Difference Between OPC and Sole Proprietorship

Difference Between One Person Company (OPC) and Sole Proprietorship

One Person Company and Sole Proprietorship can never exist together, meaning if one person is in control, personal control is eradicated. Each of these has its unique features, and knowing those differences is important in choosing which is better for the nature of the business, and legal implications that go with it, and the entrepreneur’s tolerance for risk. A comparison of OPCs and sole proprietorships is given below in detail:

1. Definition

• One Person Company (OPC):
  • An OPC refers to a sort of proprietary company owned and run by only one individual. It is managed under the Companies Act, 2013. The most important thing with OPC is that a separate legal entity exists from the owner which means the company can own assets, incur liabilities, and enter into contracts.
• Sole Proprietorship:
  • In the case of a sole proprietorship, it exists unregistered, and the owner takes everything under the business, including all liabilities and profits. No legal distinction exists between the owner and the business.

2. Legal Structure

• OPC:
  • An entity is distinct from the owner. The company possesses the legal status to enter into contracts, have property rights, sue, or be sued in its name. The owner is liable only for the amount of share capital put in.
• Sole Proprietorship:
  • The owner and the business are the same entity in law. Thus, the owner is liable personally for all business debts, obligations, and actions.

3. Registration

• OPC:
  • An OPC must follow the procedures carried out at the Ministry of Corporate Affairs for its incorporation under the Companies Act 2013. Filling necessary paperwork alongside document submission with a Digital Signature Certificate (DSC) and Director Identification Number (DIN) for the proprietor is required for OPC incorporation under the Companies Act 2013.
• Sole Proprietorship:
  • Formal registration is not required for a sole proprietorship. However, depending upon the nature of the business, the owner may have to obtain permits under the Shops and Establishments Act or, in the event they apply to his business activities, register under Goods and Services Tax.

4. Liability

• OPC:
  • In an OPC, the owner has limited liability up to their investment in the company. This also protects the owner’s assets and doesn’t allow the company’s debts or liabilities to touch the owner.
• Sole Proprietorship:
  • Unlike that of a corporation or limited liability company, a sole proprietor assumes unlimited liability. This means that all are fundamentally liable for debts and issues of the firm whatever they are. If the business incurs losses, all the owner’s personal property, including house, savings, and vehicles, could be seized.

5. Taxation

• OPC:
  • For taxation, an OPC is treated as a separate legal entity. The profits from business are under the corporate rates of tax, while any salary received by the owner as well as dividends paid to him are considered part of his income.
• Sole Proprietorship:
  • The income of “Sole Proprietorship” is personal income for the proprietor and will be taxed by the slab of income tax applicable to that individual. There is no separation or distinction or two-way treatment because there is no business income and personal income, but all of that gets taxed as one within the confines of the individual’s income tax return.

6. Continuity of Business

• OPC:
  • An OPC enjoys the benefit of perpetual succession, meaning that the business will continue to exist, even upon the death or voluntary dissolution of the owner. It would however cease to exist only if an express decision to shut it down or liquidate the company is made.
• Sole Proprietorship:
  • A sole proprietorship has no continuity because the business is wholly dependent on the owner. The sole proprietorship ceases whenever the owner passes away, he/she become incapacitated and cannot manage the business, or the owner decides to close it down.

7. Compliance and Regulatory Requirements

• OPC:
  • OPCs have to comply with numerous regulations. The regulatory burden for OPCs includes filing annual returns, maintaining statutory registers, and holding annual general meetings (AGMs), along with other corporate governance guidelines detailed in the Companies Act, 2013. If turnover crosses a specified threshold, the company has to go for a statutory audit above this limit.
• Sole Proprietorship:
  • There are very few compliance obligations for sole proprietorships. There are no formal filings or corporate governance norms for these businesses. The owner would, however, have to file income tax returns, and GST returns (if applicable), and comply with the local business legislation, among others.

8. Raising Capital

• OPC:
  • Raising capital for an OPC is more structured and may include the issuance of shares to raise funds. Capital raising in an OPC is limited compared to that of a private limited company, but it can also attract investments as well as raise money from banks or financial institutions.
• Sole Proprietorship:
  • Sole proprietorships generally float among your funds, loans from banks, or funding from family and friends. Raising funds can be challenging as banks and investors are generally unwilling to lend money to sole proprietorships due to the higher risk involved.

9. Ownership and Control

• OPC:
  • An OPC is owned by a single person. The structure allows for the appointment of a nominee, one who can take over the business in case the owner is unable to do so. In this way, the business does not come to an end with the death or incapacitation of the named owner.
• Sole Proprietorship:
  • It is entirely owned and controlled by one individual known as the sole proprietor. Except for the sale or transfer of assets, there are no formal provisions under which ownership may pass to some other person.

10. Flexibility

• OPC:
  • An OPC provides further protection and corporate benefits, but cannot be as flexible as a sole proprietorship. Decision-making, compliance with regulations, and restructuring would be formal and required to follow set procedures. Any change in the form of a business would have to comply with the provisions of the Companies Act.
• Sole Proprietorship:
  • Changes in the business model, products, or services can be made by the owner without the need for approval or legal procedures. The owner may also close down the business at any time without formalities.

Get Started with TaxDunia

One Person Company, or OPC, has its advantages, as well as disadvantages, and so does Sole Proprietorship. In case one is looking for limited liability protection, a more formal business structure, and greater credibility, then this is where an OPC is chosen. In contrast, a sole proprietor enjoys quite a simple, low-compliance model of business, a business with complete control over decisions and operations. Get started with TaxDunia to know which business model suits your demands and how to register for it.