A company can be founded with just one director and one member, according to Section 2 (62) of the Company’s Act 2013. In India, a One Person Company registration is a type of entity with fewer compliance requirements than a Private Limited Company.
One Person Company (OPC) enables the establishment of a separate legal entity by a single individual. This structure grants the owner limited liability while preserving full control over company operations. Within an OPC, the owner assumes the role of the sole shareholder and can designate a nominee for succession planning purposes. Compliance obligations encompass statutory audits, annual filings and the maintenance of accurate financial records.
In contrast, Sole Proprietorship stands as the simplest and widely adopted business ownership model. It entails an individual operating and owning a business, taking on all risks and liabilities. Unlike OPC, there exists no distinct legal entity, leaving the proprietor’s personal assets exposed to business debts and legal matters. Sole proprietors enjoy full autonomy in decision-making; however, they bear personal liability for any business-related obligations or losses. Setting up and managing a sole proprietorship is relatively straightforward, without much formal registration needs or intricate legal procedures.
Drawing Comparison between One Person Company and Sole Proprietorship
An OPC and a sole proprietorship can be compared based on the following grounds:
1. Difference based on Legal Framework and Formation Process
On the basis of legal formation and framework, the following comparison can be made:
Legal requirements and regulations for forming an OPC:
- Ownership and distinct legal entity: OPC allows single-person ownership, making it suitable for entrepreneurs who wish to operate independently and creating a separate entity distinct from the owner.
- Liability protection for the owner: The owner of an OPC benefits from limited liability protection. This ensures that, in case of financial obligations or legal disputes, the owner’s personal assets remain safeguarded and their liability remains restricted to the capital invested in the company.
- Incorporation process and documentation: To form an OPC, the legal procedures of company incorporation need to be followed. Examples are obtaining a Digital Signature Certificate, Director Identification Number, submission of necessary documents, etc.
Legal requirements and regulations for establishing a Sole Proprietorship:
- No separate legal entity: According to the law, in OPC business, the business and the owner are considered as one entity and thus no separate distinct entity is created as in OPC.
- Sole proprietor’s unlimited liability: In a sole proprietorship Firm, unlimited personal liability implies that business related or business transaction liabilities can be settled using the proprietor’s personal assets. Creditors possess the ability to pursue the proprietor’s personal assets for settling business debts as he assumes unlimited liability for the business.
- Simplicity of formation process: Establishing a sole proprietorship is relatively simple and straightforward. The proprietor can choose to operate under their own name or a trade name, depending on local regulations and start conducting business immediately.
2. Difference on the basis of Ownership and Management
Based on Ownership and Management, the following comparison is made:
Ownership structure in OPC:
- Single person as the sole shareholder: In an OPC, the sole shareholder is a single person who holds complete ownership and control over the company’s affairs.
- Possibility of appointing a nominee: Furthermore, OPC allows the possibility of appointing a nominee who can assume ownership in case of the shareholder’s incapacitation or death, ensuring business continuity.
- Transferability of shares: Regarding share transferability, it is worth noting that OPC shares can be transferred, but only as per certain conditions specified in the Articles of Association. Also, compared to other types of companies, the transfer of shares in an OPC is made subject to more complex restrictions.
Ownership structure in Sole Proprietorship:
- Single individual is the owner and controller of the business: In a sole proprietorship, a proprietor is the only brain and hands of the company who is to assume complete authority over all aspects of the business.
- No Nominee appointment: In the case of sole proprietorship, there is no appointment of a nominee as in the case of an OPC and the proprietor runs the business on his own.
- No transferability of shares: As opposed to OPC shares which can be transferred, there is no such provision for sole proprietorships.
Decision-making and management in OPC and Sole Proprietorship:
- OPC is managed via a board of directors: In an OPC, management is executed through the appointment of directors, who are responsible for making all important decisions and overseeing regular operations.
- Sole Proprietor’s complete control and decision-making authority: A sole proprietorship grants the owner absolute control and power to take decisions for the business and thus there’s no necessity for board meetings or consultations with external stakeholders.
3. Difference based on Taxation and Compliance
On the basis of taxation and compliance, the following comparison can be made:
Tax implications for OPC:
- Corporate tax rates and benefits: OPCs are subjected to corporate tax rates like those imposed on companies, thereby availing them of various tax benefits and deductions. This, in turn, has the potential to reduce their overall tax liability.
