Starting a small business can be both exciting and overwhelming. One of the most important decisions you need to make when starting your business is choosing the right business structure. The 2 most popular corporate structures for small businesses are sole proprietorships and OPC. In this blog we will discuss the differences between sole proprietorship and OPC and help you choose the right company for your small business.
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What is sole proprietorship and OPC?
Let's discuss the importance of sole proprietorship and OPC:
- One-man business:
A sole proprietorship is a corporate structure where the business is owned and operated by an individual. This is the simplest and most common form of business ownership. In a sole proprietorship, the owner is liable for all liabilities and debts of the business. The owner also assumes all profits and losses of the company. Legally, owners and companies are one and the same.
- One Person Enterprise (OPC):
A one-person company (OPC) is a corporate structure introduced in India in 2013. It was designed to give small business owners the benefits of a limited liability company without the hassle of forming a board company. In a one-person company, there is only one shareholder who is also the managing director of the company. The shareholder has limited liability, which means that if the company fails, their personal assets are not at risk.
Differences between sole proprietorship and OPC
- Legal structure:The main difference between a sole proprietorship and an OPC is their legal structure. A sole proprietorship is not a separate legal entity from its owner, while an OPC is a separate legal entity from its owner.
- Liability:In a sole proprietorship, the owner is personally liable for all debts and liabilities of the business. This means that the owner's personal wealth can be at risk if the company fails to repay a loan. With an OPC, the owner has limited liability, meaning their personal assets are not at risk if the business fails.
- Property:In a sole proprietorship, the business is owned and operated by one person. In a one-person company, there is only one shareholder who is also the managing director of the company.
- Compliance Requirements:In contrast to an OPC, a sole proprietorship does not have to fulfill many legal formalities. An OPC must fulfill legal formalities such as holding board meetings,submission of annual accounts[1], and keeping legal registers.
- Taxation:A sole proprietorship is taxed according to the owner's individual tax board while an OPC is taxed according to the corporate tax rate.
Choosing the right corporate structure for your small business
Choosing the right business structure for your small business can have a significant impact on the success of your business. Here are some important factors to consider when choosing between sole proprietorship and OPC:
- Liability:If you are concerned about personal liability, an OPC is a better option. An OPC offers its owner limited liability protection, meaning that if the business fails, their personal assets are not at risk.
- Compliance Requirements:If you don't want to be burdened with legal paperwork, a sole proprietorship may be a better option. A sole proprietorship has fewer compliance requirements, which means you have more time and resources to focus on growing your business.
- Taxation:If you want to benefit from lower tax rates, an OPC might be a better option. An OPC is taxed at the corporate tax rate, which is generally lower than the individual tax rate.
- Expansion plans:If you plan to expand your business in the future, an OPC might be a better option. A one-person company has a separate legal entity, which means it is easier to raise funds and attract investors. It also allows you to hire more shareholders and directors if you want to expand your business.
- Flexibility:If you want flexibility in your business structure, a sole proprietorship may be a better option. As the sole owner of the company, you have complete control over all decisions and operations. With an OPC, you have to comply with legal formalities and there are restrictions on who can become a shareholder or director.
- Trademark:If you want to create a brand image and establish credibility in the market, an OPC might be a better option. A one-person company has a separate legal entity, which gives it a more professional image and creates a sense of credibility in the market. This can help you attract more customers and clients.
Pros and cons of sole proprietorship and OPC
The following are the advantages and disadvantages of sole proprietorship and OPC:
Advantages of sole proprietorship
- Easy to set up:Starting a sole proprietorship is relatively easy and inexpensive. You do not need to register with the government or submit any legal documents.
- Complete control:As the sole owner of the company, you have complete control over all decisions and operations. You don't need to consult partners or shareholders before making decisions.
- Tax Benefits:Since a sole proprietorship is not a separate legal entity, you do not have to pay corporation tax. Instead, you will be taxed according to your individual tax bracket, which can result in lower taxes.
- Privacy:As a sole trader, you are not required to disclose your financial information or any other details to the public or the government.
