Difference between Sole Proprietorship and One Person Company

India is emerging as an important business destination around the world. To commence business, the legal framework in India provides for several different options of business arrangements for entrepreneurs. Among different types of companies, two of the major choices for individuals are establishing businesses via a one-person company or a sole proprietorship. Both of these business structures cater to single owners; however, both of these structures possess fundamental differences that can significantly impact business operations and applicable legal obligations. A sole proprietorship is an unincorporated business owned and operated by a single entrepreneur. It is the simplest and most common type of business structure popular in India. Here, the owner is personally liable for all business liabilities and enjoys complete control over decision-making and profits. Whereas, the One Person Company (OPC) was introduced under the provisions of the Companies Act, 2013 in India. OPC is a separate legal entity that allows a single entrepreneur to operate as a company. It provides limited liability protection to the owner, ensuring the separation of personal and business liability.

What is Sole Proprietorship?

A Sole Proprietorship is the most popular, oldest, and simplest form of business organization. It is basically made up of two words: one is ‘sole’, which means “one,” and the second is ‘proprietor’, which means “owner.” So, Sole Proprietorship means a business with a single owner, also known as a Sole Proprietor. A Sole Proprietorship is defined as a form of business organization in which the business is owned, managed, and controlled by a single person. The Sole Proprietor is the sole recipient of all profits and the bearer of all losses in the business. It is suitable for enterprises that require personal attention, personalized services, and limited capital, such as grocery shops, beauty parlors, boutiques, etc. Other names of the Sole Proprietorship are individual entrepreneurship, sole trader, and individual proprietorship. The sole owner of the business cannot share ownership with any other person, but he or she can appoint employees and take help from other people. Besides, only the owner can invest money in the business and raise capital through loans from other sources of finance. As per the definition given by L.H. Haney, a sole proprietorship is a form of business organization, at the head of which stands an individual as one who is responsible, who directs its operations, and who alone runs the risk of failure.

What is One Person Company?

According to Section 2(62) of the Companies Act, 2013, a one-person company means a company that has only one person as a member. It is incorporated as a private company with only one member. Therefore, a corporation can be registered even if it only has one shareholder or member. The main aim of One Person Company was to encourage the corporatization of microbusinesses and entrepreneurship. The JJ Irani Expert Committee recommended the formation of the OPC in India in 2005. It has all the benefits of a private limited company, such as being a separate legal entity, protecting personal assets from the liabilities of the business, and having perpetual succession. One Person Business (OPC) is officially a company with only one shareholder, as its members are recognized as the company’s shareholders. OPCs often originates when there is just one founder or promoter of the company. Due to the multiple benefits that OPCs provide, businessmen or entrepreneurs who are just starting a business choose this form of business over sole proprietorships.

