An OPC and Sole Proprietorship may sound alike, but they operate differently. The distinction between OPC and sole proprietorship extends to their functioning and legal frameworks. Prior to the enactment of the Companies Act in 2013, a sole proprietor’s sole recourse for starting a business was to establish a sole proprietorship. However, the introduction of OPC has provided an alternative avenue. This discussion explores the comparative merits of OPC and sole proprietorship, highlights why sole proprietorship prevails over OPC, delves into the advantages of OPC in comparison to sole proprietorship, and outlines the disparities between proprietorship and OPC.
What is an OPC and Sole Proprietorship?
- OPC (One Person Company): The Companies Act of 2013 introduced the One Person Company (OPC), a unique hybrid combining elements of a sole proprietorship and a company. Serving as an opportunity for a sole proprietor to establish a company, an OPC is classified as a private company with limited liability. Possessing a distinct legal entity, an OPC is obligated to hold at least one board meeting in each half of the year.
- Sole Proprietorship: A sole proprietorship is the most straightforward form of business conducted by an individual. The individual can establish the business using their own name or a fictitious one. The person establishing sole proprietorship is personally responsible for its debts. Unlike entities such as OPCs, or companies, a sole proprietorship lacks a distinct legal entity. The costs and compliance requirements for initiating a sole proprietorship are minimal.
Advantages of OPC and Sole Proprietorship
Following are the advantages of an OPC and Sole Proprietorship:
- Advantages of Sole Proprietorship
- Minimal compliances are required to initiate sole proprietorship.
- It is cost-effective, with lower startup expenses compared to a company or LLP.
- The sole proprietor maintains complete control over the business.
- Quick decision-making is facilitated without the need for external approval.
- Board and annual meetings are not mandatory for sole proprietorship.
- Tax liability is reduced, as business profits are subject to the individual income tax slab.
- Mandatory audits are not required for sole proprietorship when not stipulated by the business type.
- An OPC enjoys a separate legal entity status independent of its single-member founder.
- The members’ liability is confined to their shares, with no personal liability for the company’s losses.
- Capital/fundraising is facilitated due to the private company status of OPC.
- OPC involves fewer compliance requirements compared to private limited companies or LLPs.
- The incorporation process is simplified as only one member, and one nominee are required.
- Efficient management of company affairs is feasible, given the singular establishment and operation of the OPC.
- OPC exhibits perpetual succession, even with only a single member.
- Credibility is enhanced by being established under the Companies Act of 2013.
Basic Differences between OPC and Sole Proprietorship
Let’s discuss some basic differences between OPC and Sole Proprietorship:
- Sole Proprietorship: No compulsory registration is required. The business can operate under the proprietor’s name or a chosen business name without formal registration.
- OPC: Should be registered under the Companies Act, 2013 on the Ministry of Corporate Affairs (MCA) website. Formal registration is mandatory to establish an OPC.
- Sole Proprietorship: Does not have a separate legal status. The business and the proprietor are considered the same entity.
- OPC: Has a separate legal status distinct from its member, providing a level of legal separation between the company and the individual.
- Sole Proprietorship: The sole proprietor has unlimited liability, meaning personal assets are at risk to cover business debts.
- OPC: Members have limited liability, restricting their responsibility to the extent of their shareholding in the company.
- Sole Proprietorship: Does not require a nominee.
- OPC: Requires a minimum of one nominee to be appointed during the incorporation process, ensuring continuity in case of the member’s incapacitation.
- Sole Proprietorship: No directors are required, as the proprietor manages the business independently.
- OPC: A minimum of one director is necessary for the formation and management of the company.
- Sole Proprietorship: Not allowed for foreign citizens.
- OPC: Allows foreign ownership, provided one individual is the director, and the other is the nominee. Both, however, cannot be foreign citizens.
- Sole Proprietorship: Business ownership cannot be transferred since it is closely tied to the proprietor.
- OPC: Ownership can be transferred to the nominee, ensuring a smooth transition in case of the member’s absence.
- Sole Proprietorship: The business ceases to exist upon the death or retirement of the sole proprietor.
- OPC: The existence is independent of the member, as the nominee or director continues the OPC in the event of the member’s death.
- Sole Proprietorship: Taxed in the individual slab rate applicable to the proprietor.
- OPC: Taxed at a fixed rate of 30% on profits, plus cess and surcharge.
- Sole Proprietorship: Requires filing of only income tax returns.
- OPC: Involves filings with the Registrar of Companies (ROC) as per the Companies Act, 2013, and compliance with the Income Tax Act.
Certainly, there exist discernible distinctions between OPC and Sole Proprietorship. Despite both being characterized by a single person/member, their operational dynamics diverge significantly. An OPC incorporates the traits of a company, endowing it with distinct advantages that a sole proprietorship lacks. Consequently, a sole proprietor is burdened with unlimited liability, and the business lacks the attribute of perpetual succession.
In the realm of OPC, a crucial facet involves the necessity for a nominee who assumes responsibility for managing the company in the event of the sole proprietor’s demise. Conversely, such a stipulation is absent in the structure of a sole proprietorship. This divergence in procedural requirements enhances the appeal of OPC over a sole proprietorship. As a result, individuals tend to gravitate towards OPC due to the advantages it offers in comparison to the inherent limitations of a sole proprietorship.