Ever since One Person Company (OPC) was introduced by the new Companies Act 2013, entrepreneurs have struggled with the question of how it compares with the traditional proprietorship. This question was addressed at a basic level here.
In this post, we will specifically explore tax considerations that you can factor in while evaluating whether to start an OPC or sole proprietorship, as their financial impact is direct and significant for any new business.
First, you will be able to pay income tax as per your personal tax slab in case of a proprietorship (i.e. 30 percent tax rate kicks in only if your income crosses INR 10 lakhs, 20 percent on income between 5 – 10 lakhs, 10 percent on income between 2 – 5 lakhs and nothing on income below that). For an OPC you will always be paying 30 percent tax on any income.
Second, while making payments (for salary, consultancy fee, rents, etc.) if your business is structured as a company you will have to deduct TDS and make necessary filings in all cases. This provision to deduct TDS does not apply if payments are made by individuals, unless your business turnover (revenue) crosses INR crore.
Third, you also don’t need to bother about conducting tax audit for a sole proprietorship business unless a turnover of INR 1 crore is crossed. However, all companies (including OPCs) need to conduct an audit no matter what their income.Whether it is a proprietorship or OPC, all income from the venture will be classified as business income for income tax purposes. That implies that you will be able to deduct salaries and ‘client’ lunches from the revenues to arrive at your real profit. Similarly, the provision for set-off implies that business-related losses can be carried forward to future years and adjusted against profits. On this count, both OPC and proprietorship are similar.