You have a great idea that will change how people live, work and do their stuff. You have the working plan in place, the cash flow planned out and keen investors lined up. So, how do you set up your business? Did the question confuse you a bit?
If you are anything like the maverick entrepreneur we think you are, chances are you were so busy with the idea and its planning, that you completely forgot that you have to set up some type of business to get going.
You must have heard two magical words: One Person Company (or OPC) and Sole Proprietorship during the process, but no one can give you a definite idea of what they are and which one you need to go with.
If you are at the crossroads and planning to set up a business soon, then it is perhaps time for you to understand the differences between an OPC and a Sole Proprietorship. Read on to know which is what and which one is good for you.
A Quick Intro to One Person Company (OPC)
An OPC as the name suggests is a special type of a private limited company that only needs one director or shareholder to be set up (a private company needs at least two directors and can have up to 50 shareholders). The company is a separate legal entity, distinct from the director and can hold assets, take on debt and carry on business under its own name.
The concept of OPC came into being with the Companies Act of 2013 to provide some sort of an option for individuals who were looking for something more than a sole proprietorship but less than a fully functional private company or partnership.
A great thing about the OPC is that you do not have to hold board meetings or general meetings, though all decisions taken through resolutions have to be kept in the records such as the minutes of meetings.
A Quick Intro to Sole Proprietorship
A Sole Proprietorship refers to a business where one person (or proprietor) owns the entire business. All assets, debt and business operations are carried out under the name of the owner. This is the easiest way to start a business and perfect for small businesses where the fund requirements are small and the overall business risk is less.
Now let us look at the key differences between the two types of enterprises.
Difference between OPC and SP
1. Based on Formation
Setting up a Sole Proprietorship is definitely much easier than forming an OPC.
To set up a proprietorship, you would need to register a trade name, get registered under the GST Act and if a shop or office type of an establishment is required, you need to register under the Shop & Establishments Act. Registration under the Shop & Establishments Act which varies from state to state. You also need a PAN card and a current bank account under your name. Additionally, if you want to set up an export or import business, then you have to get an Importer and Exporter Code from the Director General of Foreign Trade.
Setting up an OPC is slightly more difficult even though the Ministry of Corporate Affairs has made the process quite streamlined. The steps are as below:
- You or your representative have to apply for your Digital Signature Certificate (DSC)
- You can thereafter or alongside file for a Director Identification Number (DIN) using Form DIR-3
- Once you have both the DIN and DSC, then you or your representative has to file Form INC-1 to check for name availability Association
- In the meantime, you to prepare the draft Memorandum of Association and Articles of Association
- Once you have got the name you want, you need to fill Form INC-2 within 60 days to incorporate the company. If you are not the only director then the Form DIR-12 that contains details of directors has also to be filled with INC-2. Other documents that need to be submitted with INC-2 are the Memorandum and Articles of Association, ID and address proof of the nominee, his / her consent, an affidavit from the share subscribers in Form INC-9, etc.
- Once the company has been registered, you need to apply for the company PAN and TAN in addition to getting registered under the GST Act
2. Based on Independence, Asset Ownership, and Liability
The OPC has an identity that is independent of the shareholder and directors. This implies it can hold assets including property under its own name.
Moreover, the director or shareholder has limited liability under the OPC route. They only need to pay for any share capital that is still unpaid and their liability ceases. His or her personal assets will not be encumbered by any claims against the company.
A Sole Proprietorship does not have any independent identity. The director owns all assets and is liable for all debts that the business may have and all claims made against it. This means he will have to make a good profit on the outstanding amounts by even selling off his personal assets.
[You can also refer to- How To Register A Company In India]
3. Based on Compliance Measures
An OPC has to comply with more regulations and guidelines than a proprietorship. For instance, it has to get its accounts audited and file its annual returns just like a private company. It also has to keep a record of all resolutions and intimate details of all its contracts.
Only the basic compliance is required from a proprietorship and the owner can file income tax returns for himself and his business just like a regular individual. The business owner only has to get the accounts audited under section 44B of the Income Tax Act if revenues or sales exceed the specified thresholds.
4. Based on Taxation
An OPC is charged at the standard 30% tax rate applicable to private companies. It has to pay the Minimum Alternate Tax (MAT) of 18.5% if the standard tax applicable at 30% is less than 18.5% of the book profits. A Sole Proprietorship, on the other hand, is taxed at the same rate as the owner at the standard tax rates applicable to individuals. However, it has the option to declare profits at a flat rate of 8% of turnover if total sales are less than Rs. 1 crore.
5. Based on Conversion
An OPC has to convert itself into a private or public limited company when its average sales or turnover for 3 years exceeds Rs. 2 crore or its paid-up share capital crosses Rs. 50 lakh. There is no such restriction on a proprietorship and it can continue to be one even if its turnover crosses Rs. 2 crores or even more.
6. Based on Succession
An OPC needs to have a nominee for the business who has to be named at the time of formation of the company. This person shall become the member of the company in the event of passing away of the first member and will be responsible for running the business. No such criteria exist for a proprietorship. It ceases with the passing away of the owner of the business.
We hope these general differences between an OPC and a Sole Proprietorship will help you understand it better and help you take the further steps.
[You can also read: How to Check Company Registration Status on MCA?]