02 December 2022
A One Person Company (“OPC”) and a sole proprietorship sound somewhat similar, but interestingly they are not.
In India, the concept of a sole proprietorship has been prevalent for a long time, as India has traditionally been a business-minded economy with there being single owners starting their own business ventures. The success of sole proprietorships can be primarily attributed to the ease of starting, closing and functioning of business, in addition to there being an absence of a provision relating to OPCs in the Companies Act, 1956.
The concept of OPC was newly introduced in India by way of the Companies Act, 2013 (“the Act”).
What is the meaning of OPC and Sole Proprietorship?
As section 2(62) of the Act “One Person Company” means a company which has only one person as member. An OPC is effectively a company that has only one shareholder as its member. An OPC can be started with 1 director – which is not possible with a basic private or public company. Yet, the incorporation process of OPC is similar to the process of any other company.
A sole proprietorship (also referred to as a sole trader or a proprietorship), on the other hand, is an unincorporated business that has just one owner who pays personal income tax on profits earned from the business. A proprietorship firm does not have any specific law governing it.
The main point of difference
For a layman, it would be difficult to distinguish between OPC and sole proprietorship. The main difference between the two can be understood by understanding the scope of the word ‘liability’ in relation to both the structures.
An OPC structure limits the liability of the sole shareholder to an extent, thereby making the OPC liable as a separate legal entity. For example, if any creditor has to recover any dues from the OPC, the same can be recovered from the account of the company; in view thereof the creditors cannot recover such amounts from the personal account of the sole member of the company.
However, when it comes to sole proprietorship, there is no concept of a separate legal entity and consequently, the sole proprietor risks the chance of being exposed to unlimited liability. Continuing from the earlier example, if any creditor has to recover any dues from the sole proprietor, the same can be recovered from the personal account of such sole proprietor. The concept of ‘limited liability’ does not apply to a sole proprietorship.
The concept that a company is a separate legal entity distinct from its members came into presence from the landmark case of Salomon v. A. Salomon and Co. Ltd. [1896] UKHL 1, [1897] AC 22. In the given case, it was held that a company and the members thereof (operating at different levels for the company’s functioning) are considered as separate legal entities.
Other Differences between OPC and Sole Proprietorship
An OPC is a separate legal entity and it can sue & be sued in its own name. On the other hand, a sole proprietorship has no separate legal existence and as such, it is the sole proprietor who shall be entitled to sue and be sued, for any acts done in the proprietorship’s name.
In case of an OPC, the liability of such OPC shall be limited to the share capital paid-up by the sole member of such OPC. In the case of a sole proprietorship, the liability shall not be limited to the funds invested in the firm. The concern’s personal assets can also be used to repay the liability amount.
It is mandatory to register an OPC with the Registrar of Companies, the Ministry of Corporate Affairs. On the other hand, in case of a sole proprietorship, there is no requirement of any registration. However, such sole proprietors can be registered under MSME, Shop & Establishments, GST, Professional Tax, IEC, etc. since there are no specific laws governing sole proprietorships.
There is a basic requirement of having 1 natural person as a member in both the structures.
In case of a sole proprietorship, the said proprietor shall be solely responsible for the management of the firm. However, the proprietor may also hire employees to the business. In case of an OPC, the management of the OPCs affairs shall be done through the OPCs board of directors. It is, however, interesting to note that while an OPC has only 1 member (i.e., a shareholder), it could have up to 15 directors.
In the case of both an OPC and a sole proprietorship, there is no requirement for the entity to have minimum share capital.
Since OPCs are governed by the Act, there are more compliance requirements as compared to sole proprietorships. However, OPCs have fewer compliances as compared to other types of companies. In case of sole proprietorships, there are no mandatory compliances other than filing income tax returns. However, in case of sole proprietorships, one also has to comply with other applicable laws (for example GST, etc.) in accordance with the registrations taken by such sole proprietorships.
An OPC must convert itself into a private or public limited company the moment it has an average turnover of over Rs. 2 crore for three years or a paid-up share capital of over Rs. 50 lakh. A sole proprietorship, on the other hand, may remain one no matter what its revenue is.
In case of succession, an OPC needs to have a nominee designated by its member. The nominee shall, in the event of the death of the sole member, become a member of the company and shall be responsible for the running of the company. In the case of sole proprietorship, however, succession can only take place through an execution of a last testament and will, which may or may not be challenged in a court of law.
Getting funding and loans from banks is usually difficult in case of sole proprietorships. On the other hand, in case of OPCs, obtaining loans is slightly easier as this structure is governed by the Act and there is more trust and credit worthiness.
An OPC is taxed like a company and the tax rates applicable to a company apply. A sole proprietorship is taxed as an individual under the Income Tax Act, 1961. The proprietor is liable for tax as per the tax slabs mentioned under the Income Tax Act, 1961.
Conclusion
Both sole proprietorship and OPCs are forms of single person organizations; however, in light of the above-mentioned points, it can be observed that incorporating an OPC offers several advantages over traditional proprietorship businesses. It is however pertinent to note that every form of business has its own merits and shortcomings and the performance of a business majorly depends upon the intent of the entrepreneur and his objectives. In conclusion, choosing between an OPC structure and a proprietorship shall depend from person to person and business to business.
Disclaimer:
The content of this article is for information purpose only and does not constitute advice or a legal opinion and are personal views of the author. It is based upon relevant law and/or facts available at that point of time and prepared with due accuracy & reliability. Readers are requested to check and refer to relevant provisions of statute, latest judicial pronouncements, circulars, clarifications etc before acting on the basis of the above write up. The possibility of other views on the subject matter cannot be ruled out. By the use of the said information, you agree that the Author / Treelife is not responsible or liable in any manner for the authenticity, accuracy, completeness, errors or any kind of omissions in this piece of information for any action taken thereof.
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