In India, starting a business as a sole proprietor or incorporating a One Person Company (OPC) are two popular choices for individuals looking to operate a business independently. While both structures enable single ownership, they differ significantly in terms of legal status, compliance requirements, liability, and taxation.
In this guide, we will delve deeply into the difference between the two entities.
What is a Sole Proprietorship?
A sole proprietorship is an unincorporated business that is owned and managed by a single individual. It is the simplest form of business organization and does not require formal registration. The owner and the business are considered the same legal entity.
Characteristics of Sole Proprietorship
- Single Ownership: Owned and managed by one person.
- No Separate Legal Entity: The business and its owner are considered a single legal entity.
- Unlimited Liability: The owner is personally liable for all business debts and obligations.
- No Perpetual Existence: The business ceases to exist upon the owner’s death.
- No Mandatory Audits: Financial audits are not mandatory for sole proprietorships.
What is a One Person Company (OPC)?
A One Person Company (OPC) is a corporate entity with a single owner. Introduced under the Companies Act, 2013, OPC allows a single entrepreneur to incorporate a company with limited liability, distinct from a sole proprietorship.
Characteristics of One Person Company (OPC)
- Separate Legal Entity: OPC has a distinct legal identity from its owner.
- Limited Liability: The liability of the owner is limited to the amount invested in the company.
- Mandatory Registration: The company must be registered under the Companies Act, 2013.
- Perpetual Existence: The OPC continues to exist despite changes in ownership.
- Compliance Requirements: Annual filing with the Ministry of Corporate Affairs (MCA) and mandatory financial audits.
- Nominee Requirement: The owner must nominate another individual as a successor.
Difference between Sole Proprietorship and One Person Company (OPC)
| Aspect | Sole Proprietorship | One Person Company (OPC) |
| Legal Status | It is not a separate legal entity. The owner and business are the same | It is a separate legal entity from the owner. |
| Liability | Unlimited Liability and the personal assets of the owners are constantly at risk. | The liability of the owner is limited to the amount of capital invested. |
| Registration Requirement | It is not mandatory. | Mandatory registration under the Companies Act, 2013 |
| Governing Law | It adheres to general business regulations and national laws. | It is governed by the Companies Act, 2013. |
| Perpetual Existence | Sole Proprietorship ends with the proprietor’s death. | The entity continues to exist even after the death of the owner through the nominee. |
| Ownership Transfer | Not transferable, it ceases upon the death of the proprietor. | Transferable to the nominee as per legal provisions |
| Capital Raising | Limited to personal savings and loans | Can raise funds through loans, equity, and other corporate means |
| Business Image | Informal and personal; suitable for small businesses | Formal corporate image enhances business credibility |
| Decision Making | Complete control by the owner | Decision-making lies with the sole director but is regulated by company laws. |
| Management Structure | Single-handedly managed by the proprietor | Managed by a single director; the nominee must be appointed |
| Conversion | It cannot be converted into another business form. | It can be converted into a Private Limited Company after meeting certain conditions. |
| Closure Process | Simple, winding up by closing accounts | Formal winding-up process as per the Companies Act, 2013 |
| Nominee Requirement | No requirement | Mandatory to appoint a nominee during incorporation |
| Business Continuity | No guarantee; ceases with the owner | Ensured through the nominee |
| Banking and Loans | Difficult to secure significant loans | Easier access to credit due to legal recognition |
| Tax Structure | Income is taxed as per the individual income tax slab rates. | Taxed as a private limited company at a flat corporate tax rate of 25% (if turnover ≤ ₹400 crores). |
| Presumptive Taxation | Eligible under Section 44AD for business income (8%/6% of turnover) and Section 44ADA of the Income Tax Act, 1961 for professionals (50% of gross receipts). | Not eligible for presumptive taxation. Taxes are calculated on actual profit. |
| Tax Rates | Based on personal income tax slabs: – Up to ₹2.5 lakh: Nil – ₹2.5–5 lakh: 5% – ₹5–10 lakh: 20% – Above ₹10 lakh: 30% | A 25% corporate tax rate applies if the turnover is ≤ ₹400 crores. 30% if the turnover exceeds ₹400 crores. 22% under Section 115BAA of the Income Tax Act, 1961, without specific deductions. |
| Dividend Taxation | No separate dividend tax is applicable, as the owner directly owns profits. | The Dividend Distribution Tax (DDT) has been abolished; however, dividends remain taxable in the hands of the shareholder at the applicable rates. |
| Tax Deductions and Exemptions | Can claim deductions under Section 80C, 80D of the Income Tax Act, 1961, and other personal tax-saving schemes. | Can avail deductions applicable to companies, but not personal tax benefits. |
| GST Compliance | GST registration is mandatory if the annual turnover exceeds ₹20 lakh (₹10 lakh for special categories of states). GST return filing as per category (regular/composition). | GST registration is mandatory if the annual turnover exceeds ₹20 lakh (₹10 lakh for special categories of states). Monthly/quarterly GST returns, depending on the scheme. |
| Income Tax Filing | Filed as part of the individual’s income tax return (ITR-3 or ITR-4 for presumptive taxation). | Filed as a corporate entity using ITR-6. Annual return and balance sheet filing required. |
| Audit Requirements | Audit is mandatory if turnover exceeds ₹1 crore (business) or ₹50 lakh (profession) under Section 44AB of the Income Tax Act, 1961. For presumptive taxation, an audit is required if the income is less than 8% or 6% of the turnover and the total income exceeds the basic exemption limit. | A statutory audit is mandatory, regardless of the company’s turnover, for the filing of audited financial statements with the Registrar of Companies (RoC). |
| Annual Compliance | Minimal compliance; file income tax returns and GST returns if applicable—no mandatory RoC filings. | Mandatory filing of financial statements with the RoC. Annual General Meeting (AGM) and annual return submission. |
| Books of Accounts | Maintenance of books is mandatory only if turnover exceeds the audit threshold. | Mandatory maintenance of books of accounts and records as per the Companies Act, 2013. |
| Tax Penalties and Compliance Issues | Penalties for late filing of GST returns, delayed income tax filing, and non-compliance with audit requirements. | Higher penalties for non-compliance with MCA and IBC guidelines, including hefty fines for late RoC filings and non-audit compliance. |
| Regulatory Body for Compliance | Income Tax Department and GST Department. | · Ministry of Corporate Affairs (MCA)
· Registrar of Companies (RoC) · Income Tax Department, and · GST Department. |
Which is Better: Sole Proprietorship or OPC?
The choice between a sole proprietorship and an OPC largely depends on the nature and scale of the business. If the objective is to run a small-scale business with minimal compliance requirements, a sole proprietorship may be a more suitable option. However, if the entrepreneur seeks legal protection, scalability, and a structured format, OPC is a better option.
Conclusion
Both sole proprietorship registration and OPC registration have their unique features and benefits. While sole proprietorships are ideal for small businesses with low risk, OPCs are better suited for those seeking limited liability and structured governance. Understanding the differences and aligning them with business objectives can help entrepreneurs make informed decisions.
