In this article, Varun Varma elaborates on the best business structure to choose between One Person Company and Sole Proprietorship. The article discusses at length the advantages and disadvantages of the two business structures over one another.
The concept of one person company is new to this era of the Corporate world. The term one person company is introduced in new companies act i.e The Companies Act 2013 (No.18 of 2003). It provides a platform which opens up a way for the sole-proprietor form of business to enter into a corporate framework. One person company is a thing made by combining two different elements of business i.e Sole Proprietorship and Corporate the Framework.[1] And whereas a sole proprietorship has been defined as a business which is attached to his owner solely and the income and losses are solely taxed from the income of the owner. Sole Proprietorship is one of the simplest forms of business setup because this form of business does not have the legal entity. And it is run by a single person so an owner can do the business under his name.[2]
Main Functions of One Person Company
There are many benefits which are awarded to One Person Company when it is compared to Sole Proprietorship. The benefits awarded to One Person Company (herein referred as OPC) in comparison to Sole Proprietorship are as follows.
Business Registration Certificate
OPC can form a company and it can also get a registered certificate from the registrar of the companies and can form a separate legal entity. In case of sole proprietorship, not all the Sole Proprietor businesses are not all registered under the government except few under Sales Tax or Service Tax depending on the type of business.
Business Can be transferred to Nominee Holder
The very inception of OPC defines the concept of Nominee Shareholder. In this nominee of a person is required to be mentioned by which shares of the company will be transferred by nominee shareholder in case of the demise of the sole owner of the OPC.
Limited liability of the owner
In OPC, the liability of sole owner will be limited up to extent of the amount of money invested by the owner. In case of recovery of company loan, personal assets will not be touched unless personal guarantee has been provided by the directors.[3]
Main Function of Sole Proprietorship
Sole Proprietorship is the most common and most useful form of business for those who want to be the sole entrepreneur. So, the main function of sole-proprietorship are as follows:
Hiring and Firing
As Sole Proprietorship is solely based on his owner there are several sole proprietorships where employees are hired and they are also fired on the poor performance of the work.
Charting the Course
Since Sole Proprietorship is a firm headed by the owner only. So for expanding the business, he needs to set some goals and he even needs to make some plans to achieve it.
Monitoring and Controlling
As Sole Proprietor is the only source of planning the production of the units he produced. For that, he is required to keep the check and balance on the activities done by him. He has to strategize this function in the most efficacious manner.[4]
Legal Compliance of Sole Proprietorship and One Person Company
A sole proprietorship is known as the best business formation for doing business in India. This kind of business requires few compliances to be followed for the purpose of its registration. There is no such protocol to be followed for registering a sole proprietorship. A person can start a sole proprietorship only by opening a bank account in the name of the business and the person can obtain various licenses. For opening up a Bank Account, a person needs to follow all the KYC norms which are provided by the bank and whereas for obtaining the license the proprietor needs to have Proprietor Pan Card, Business involved in Manufacturing or Trading, Business providing services[5].
The other various registration required to open up a Sole Proprietorship is as follows:
GST Registration, MSME Registration, Chartered Accountant Certification, Gumasta License or Shop Act license and much more so as per government of India rules. There is no proper business registration for sole proprietorship firm in India.
Since one person company is incorporated in the New Companies Act 2013. More than 1400 OPC have established. The procedure for opening an OPC is to have a minimum 1 Director, 1 member, minimum paid up capital of Rs. 100,000 and to obtain Director Identification Number (DIN) and Digital Signature Certificate (DSC). The liability of the member is limited[6].
For the name reservation, a form INC-1 must be filed with registrar of companies. After there is an availability of the name and an approval is received from ROC then a form INC-2 shall be filed for the purpose of incorporating an OPC within 60 Days of filing form INC-1. Form DIR-12 shall need to be filed in connection to INC-2 except when the promoter is the sole director of the company. The company is required to file form INC-22 within 30 days after the INC-2 form is approved and registered in case the address of correspondence and registered office address is not same.[7]
Difference between Sole Proprietorship and One-Person Company[8]
| S.No. | Basis of Comparison | Sole Proprietorship | One Person Company |
| 1. | Liability | Since a sole proprietorship is a single owner, the amount of liability is unlimited and there is no protection of personal assets as well. | Liability of a shareholder is limited to the mark of unpaid subscription money in his name. In the case of only one person is holding a company then the liability is complete but the protection of personal assets is within the owner. |
| 2. | Independent Corporate Existence | In Sole Proprietorship, there is no separate legal existence from that of his owner. | An OPC possesses its own existence having its separate legal entity from that of its directors or shareholders. |
| 3. | Tax Obligation | A sole proprietor is only obliged to pay income tax in association with the profit he earned by doing his business | Instead of getting exempted as seen as a company an OPC is heavily taxed. The director has to pay numerous taxes like Corporate Tax, Dividend Distribution Tax etc. |
| 4. | Transferability of Shares | There is no transferability of shares in terms of Sole Proprietorship. | In the scenario of OPC, transferability of share is next to impossible as transferring a portion of share will cease the identity of OPC and full transferability will lead to amendments in Memorandum of Association and company policies. |
| 5. | Succession | In Sole Proprietorship, when the true owner dies the business ceases to exist but it can be takeover on one condition that a will was executed by the original owner of the business and that will can get a challenge in the court of law. | In terms of OPC, if the member of the company dies then the nominated member of the company who was appointed by the member as a nominee will be taking up his ranks. All the assets and liabilities are shifted to the new member. |
Conclusion
The war between the sole proprietorship and the one-person company is somehow related to two sides of the same coin. The sole proprietorship form of business has its own perks and disadvantages whereas OPC has got it’s pros and cons. OPC is more of corporation headed by a single individual as compared to Sole Proprietorship. In terms of registration process there is no definite way to register a Sole Proprietorship and on the contrary, there are few compliances which are supposed to be followed for registering a One Person Company.
References
[1] What is one person company? , One Person Company, www.onepersoncompany.com.
[2] Sole Proprietorship, Entrepreneur India, www.entrepreneur,com/encyclopedia/sole-proprietorship.
[3] Sole Proprietorship or One Person Company- Which One Is Better?, Team HP, December 13, 2014, thehindustanpost.com/sole-proprietorship-or-one-person-company/
[4] Managerial Function of Sole Proprietorship, by Chris Joseph, EHow, www.ehow.com/info_8292109_managerial-functions-sole-proprietrships.html
[5] Sole Proprietorship Registration, India Filings, November 23,2014, www.indiafilings.com/learn/sole-proprietorship-registration/
[6] ABHYANKAR, Procedure of OPC (One Person Company) Formation, In India:CS Meenal Abhyankar, (05.04.2015), blog.abhyankarcs.com/company-formation-in-india/procedure-of-one- person- company-formation-in-India/
[7] Ministry of Corporate Affairs, FAQ On One Person Company, http://www.mca.gov.in/MinistryV2/onepersoncompany.html
[8] ARJIT NARENDRA SRIVASTAVA, SOLE PROPRIETORSHIP, Law Far (July 29th, 2016), http://lawfarm.in/blogs/difference-between-one-person-company-and-sole-proprietorship
