along with the initial cost of registering a company, an OPC has to incur other charges to keep up with various annual compliances.
|2. Tax dues:
Unlike a sole proprietorship, no specific tax incentives are available for an OPC.
|3. Compliance burden:
OPC is a kind of Private Limited Company and you have to abide by provision of the Companies Act, 2013 (Example: Auditor Appointment, Annual Filling, holding meetings, etc.)
Determine Your GST Liability
What Are The Differences Between A Sole Proprietorship And OPC?
|1. Name of the entity||Proprietor may choose any name||The name must contain the word OPC|
|2. Cost of Setting up||Minimal||Higher compared to Sole proprietorship|
|3. Legal Status||No separate legal entity||Separate legal entity|
|4. Liability||Unlimited||Limited to the extent of share capital|
|5. ROC compliance||Not Applicable||Applicable|
|6. Statutory Audit||Not Applicable||Mandatory|
|7. Fundraising||It is challenging to raise funds from banks and other financial institutions||Easier to raise funds from banks and other financial institutions|
|8. Tax Rate||Business is taxed at an individual tax rate||Company is taxed at a corporate tax rate|
|9. Liquidation||The business is dissolved on the death of the proprietor||The business can be liquidated through a legal process.|
|10. Most suited for||Unorganized sector||Organized business sector|
In both Sole proprietorship and OPC, you can manage your business on your own terms.
If you have recently become an entrepreneur, and have started your business on a small scale then a sole proprietorship is ideal. You would have complete control and sole decision-making power in your business. You do not have to deal only with a lot of compliances.
An OPC being hybrid in nature, it is more suited for entrepreneurs who want to conduct business in an organized setup. You can take advantage of the corporate structure while still being in control of the business decisions. You can reap the benefits of limited liability and access various financial institutions to raise funds.
You can make an informed decision about the type of business entity you want to set up, based on the above information.
How Can We Help You?
At ICI we have the expertise and skills to guide you through various legal processes and necessary compliances. A few examples of the services provided by us are as follows:
- Registrations for Sole Proprietorship and OPC
- Shop and Establishment Act License
- GST Registration for a firm.