Often entrepreneurs do not wish to seek partners when establishing their business. Further, they may also want to do away with the complexities of getting Directors, a Board, and other Shareholders.
If you are one such businessperson, both One Person Company Registration and Sole Proprietorship Registration can be a good option for you. While both businesses are owned and operated by one person, the functioning differs significantly.
One Person Companies
When establishing a new company, entrepreneurs often want to separate their legal and financial liability from their company. Under the Companies Act of 2013, businesses owned and operated by a single person can be incorporated. This is done under the One Person Company registration process.
For a One Person Company registration, the business needs to have only one Director who is also the only shareholder, plus a registered address. Further, the process has a minimum capital requirement of INR 1 lakh. The Director should be a natural person, resident of India, above 18 years of age, and have no other OPCs in his/her name.
Why Go for One Person Companies
With the One Person Company registration process, here are the following benefits:
- The company becomes a separate legal entity.
- The Director is no longer personally liable for the company’s losses and debts.
- Shares can be transferred from one owner to another easily.
- The company enjoys perpetual succession independent of the owner.
- Raising capital is easy via investments from venture capitalists.
- The company can register as an MSME and get access to government schemes.
- Being a registered company, the business enjoys more credibility.
Further, companies that fall under the ambit of the Startup India scheme are eligible to enjoy a three year tax holiday.
Some Issues Faced by One Person Companies
While the One Person Company registration process establishes your company as a separate legal entity, it also has the following issues:
- The company cannot conduct any activity that qualifies as a Non-Banking Financial Investment.
- There is a lack of distinction between the management and owners.
- Since there is only one owner, the One Person Company registration is suitable for smaller companies.
- The registration process can be tedious.
Sole Proprietorship Firms
The simplest and most convenient way to start a business is opting for the Sole Proprietorship registration. Sole Proprietorship firms fall under the ambit of the Shops and Establishment Act, however, registering under the same is optional.
By going for the Sole Proprietorship registration, it becomes easier for a firm to obtain an FSSAI and Import/Export license, and register for Trademark, Professional Tax, and MSME benefits.
Since only one person is responsible for the business, decision-making is quicker. This ensures the business can make quick changes and grow without being restricted by compliance norms.
What Makes Sole Proprietorship Firms a Good Choice
For people who wish to start their business without any regulatory hassles, sole proprietorship registration is a sound choice. By opting for this they enjoy:
- Little to no compliance restrictions.
- An economical option for new businesses.
- Complete control over their business.
- Lower tax slab since the income tax is payable at an individual level.
- No income tax to pay if the business turnover is below the minimum taxable amount.
- No complexities when changing the business design or shutting down the business.
Further, the owner does not need to consult anyone when making a business decision, whether big or small. To top it off, there is no need for board meetings, annual meetings, and mandatory audits for the business.
Limitations and Disadvantages of Sole Proprietorships
Though establishing the business becomes simpler, there are certain drawbacks that Sole Proprietorship Firms face:
- The owner is personally liable for all debts and legal actions associated with the business.
- There is no room for perpetual succession since legally the owner and the business are one and the same.
- Raising capital and business expansion is a difficult activity.
- Building client faith and market reputation can be tough.
How One-Person Companies Differ From Sole Proprietorship Firms
While both businesses are owned and operated by a single person, there are certain notable differences between them. These can be categorized as:
● Registration
Sole Proprietorship firms need not register; however, One Person Company registration is mandatory under the Companies Act of 2013.
● Legal Status and Liability
OPCs are separate legal entities while Sole Proprietorship firms are not. Thus, in OPCs, the owner has limited liability protection.
● Foreign Ownership
The nominee can be a foreigner in OPCs, but the Director/ Owner needs to be a citizen of India in both cases.
● Transferability and Succession
Owner is transferable with the One Person Company registration but not so in Sole Proprietorships. Further, since the OPC becomes a separate legal entity, it enjoys perpetual succession which is not true for Sole Proprietorship Firms.
● Compliance and Annual Filings
One Person Companies are subject to industry-specific compliances and have to file documents annually with the ROC (Registrar of Companies). Further, they have to file annually for Income Tax. Sole Proprietorship firms do not have to meet any such compliance norms. Plus, their only compulsory filing is for Income Tax.
Wrapping Up: Choosing the Right Business Format
While the Sole Proprietorship registration is easy to obtain and maintain, with very little compliance needs, it has the potential to limit the growth of your business. If you opt for One Person Company Registration, you will enjoy the benefits of a Private Limited Company.
When setting up your business, it is important to evaluate its scope and how you want it to function. Based on this, as an entrepreneur, you need to determine which registration to opt for.
