In this blog post, Sudarshan Mohta, a law graduate, writes about the differences between a One Person Company and a Sole Proprietorship.

Introduction

India is a land of opportunities, trade, business and commerce. Through this article, we will learn about two types of business entities, both of which can be established by only one person, namely Sole Proprietorship and One Person Company, and are recognized under the laws of India.

Sole Proprietorship

i. What is a Sole Proprietorship?

The word ‘sole’ means single and ‘proprietorship’ means ownership. Sole proprietorship is known to be the oldest, simplest and most common form of business entity. Sole proprietorship is a kind of business entity which is owned and controlled by one person only, who assumes the title of ‘sole proprietor’ or a ‘sole trader’.

The two main features of a sole proprietorship are:

• The sole proprietor receives all the profits; and
• The sole proprietorship is subject to unlimited liability

The following table is a summary of the advantages and disadvantages of a sole proprietorship:

ii. Advantage of a Sole Proprietorship

Sole proprietorship is a popular form of doing business, and comes with the following advantages:

• Easy to form and wind up: A sole proprietorship is easy to form and wind up; it doesn’t require formal registration except for those businesses which are required to have necessary licenses issued by the local authorities. The sole trader is at absolute discretion to form or wind up the business at any time.
• No formal registration: It is not mandatory for sole proprietors to register their business. However, an exception to the same can be made for certain tax related and business specific registrations.
• Quick decision taking power: The ownership of the business is in the hands of one person i.e. the sole proprietor. Therefore, he has absolute control and can make quick and flexible decisions. A sole proprietor is free to consult others (professionals) before taking a decision.
• Close personal relations: Close personal relations are maintained by the sole proprietor with his employees and his customers. This ensures a smooth flow in the business.
• Safety of business secrets: Since management and control are in the hands of the sole proprietor, keeping business secrets is easy. It is essential to keep secrets and technicalities away from competitors and outsiders.
•  No sharing of profits: As the name suggests, a sole proprietor is the sole owner of the business, hence all profits are retained by him.
•  Direct motivation: There is a direct link between efforts and reward, therefore, the sole proprietor would be inclined to work harder to secure higher profits and make minimal losses.
•  Provides employment: Sole proprietorship provides employment to the sole proprietor as well as those subordinate to him.

iii. Disadvantages of a Sole Proprietorship

Sole proprietorship like any other type of business is not free of encumbrances; following are the disadvantages of a sole proprietorship:

• Limited Capital: The owner of a sole proprietorship is responsible to arrange funds to ensure the business starts, sustains and succeeds. This can get difficult as an individual can only source a limited amount of funds from outside investors, banks and other financial institutions. The insufficiency of smooth flowing capital can curb the growth of the business or even put it to a standstill.
•  Unlimited Liability: If a sole proprietor fails to meet the business debts, his personal assets may be used to meet such liabilities. All his personal wealth is linked to the business. This limits the sole proprietor from taking risks and makes him extra cautious about starting or expanding the business.
• Lack of continuity: A sole proprietorship is closely tied to the life of the sole proprietor. The business may not be able to survive the death of an owner. Hence, it is safe to say that death of the owner brings an end to the business.
• Limited expansion: The sole proprietor cannot be an expert in every facet of business management; therefore expansion limits itself at the peak of the sole proprietor’s potential.
• Lack of expertise: A sole proprietor maybe knowledgeable, but he cannot be an expert at every aspect of business. Also, a lack of additional disposable income makes hiring professionals a restricted activity. This in turn hampers the growth of a sole proprietorship.
• Limited size: A sole proprietorship can only expand up to a certain point, beyond which a sole person cannot manage all the professional activities alone due to the sheer vastness of the activities and meeting the impossibility of being physically present everywhere at the same time.

iv. Legal Requirements

A sole proprietorship is the most preferred form of doing business because no formal/separate registration is required for conducting such business. A sole proprietorship can be run from a residential establishment or from a commercial establishment. If the owner chooses the latter, he must comply with certain provisions of the Shop & Establishments Act, the provisions of which differ across different states. A sole proprietor must possess a Permanent Account Number (PAN) card as tax returns are filed in the name of the proprietor. If the sole proprietor wants to engage in international trade, he must obtain an Importer and Exporter Code from the Director General of Foreign Trade.

One Person Company

i. What is a One Person Company?

A One Person Company (OPC) is defined under Section 2(62) of The Companies Act, 2013 as under:

‘A company which has only one person as a member.’

Two main features of a One Person Company are:

• The entrepreneur founding the OPC is subject to limited liabilities
• The OPC is taxed at the same level as any other company

The following table is a summary of the advantages and disadvantages of a One Person Company:

ii. Advantages of a One Person Company

A One Person Company comes with the following benefits:

• Ease in management:
• Perpetual Succession: A One Person Company is an incorporated entity and therefore also has the feature of perpetual succession. This makes it easier for entrepreneurs to raise capital for the business.
• Legal Status: One Person Company business enjoys a corporate status in society, this helps attract quality workforce. One Person Company is a Private Limited Structure.
• Limited liability protection to directors and shareholders: This is the most desirable reason why many individuals are opting to incorporate a One Person Company. If the business is unable to pay its liabilities or meet its obligations, the liability of the entrepreneur is limited to the extent of the unpaid subscription money. Unlike a sole proprietorship, the individual’s personal assets will not be used to make payments once the unpaid subscription amount has been met.
• Ease in management:

No requirement to hold annual or extra ordinary general meetings: The resolution should be communicated by the member and entered in the minutes book. The date on which the entry is made shall be deemed to be the date of the meeting.

