One Person Company Vs Sole Proprietorship

Entrepreneurs often choose between a Sole Proprietorship and a One-Person Company (OPC) when starting a business. A sole proprietorship is easy to set up with minimal compliance but offers no legal separation between the owner and the business, which exposes personal assets to business liabilities. An OPC is introduced under the Companies Act, 2013, and offers limited liability protection and a separate legal identity. This comparison is important for small business owners to understand the implications of legal recognition, liability, taxation, and ease of setup. This helps them select the structure that best aligns with their business goals. In this article, you will learn the difference between a one-person company and a sole proprietorship.

What is a One Person Company?

A One Person Company (OPC) is a business structure introduced in India under Section 2(62) of the Companies Act, 2013. It allows a single individual to establish a company with limited liability and a separate legal identity, which combines the simplicity of sole proprietorship with the benefits of a corporate entity. The sole member must be an Indian citizen and resident, and is required to nominate a successor in case of ill circumstances. OPCs are designed to support solo entrepreneurs by providing a formal business framework with reduced compliance requirements compared to traditional private limited companies. This structure is particularly beneficial for small businesses seeking scalability and legal protection without the complexities of multi-member companies.

Features of a One Person Company

The following details include the key features of a One Person company:

• Single Ownership: An OPC is established and managed by one person who acts as both the director and shareholder. This makes decision making and management processes easier.
• Limited Liability Protection: The owner’s personal assets are protected as their liability is limited to the amount invested in the company. This means personal property isn’t at risk for the company’s debts and losses.
• Separate Legal Entity: An OPC is recognized as a distinct legal entity, which is separate from its owner. It can own property, enter into contracts, and initiate or face legal proceedings independently.
• Nominee Requirement: At the time of incorporation, the sole member must appoint a nominee who will take over the company in case of the owner’s death or incapacity. This is an important step as it ensures the business continues.
• No Minimum Capital Requirement: There is no mandatory minimum paid-up capital to start an OPC, which makes it accessible for small entrepreneurs.
• Exemptions and Privileges: OPCs enjoy certain exemptions under the Companies Act, such as not being required to hold annual general meetings and having simplified compliance requirements.
• Conversion Flexibility: An OPC can be converted into a private or public company upon meeting specific criteria, such as exceeding a certain turnover or capital threshold.
• Easy Access to Funds: OPCs can raise funds more easily by securing loans, attracting investors, and issuing debentures, which provide avenues for business expansion and growth.
• Tax Benefits: OPCs can avail various tax advantages, such as lower tax rates for companies with turnover up to Rs. 250 crores and eligibility for deductions under the Income Tax Act. These benefits can lead to significant tax savings.

Eligibility for MSME Benefits: By registering as a Micro, Small, and Medium Enterprise (MSME), OPCs can access government schemes, which include priority sector lending, concessions, and subsidies that aid in business development.

Disadvantages of a One Person Company

A One Person Company offers several benefits, but it is essential to consider its limitations before choosing this structure for your business. Let us discuss some of the disadvantages of an OPC:

• Limited Capital Raising: OPCs cannot raise funds by issuing shares to the public, which restricts their ability to access substantial capital for expansion.
• Compliance Burden: OPCs are required to adhere to compliance norms similar to private limited companies, despite being a single-member entity. This includes annual filing and board meetings, which can be time-consuming and costly.
• Business Activity Restrictions: OPCs are prohibited from engaging in certain activities, such as non-banking financial investments and charitable operations, under Section 8 of the Companies Act, which limits their operational scope.

Key Requirements for Registering an OPC

Here are the key requirements for registering an OPC:

• Only an Indian citizen and resident living in India can form an OPC.
• Only one member is allowed who will act as both the shareholder and the director.
• The sole member must designate a nominee who also must be an Indian citizen or resident of India. The nominee will be taking over the company in case of the member’s death or incapacity.
• Consent of the nominee must be obtained in Form INC-3.
• The name of the OPC must be selected beforehand.
• The minimum authorized capital of an OPC must be Rs. 1,00,000.
• The proposed director must obtain a Digital Signature Certificate (DSC).
• Documents such as PAN card, Aadhaar card, proof of address, a photograph, and registered office address proof.

How to Register a One Person Company?

The following details include the process of registering an OPC in India:

Step 1: You need to obtain a Digital Signature Certificate (DSC), which is essential for signing electronic documents.

Step 2: After obtaining DSC, apply for a Director Identification Number (DIN), which is required for the proposed director.

Step 3: Use the SPICe+ Part A form on the MCA portal to reserve your company name.

Step 4: Draft the Memorandum of Association (MoA) and Article of Association (AoA), which outline the company’s rules and objectives.

Step 5: File the incorporation forms by submitting SPICe+ Part B along with the essential documents.

Step 6: Collect all the necessary documents, which are mentioned as follows:

• Identity Proof
• Address Proof
• Proof of Registered Office
• Passport-Size Photos
• Digital Signature Certificate (DSC)
• Director Identification Number (DIN)
• Memorandum of Association (MoA)
• Articles of Association (AoA)
• Nominee Consent (Form INC-3)
• Director Consent (form DIR-2)
• Director’s Declaration of Non-Disqualification (Form INC-9)

Step 7: Apply for PAN (permanent account number) and TAN (tax deduction and collection account number), which can be done simultaneously through the SPICe+ form.

Step 8: After approval, the registrar of companies (RoC) will issue this certificate, which signifies the legal existence of your OPC.