Difference between Sole proprietorship and One person company

Basis	Sole Proprietorship	One Person Company (OPC)
Definition	A sole proprietorship is an unincorporated business owned and operated by a single entrepreneur. It is the simplest and most common type of business structure popular in India. Here, the owner is personally liable for all business liabilities and enjoys complete control over decision-making and profits.	The One Person Company (OPC) was introduced under the provisions of the Companies Act, 2013 in India. An OPC is a separate legal entity that allows a single entrepreneur to operate as a company. It provides limited liability protection to the owner, ensuring the separation of personal and business liability.
Ownership and Liablity	The single owner has complete ownership and control over the affairs of the business. The single owner himself is personally liable for all debts, losses, and legal obligations of the business. In the case of a sole proprietorship, there is no legal distinction between personal and business assets.	The individual is the only shareholder and director. OPC members enjoy limited liability; the owner’s personal assets are protected from the company’s liabilities, and there is a distinction between the two.
Applicable Regulations	Establishing a sole proprietorship is free from stringent legal proceedings and requires no formal registration under a specific act. The owner operates the business under his own name or under a trade name and may need to obtain applicable licenses and permits as applicable in the local jurisdiction	Registration of OPC is to be done within the strict guidelines as specified under the Companies Act of 2013. All filings are to be made with the Registrar of Companies (RoC). The OPC must draft and submit the Memorandum of Association (MoA) and Articles of Association (AoA) to the RoC. OPCs have to comply with other applicable compliances, such as filing annual financial statements and conducting annual general meetings.
Continuity and Transferability	It lacks perpetual existence as the business is totally dependent on the owner. In the event of the owner’s demise or discontinuation of the business, the entity will cease to exist.	An OPC enjoys the status of a separate legal entity and has perpetual succession. The ownership of an OPC can be transferred by selling shares or by appointing a nominee, ensuring the business’s longevity.
Fundraising	Sole proprietorship can’t issue equity shares. As they are not covered by a uniform regulatory structure, it is difficult for them to raise funds from investors. However, sole proprietorships may raise funds from banks, NBFCs, or other informal sectors.	OPCs, as covered by a uniform regulation structure, have a better advantage when it comes to fundraising and expansion. OPC’s can issue equity shares and raise funds from investors, which helps the OPC in growth opportunities and scaling the business.
Taxation	Taxation provisions are applicable to the individual; only an ITR filing is required. Tax rates are levied as per the tax slab of the individual.	Taxation provisions are the same as for the company. Apart from ITR, annual filing with RoC is also required.
Name	Sole proprietorship generally use the owner’s name or a trade name and may need to obtain applicable licenses and permits as applicable in the local jurisdiction.	In a One Person Company, it must contain the word “OPC” to differentiate itself from other entities
Member	Maximum one member can be a part of proprietorship.	As per the companies act of 2013, a maximum of two members can be a part of OPC.

Conclusion

The legal framework in India provides for several different options of business arrangements for entrepreneurs. Among different types of companies, two of the major choices for individuals are establishing businesses via a One-Person Company or a Sole Proprietorship. Both of these business structures cater to single owners; however, both of these structures possess fundamental differences that can significantly impact business operations and applicable legal obligations. A Sole Proprietorship is an unincorporated business owned and operated by a single entrepreneur. It is the simplest and most common type of business structure popular in India. Here, the owner is personally liable for all business liabilities and enjoys complete control over decision-making and profits. Whereas the One Person Company (OPC) was introduced under the provisions of the Companies Act, 2013 in India. OPC is a separate legal entity that allows a single entrepreneur to operate as a company. It provides limited liability protection to the owner, ensuring the separation of personal and business liability.

Frequently Asked Questions (FAQs)

1. What is a Sole proprietorship

Answer:

A sole proprietorship is defined as a form of business organization in which the business is owned, managed, and controlled by a single person. The sole proprietor is the sole recipient of all profits and the bearer of all losses in the business. It is suitable for enterprises that require personal attention, personalized services, and limited capital, such as grocery shops, beauty parlors, boutiques, etc.

2. What is an One Person Company?

Answer:

According to Section 2(62) of the Companies Act, 2013, a one-person company means a company that has only one person as a member. It is incorporated as a private company with only one member. Therefore, a corporation can be registered even if it only has one shareholder or member. The main aim of One Person Company was to encourage the corporatization of microbusinesses and entrepreneurship.

3. What is the difference between Sole Proprietorship and OPC on the basis of taxation?

Answer:

In case of sole proprietorship the taxation provisions are applicable to the individual; only an ITR filing is required. Tax rates are levied as per the tax slab of the individual. Whereas in case of OPC taxation provisions are the same as for the company. Apart from ITR, annual filing with RoC is also required.

4. What is the difference between Sole Proprietorship and OPC on the basis of name clause?

Answer:

Sole proprietorship generally use the owner’s name or a trade name and may need to obtain applicable licenses and permits as applicable in the local jurisdiction. In a One Person Company, it must contain the word “OPC” to differentiate itself from other form of companies.

5. What is the difference between Sole Proprietorship and OPC on the basis of members?

Answer:

Maximum one member can be a part of proprietorship. As per the Companies Act 2013, a maximum of two members can be a part of OPC.