Disadvantages of sole proprietorship
- Unlimited liability:One of the biggest disadvantages of a sole proprietorship is unlimited liability. This means that the owner is personally responsible for all debts and obligations of the company.
- Restricted Access to Funds:Because a sole proprietorship is owned and operated by a single person, it can be difficult to raise funds or attract investors. This may limit the company's growth potential.
- lack of continuity:A sole proprietorship is dependent on the owner. If the owner dies/becomes incapacitated, the business can end.
Advantages of a one-person company
- Limited liability:The biggest advantage of an OPC is the limitation of liability. The owner has limited liability protection, which means that if the business fails, their personal assets are not at risk.
- Independent legal entity:An OPC has a separate legal entity, making it easier to raise funds and attract investors. It also creates a more professional image and can help establish credibility in the market.
- Continuity:Because an OPC is a separate legal entity, it can continue to exist even if the owner dies or becomes incapacitated. This makes it a more stable business structure.
- Tax Benefits:An OPC is taxed at the corporate tax rate, which is generally lower than the individual tax rate. This can result in lower taxes and more savings.
Disadvantages of a one-person company
- Compliance Requirements:An OPC must complete legal formalities such as holding board meetings, filing annual returns and maintaining legal registers. This can be time consuming and require additional resources.
- Limited Control:As an OPC owner, you must comply with legal formalities and there are restrictions on who can become a shareholder or director. This may limit your control over the business.
- Higher setup costs:Starting an OPC can be more expensive than starting a sole proprietorship. You must register with the government and submit legal documents, which may incur additional costs.
Diploma
When deciding betweenone-man businessand OPC for your small business, it is crucial to carefully weigh the unique advantages and disadvantages of each structure. As a sole proprietor, you have complete control of your business and can easily set it up with minimal fuss, but unlimited liability means you are personally responsible for all of your company's debts and obligations. On the other hand, an OPC offers limited liability protection, creates a separate legal entity and provides more professional credibility, but there are additional compliance requirements and higher setup costs to consider.
To make an informed decision, you should consider a number of factors including your company's expansion plans, taxation, access to finance, continuity, flexibility and control. It's important to note that both structures have potential for success and the structure that works best for you will depend on your unique business needs and goals.
In summary, the right corporate structure for your small business depends on the specifics of your business and your future goals. If you make the right choice, you can build a stable and profitable business. It's important to remember that the structure you choose is not set in stone and may change as your business evolves. As such, it is crucial to continually assess your organization's needs and goals to ensure you have the right structure in place to support your growth and success.
Read our article:Procedure for registering a sole proprietorship: a step-by-step guide
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FAQs
Why sole proprietorship is most suitable? ›
Sole proprietorship is the simplest and the oldest form of business under which an individual is able to conduct business. It does not need to be registered or incorporated. Therefore, it is not considered as a legal entity. Sole proprietorship can be operated under the name of the owner or some fictitious name.
What is OPC as compared to sole proprietorship? ›Though an OPC and sole proprietorship have only one person/member, their functioning differs. OPC has the features of a company, while the sole proprietorship does not enjoy the benefits of a company. Thus, the sole proprietor has unlimited liability, and the business does not have perpetual succession.
Which business would be most suitable for a sole proprietorship? ›Retail activities such as selling of grocery, household goods, merchandise, electric goods, etc. can be carried on at very minimal risk by a proprietor.
What is a sole proprietorship and why is it the most common form of business organization in the United States? ›A sole proprietorship is the most common form of business organization. It's easy to form and offers complete control to the owner. But the business owner is also personally liable for all financial obligations and debts of the business.
What is the best form of business organization and why? ›Corporations offer the strongest protection to its owners from personal liability, but the cost to form a corporation is higher than other structures. Corporations also require more extensive record-keeping, operational processes, and reporting.
Is a sole proprietorship better or worse than the other forms of business ownership? ›Sole proprietorships have more freedom than other forms of business with respect to government controls. No special taxation. Sole proprietorships do not pay special franchise or corporate taxes. Profits are taxed as personal income as reported on the owner's individual tax return.
