Just when you are about to kick start a new business alone, but confused among different choices which are available, one always thinks what is better a Sole Proprietorship or a One Person Company?

Read the article below to find about Sole Proprietorship vs One Person Company and what you can do in that situation. We bring you 8 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 pros and cons 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’ denotes single and ‘proprietorship’ signifies ownership. Sole proprietorship is recognized as one of the most common, simplest and oldest form of business entity. It is owned and controlled 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 an individual owner who pays personal income tax on profits earned from the business. It is the simplest 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 distinction 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 corporations and limited partnerships, as there is no creation of separate legal entity. As a result, the owner of a sole proprietorship has unlimited liability incurred by the entity. For example, 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 fusion of Sole-Proprietorship and Company form of business. The Companies Act, 2013 brought in 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/relaxed requirements under the Act.

In the former Companies Act 1956 a minimum of two directors and shareholders were required to form a private limited company. However with the new Companies Act 2013, as per Section 2(62), a company can be formed with just 1 Director and 1 member. OPC Company is a form of a company where the compliance requirements are lesser than that of a private company.

The concept brought in extravagant prospects for sole proprietors and individual entrepreneurs who can take the advantages of Limited liability and corporation.

Which one to choose between Sole Proprietorship and One Person Company?

Check out the difference between OPC and Sole Proprietorship given below and decide!

1.  Registration:

While starting any business you need to get registration but in case of sole proprietorship the formal registration is not a pre-requisite. However, in case of the One Person Company, Registration is an important feature and the process for the same is lengthy. A One Person Company would 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)  Draft Memorandum of Association and Articles of Association

(d)  Apply for Incorporation with the RoC and

(e)  Complete post-incorporation formalities.

2. Legal Status: 

Sole proprietorship lacks separate legal identity unlike a partnership firm or corporation. A sole proprietorship is a small 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 benefit of a corporate status in society, this helps in drawing high-quality employees.  The existence 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 desirable reason why many individuals are opting for an OPC.

4. Taxation:

In Proprietorship, Tax liability of Proprietorship firm is borne by the Proprietor whereas for OPC, tax liability of the company and single member is independent.

5. Succession:

In the case of sole proprietorship, succession takes place through an execution of a Will. In a One Person Company, nominee 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.

6. Compliance:

In a sole proprietorship, the owner only needs to file the annual returns. While a One Person Company has to file annual returns, get its accounts audited and meet other compliances of a Private Limited Company.

7. Conversion:

Conversion of Sole Proprietorship to Private Limited Company is a tedious process as compared to conversion of OPC to Private Limited Company. OPC has to convert itself compulsorily to 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 Companies Act and gets the registration certificate, it automatically creates brand value which a sole proprietorship lacks.

9. Separate Property:

As there is no distinction 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 advantage as a company has a separate legal entity. Any property purchased by OPC will be the asset of that OPC. The member does not have an insurable interest in the property of the company.

Comparison Table: One Person Company vs Sole proprietorship

CONCLUSION

The combat between sole proprietorship and one-person company is somehow like two sides of the same coin. The sole proprietorship form of business has its own perks and disadvantages whereas OPC has got its pros and cons. OPC is like a corporation headed by a single individual as compared to Sole Proprietorship. When it comes to registration process there is no explicit way to register a Sole Proprietorship and on the contrary, there is lesser compliance which is to be followed for registering a One Person Company.

When it comes to selecting the type of business, you need to think before you choose. Every form has some pros and some cons, here we have provided you the detailed analysis of the two. It depends on type and choice of your business. If you want to be your own boss and run a business from home or without a proper infrastructure or office, a sole proprietorship allows you to be in complete control. If you want to start a corporation with less compliance then One Person Company is the one for you. Ultimately, it’s your choice to choose between the two.

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