Sole Proprietorship v. One Person Company

A sole proprietorship is an unregistered business with an individual owner who pays personal income tax on profits earned from the business. It is the simplest form of business structure with very little government regulation. Forming sole proprietorships is popular among individuals, self-contractors, consultants, small business owners etc.

The concept of One Person Company (OPC) is newly introduced by Section 2 (62) of Companies Act, 2013 and it means a company which has only one person as a member. It can be formed as a private limited company bringing in new prospects for Sole Proprietors and individual entrepreneurs to take advantage of limited liability and the benefits of having a corporate status. The compliance requirements are lesser than that of a private company, and an OPC can be formed with just one Director and one member. 

Differences between the two are as under: 

  1. Legal Status: A sole proprietorship is not a separate legal entity from that of the person who owns it. It is a small business structure in which from a tax and legal viewpoint, the business and the business owner are indistinguishable. An OPC on the other hand is a separate legal entity and has the benefit of having a corporate status. As such, it can sue and be sued, enter into contracts, and can acquire property separately. 
  2. Registration: Formal registration is not a prerequisite in the case of a sole proprietorship, where as a OPC has to compulsorily be registered with the Registrar of Companies (ROC) through a lengthy process.
  3. Liability: A sole proprietorship’s liability is unlimited that is, all the assets of the individual will be attached and there is no limitation on the liability. Liability extends to his personal property as well. As an OPC is a separate legal entity, the owner has a limited liability, in case the business suffers a loss or has to be wound up. This is the most desirable reason why many individuals are opting for an OPC. 
  4. Taxation: In the case of a Sole Proprietorship, Tax liability of Proprietorship firm is borne by the Proprietor whereas for OPC, tax liability of the company and single member is independent. Also, an OPC has the benefit of a tax holiday for the first 3 years under Start-up India, Start-up India Initiative, if it meets the eligibility criteria. 
  5. Legal Compliances: In a sole proprietorship, the owner only needs to file the annual returns. While a One Person Company has to file annual returns, get its accounts audited and meet other compliances of a Private Limited Company.
  6. Succession: In the case of sole proprietorship, 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. For the purposes of succession, an OPC needs to have a nominee designated by its member. The nominee should also be a natural born citizen and resident of India. The nominee shall, in the event of the death of the member, become a member of the company and shall be responsible for the running of the company. 
  7. Conversion: Conversion of Sole Proprietorship to Private Limited Company is a tedious process as compared to conversion of OPC to Private Limited Company. Moreover, a Sole Proprietorship need not convert itself regardless of the quantum of its revenue. OPC has to convert itself compulsorily to Private Limited Company if its Paid-up share capital exceeds Rs.50 Lakhs and if it’s average turnover of any three consecutive financial years exceeds Rs.2 Crores.