What is the advantage of having a one person corporation OPC form of business? ›Limited Liability
This means that all the personal assets of the “owner” or stockholder are protected. If the company defaults on its loans, the debtor will have to go after the corporation as a separate entity.
There is no formal way of converting a sole proprietorship firm into an OPC. We have to apply for a fresh registration for OPC with Ministry of Corporate Affairs. Therefore, the steps would be same as starting a fresh One Person Company.
What type of business is best for sole proprietorship or partnership? ›Partnerships may enjoy the advantage of having more access to operating capital. While the sole proprietor may need to rely on financing, such as bank loans, to start and sustain the operation, partners may be able to pool their resources to come up with needed funds. Sole Proprietorship vs.
Which business is best sole proprietorship or partnership? ›Sole Proprietorship or Partnership—which is better? The answer depends primarily on how you plan to structure your business. If you plan to be the sole owner, Sole Proprietorship is the option to choose. If you want to set up a business together with someone else, you will have to set up a Partnership.
What are 4 good examples of sole proprietorships? ›
- Freelance Writer. A freelance writer provides written content for clients, either for print or digital publication. ...
- Photographer. ...
- Personal Trainer. ...
- Plumber. ...
- Freelance Graphic Designer. ...
- Housekeeper. ...
- Bakery Owner. ...
- Tutor.
A soleproprietorship, a business owned by only one person, accounts for 72% of all U.S. businesses. Advantages include: complete control for the owner, easy and inexpensive to form, and owner gets to keep all of the profits.
What are advantages of sole proprietorship over other forms of business organization? ›- Simple to Organize. The initial organization of the business is quite simple. ...
- Simple Accounting. ...
- Simple Tax Filings. ...
- No Double Taxation. ...
- Complete Control.
Advantages of a sole proprietorship
Sole proprietorships are easy to establish and get started. The owner retains complete control of the business. There are no corporate income tax payments. They are less expensive than other business types.
Hierarchical structure
This makes the hierarchical structure a centralized organizational structure. In a hierarchical structure, a staff director often supervises all departments and reports to the CEO. This structure is well suited for any business in any industry.
- Sole Proprietorship. As one of the most straightforward approaches to running a business, the sole proprietorship is a popular choice. ...
- Partnerships. ...
- Corporation. ...
- Limited Liability Company (LLC) ...
- Non-profits.
A corporation is a legal entity separate from the person who owns it. It creates an extra legal barrier between you and your business entity that you can't get as a sole proprietor or with a general partnership. This is one of the reasons why it's a popular form of business organization choice for entrepreneurs.
Why you should not form a sole proprietorship? ›3 disadvantages of sole proprietorship
No liability protection. It's harder to get financing and business credit. It's harder to sell your business.
The biggest disadvantage of a sole proprietorship is that this business structure comes with no protection for the business's owner against business-incurred liabilities, such as overwhelming business debt or being sued.
Do sole proprietors pay more taxes than corporations? ›In general, corporations do pay more taxes than sole proprietorships. That's because a corporation is treated as its own entity by the IRS, meaning it has to pay state and federal taxes on the money it earns. In some cases, corporations can even be double taxed.
How much income tax do you pay on OPC? ›
Tax Slab: OPC would have to pay 30% tax on all profits. There are no exemptions.
What is the disadvantage of OPC? ›No perpetual succession: Since there is only one member in an OPC, his death will result in the nominee choosing or rejecting to become its sole member.
Can OPC company have employees? ›The first thing to note is that an OPC can only be incorporated as a private company. This means that it cannot be listed on a stock exchange and will have a smaller number of shareholders. The shareholder limit for an OPC is fifty, excluding employees and directors.
Who Cannot form an OPC? ›May One Practice His/Her Profession through an OPC? No. A natural person who is licensed to exercise a profession may not organize as an OPC for the purpose of exercising such profession, except as otherwise provided under special laws.
Can an OPC be a startup? ›3 Would a One Person Company (OPC) be eligible to avail benefits under the Startup India initiative? Yes. One Person Companies are eligible to avail benefits under the Startup India initiative.