Timeline for OPC Registration

The overall time required for registering an OPC in India typically takes between 10 to 15 days, which depends on the efficiency of document preparation, government processing, and approvals. Delays can occur if there are any issues with the documents or due to high workloads at the RoC office, but with proper planning, the process is generally smooth and on time.

What is a Sole Proprietorship?

A sole proprietorship is the simplest form of business, which is owned and run by one individual. It requires minimal legal formalities to start and offers complete control over decisions and profits. The owner bears unlimited personal liability, which means personal assets are at risk if the business incurs debts or legal issues. This structure is ideal for small-scale ventures like local shops or freelancers due to its flexibility and ease of setup. It may face challenges in raising capital and lacks continuity if the owner exits the business.

Features of a Sole Proprietorship

The details below include the features of a sole proprietorship:

• Single Ownership: The business is entirely owned by one person, which grants them full control over decisions and operations.
• Ease of Formation: Starting a sole proprietorship is uncomplicated and often requires minimal legal formalities. It typically involves obtaining necessary licenses and registering the business name.
• Unlimited Liability: The owner is personally responsible for all business debts and obligations, which means personal assets are at risk if the business faces losses.
• No Separate Legal Entity: The business and the owner are the same entity legally. This means the owner is directly accountable for all aspects of the business.
• Taxation: Profits from the business are considered personal income and are taxed accordingly, which simplifies tax processes.
• Complete Control: The owner makes all the decisions independently, which allows for swift and flexible management.
• Business Continuity: The business’s existence is tied to the owner’s lifespan, so it may cease upon the owner’s death or decision to close.
• Direct Claim to Profits: All the profits generated by the business belong exclusively to you. This direct incentive can be highly motivating and allows you to reinvest earnings as you see fit for the business.
• Maintained Confidentiality: Unlike other corporations, sole proprietorships are not required to disclose financial statements publicly. This privacy can be beneficial in competitive industries where confidentiality is important.
• Strong Customer Relationships: Being the sole point of contact allows for personalized customer service. This personal engagement helps build stronger connections and boosts long-term customer loyalty and trust.

Disadvantages of a Sole Proprietorship

A sole proprietorship offers simplicity and full control, but it also comes with significant disadvantages that aspiring entrepreneurs should consider. Let us discuss the disadvantages of a sole proprietorship:

• Challenges in Raising Capital: Sole proprietors often rely on personal funds or loans from friends and family. They can't issue shares to attract investors, unlike other corporations, which makes it harder to secure substantial funding for growth. 
• Limited Growth Potential: As a single person managing everything, it is hard to scale the business or handle big projects.
• Burden of All Decisions: A sole proprietor makes every choice on their own, from marketing to finances. It can be stressful and sometimes lead to poor decision-making without expert advice.

Key Requirements for Registering a Sole Proprietorship

Here are the key requirements for registering a sole proprietorship:

• GST registration is mandatory if your annual turnover is over Rs. 40 lakhs for goods and Rs. 20 lakhs for services (Rs. 20 lakhs and Rs. 10 lakhs respectively for special category states).
• A Shop and Establishment Act license is required by most state governments for businesses operating from a physical location.
• Udyam registration, which is not mandatory but beneficial, provides access to government schemes, subsidies, and easier loan approvals.
• Professional tax registration, which is applicable in certain states.

How to Register a Sole Proprietorship?

The following details include the process to register a sole proprietorship:

• Obtain a PAN Card: A Permanent Account Number (PAN) is mandatory for tax purposes and financial transactions. You can surely apply online from the Income Tax Department's portal.

• Choose a Business Name: Select a unique name that reflects your business. Ensure it doesn't infringe on existing trademarks.
• Open a Business Bank Account: While not legally required, it's advisable to open a bank account in your business's name for transparent financial transactions.
• Register Under the Shops and Establishment Act: This registration is mandatory for businesses operating from a physical location. Apply to your local municipal corporation.
• Obtain GST Registration (if applicable): If your annual turnover exceeds Rs. 40 lakhs (Rs. 20 lakhs for services) or if you engage in e-commerce, GST registration is required. Apply online through the GST portal.
• Register for MSME (Optional): Registering under the Udyam scheme offers benefits like easier access to credit and government schemes. The process is very simple and can obviously be done online.

Documents Required to Register a Sole Proprietorship

Here are the documents needed to register a sole proprietorship:

• PAN Card of the Proprietor
• Aadhaar Card of the Proprietor
• Passport-Size Photographs
• Bank Account in the Name of the Business
• Business Address Proof
• No Objection Certificate (NOC)
• GST Registration (if applicable)
• Shop and Establishment License
• Udyam Registration
• Trade License, if required
• FSSAI License, if required
• Import Export Code (IEC) for International Trade
• Professional Tax Registration in States Where Applicable

Timeline for a sole proprietorship

Registering a sole proprietorship in India is a straightforward process that typically takes between 5 to 15 working days, which depends on the specific registrations required and the efficiency of the relevant authorities. The timeline may vary based on factors like document completeness and departmental approvals.

Choosing between a One Person Company (OPC) and a Sole Proprietorship depends on your business goals. If you want simplicity, full control, and quick setup, a sole proprietorship is ideal. But if you are looking for legal protection, a separate business identity, and better funding options, an OPC is a better fit. Both have their pros and cons, so it's important to think about what works best for your long-term vision and resources before making a decision. In this article, you have learned about a one-person company and a sole proprietorship. Contact Online Legal India to get assistance in filing an OPC or sole proprietorship registration.