- Compliance with tax laws and regulations: Additionally, OPCs are obliged to comply with tax laws and regulations that are applicable to companies like annual tax returns, fulfilling tax payment obligations, etc.
Tax implications for Sole Proprietorship:
- Business income taxed at the individual level: In a sole proprietorship, the business income is considered as the proprietor’s personal income, and it is subjected to taxation at individual tax rates.
- Compliance with personal income tax laws: Sole proprietors are obligated to comply with personal income tax laws, which encompass filing personal income tax returns and other obligations imposed on individuals.
4. Difference based on Flexibility and Scalability
Based on flexibility and scalability, the following distinction can be seen between OPCs and sole proprietorships:
Flexibility of operations in OPC:
- Independent legal entity allows for separate contracts and agreements in OPC’s own name: As an independent legal entity, an OPC can enter into contracts and agreements in its own name. This provides flexibility in dealing with suppliers, clients and partners, as the obligations and rights are associated with the company rather than the individual owner.
- Easier access to funding and capital: OPCs have better access to funding and capital compared to sole proprietorships. Being a separate legal entity, OPCs can issue shares, take on loans and attract investments from external sources. This allows for easier capital infusion and scalability of the business.
Flexibility of operations in Sole Proprietorship:
- Greater autonomy and decision making: Sole proprietors have this benefit of autonomy and control over what and how decisions are made in the organisation but since there exists no separate legal entity, no contracts can be entered into under its name.
- Limited ability to raise external capital or enter into complex business arrangements: Sole proprietorships may face challenges when it comes to raising external capital. Since the business is solely owned by the proprietor, accessing funding from investors or financial institutions may be more difficult. Additionally, sole proprietorships may have limitations in entering into complex business arrangements due to their structure and lack of separate legal entity.
Scalability considerations for OPCs and Sole proprietorships:
Scalability considerations depend on the nature and aspirations of the business. OPCs generally have higher scalability potential due to their ability to raise external capital, issue shares and attract investors. They can also facilitate the appointment of professional managers and board members to drive growth. In contrast, sole proprietorships may have limitations in terms of raising funds and expanding operations, as they primarily rely on the proprietor’s personal resources and creditworthiness.
5. Difference based on Closure and Dissolution
Based on dissolution and closure, the comparison can be made as follows:
Dissolution process for OPC:
- Voluntary or compulsory winding-up: An OPC can be dissolved voluntarily at the owner’s discretion, leading to the closure of the business but only after properly adhering to the legal procedures for winding up the company, which include passing a dissolution resolution or settling any outstanding liabilities.
- Distribution of assets and settlement of liabilities: During the dissolution process, the OPC’s assets are liquidated and converted into cash which then is subsequently utilised to settle any outstanding liabilities, encompassing debts, taxes and other obligations. If at all any assets still remain, they are then to be distributed among the shareholders in accordance with their respective shareholding in the OPC.
Dissolution process for Sole Proprietorship:
- Informal closure by the owner: In a sole proprietorship, the owner has the flexibility to informally close the business without following formal dissolution procedures. The proprietor can simply cease operations, close bank accounts and notify relevant parties, such as clients, suppliers and authorities, about the closure.
- Settling outstanding debts and obligations: Before closing a sole proprietorship, the owner is responsible for settling any outstanding debts and obligations of the business. This includes paying off creditors, resolving legal disputes and fulfilling any contractual commitments. The proprietor may need to liquidate assets to generate funds for debt settlement.
Final Thoughts
The comparison between One Person Company and Sole Proprietorship highlights significant differences in various aspects. OPC offers limited liability protection, separate legal entity status and easier access to funding, making it suitable for those seeking liability protection and scalability. Sole Proprietorship, on the other hand, provides greater autonomy, simplicity in formation and direct control over decision-making. However, it exposes the owner to unlimited personal liability.
Entrepreneurs must carefully consider factors such as ownership structure, taxation, liability, flexibility and scalability when choosing between OPC and Sole Proprietorship. Consulting with legal and financial professionals like at StartupFino can help in making an informed decision based on specific business requirements and objectives.