What business OPC Cannot? ›The OPC cannot carry out Non-Banking Financial Investment activities, including the investments in securities of anybody corporates. It cannot be converted to a company with charitable objects mentioned under Section 8 of the Companies Act, 2013.
Is partnership better than sole proprietorship answer with reason? ›A sole proprietor is limited to money he can invest in the business, loans from family and friends and third-party credit. Partnerships enable you to share the financing and operational burden. You give up equity in your business, but you gain additional resources that can help the business expand more quickly.
Are sole proprietorships successful? ›Low start-up costs and simple taxation are significant advantages to a new business owner who is still unsure about his company's prospects. These benefits make the sole proprietorship a highly successful entity for new businesses.
What are the pros and cons of sole proprietorship? ›| The Pros | The Cons |
|---|---|
| Complete control and flexibility to run the business as you see fit | Personally liable for all business debts, you're all by yourself |
Examples of sole proprietors include small businesses such as, a local grocery store, a local clothes store, an artist, freelance writer, IT consultant, freelance graphic designer, etc.
Why is a sole proprietorship the most common type of business and easiest to form? ›
A sole proprietorship is the easiest business structure to form (you only need to get a license or permit and register your business with your local government) (hence its popularity). It is also a simple structure to maintain with few forms and little business administration needed.
What does OPC mean in business? ›What is a One Person Corporation (OPC) and Who May Form an OPC? Republic Act No. 11232, otherwise known as the “Revised Corporation Code of the Philippines” (RCC) allows the formation of an OPC. An OPC is a corporation with a single stockholder, who can only be a natural person, trust or restate.
What is an OPC in business? ›One Person Company (OPC) has been recently introduced in India to promote business enterprises that are owned and managed by a single Entrepreneur. Corporate entities like Limited Liability Partnership, Private Limited Company and Limited Company require two or more people to partner.
Is OPC self employed? ›OPC is one of the significant milestones of the Companies Act, 2013, introduced to encourage self-employment with a backbone of India's legal system. If there is only one promoter/founder, One Person Company (OPC) is the best way to start a company.
Is OPC a LLC? ›OPC and Limited Liability Partnership are two different Business Structures governed by two different acts namely Companies Act and Limited Liability Partnership Act respectively. The concept of One Person Company encourages single and enthusiastic entrepreneurs to operate their own venture.
Can OPC be a small company? ›Yes, the private company will also file form INC-6 for converting itself into an OPC. The paid up share capital of private company should not be exceeding fifty lakh rupees and should not have average annual turnover more than two crore rupees at the time of such conversion into OPC.
What is the example of OPC company? ›Companies such as Arkan Diary (OPC) Private Limited and Truffle House (OPC) Private Limited are examples of one person companies.
What does OPC stand for in taxes? ›I didn't pay my taxes through Turbo, so can't figure out how this charge came to be. I paid through a different source. I found out that OPC stands for Official Payment Corporation.
Can OPC own property? ›Ownership of property: OPC can sale, purchase and own the property like individual. Contractual Rights: OPC, being a legal entity different from its members, can enter into contracts for the conduct of the business in its own name.
What is the liability of owner in OPC? ›Limited Liability of OPC:
An OPC is a separate legal entity and therefore, the liabilities of the company are not shoved on the face of the shareholder. Most often the ups and downs in a business are erratic and often are not under the control of the owner, the member, or the director in the case of a company.
Is OPC a registered company? ›
The member in a one-person company has limited liability. Since OPC is a registered company it is treated as a separate legal entity providing greater protection to its members.
Which is better OPC or partnership? ›In the case of a One Person Company, the sole owner is required to pay the dividend distribution tax on the dividend. In the case of a Partnership Firm, there is no need as such requirement to pay any kind of tax on the profit distributed among the partners.
Can OPC do multiple business? ›As per the rules of the Companies Act, 2013, an individual can only be an owner of an OPC at a time. In other words, you cannot hold multiple OPC ownership.