 Quorum: The provisions of Section 174[1] of The Companies Act, 2013 will not be applicable to One Person Company

•  Easy Loans: Financial institutions and banks prefer to lend money to a company rather than a proprietary firm.
• Registrar Of Companies filing: Very few ROC filings are required to be made with the Registrar of Companies (ROC). The provisions of Section 98 and Section 100 to 111 (both inclusive) of The Companies Act, 2013 shall not apply to a One Person Company.[2]
• Minimum Requirements:

1. 1 shareholder
2. 1 director
3. Director and shareholder can be one and the same
4. 1 nominee
5. Share Capital shall be Rs. 1,00,000/- (INR One Lac only)

iii. Disadvantages of a One Person Company

An OPC is not all good and devoid of vices, below are the demerits of an OPC entity:

• Only one member:

1. An OPC can have a minimum or maximum of 1 member
2. A minor shall not be eligible to become a member/nominee of an OPC
3. A natural person who is an Indian Citizen and resident in India shall be eligible to incorporate an OPC.

• Suitable only for small business: An OPC can have a maximum paid up share capital of Rs. 50 lac or a turnover of Rs. 2 crore[3].
• Tax Liability: The IT Act puts an OPC under the same tax slab as other private companies for taxation purposes. Private Companies are placed under the tax bracket of 30% on total income. On the other hand, an individual running a sole proprietorship concern is subjected to income tax slab rates of an individual (I.e. 10% to 30%).
• Compliance Costs: An OPC would have recurring costs such as annual filing with the ROC, hiring a Chartered Accountant, Company Secretary, Lawyer, and other professionals as opposed to a proprietorship concern. An OPC will need to get its accounts audited and file yearly returns with the ROC.
• Incorporation Costs: An OPC needs to be registered with the ROC under The Companies Act, 2013. An OPC would be required to hire professionals such as a Chartered Accountant or a Company Secretary for complying with such formalities.

iv. Legal Requirements

• An OPC can be formed only by a natural person, who is an Indian citizen and resident in India.
• The shareholder shall nominate another person who shall become the shareholder in case of death/incapacity of the original shareholder.
• Exemptions available to an OPC:

1. Signatures on Annual Returns – In the absence of a company secretary, the annual returns can be signed by the director of the company
2. Holding Annual General Meetings – The provisions of Sections 100 to 111 (both inclusive) of The Companies Act, 2013 shall not apply to a One Person Company.

• A person shall not be eligible to incorporate more than a One Person Company or become nominee in more than one such company.

Difference between ‘Sole Proprietorship’ and ‘One Person Company’

Ideal for Business

Sole Proprietorship

A sole proprietorship concern is suitable for businesses that involve taking foreseeable risks, requires limited capital and a reasonable degree of expertise. A sole proprietorship is usually favoured when the business is small in size and the owner wants to maintain full control and be the sole decision maker.

Example- A grocery, garments, stationary, and book store.

One Person Company

An OPC is suitable for small businesses as it allows the founder to take risks as it doesn’t dig into his personal assets to compensate on failing to meet business debts.

Example- weavers, traders, artisans, small to mid-sized entrepreneurs, etc.

Conclusion

One Person Company has existed globally for years now, while it still remains to be a fresh phenomenon in India as it was only introduced in 2013. An OPC creates a separate legal entity as opposed to the sole proprietorship way of doing business. A sole proprietorship extends the liability to the proprietor, whereas in an OPC the entrepreneur is only liable to the extent of unpaid subscriptions. An OPC also enjoys certain exemptions from compliances that need to be adhered to by bigger companies, making an OPC more desirable. However, the biggest deterrent in choosing an OPC over a sole proprietorship is that an OPC is taxed at 30% as opposed to sole proprietorship business which is taxed along with the individual. One key benefit India would enjoy through the establishment of OPC’s is that it will help organize the unorganized sector of proprietorship.

In conclusion, an OPC or an SP would be the choice of an individual depending on his requirements, business plan, market conditions, etc. One could see small changes in the tax structure after implementation of the Goods and Service Tax (GST) which was passed in 2016 and will be implemented from 2017.

Footnotes:

[1] S.174 of The Companies Act, 2013, Quorum for meetings of Board

[2] S. 122(1) of The Companies Act, 2013, Applicability of this chapter to one person company

[3] S. 2(85) of the Companies Act, 2013 provides for the definition of a small company

‘‘small company’’ means a company, other than a public company,—

• paid-up share capital of which does not exceed fifty lakh rupees or such higher amount as may be prescribed which shall not be more than five crore rupees; or
• (ii) turnover of which as per its last profit and loss account does not exceed two crore rupees or such higher amount as may be prescribed which shall not be more than twenty crore rupees:

Provided that nothing in this clause shall apply to—

(A) a holding company or a subsidiary company;

(B) a company registered under section 8; or

(C) a company or body corporate governed by any special Act;

[4]Second proviso to S.12(3)(d) of the Companies Act, 2013