INTRODUCTION
When starting a new business entity under the Companies Act of Indian law, two of the most common options are sole proprietorship and company. A sole proprietorship is a business owned and operated by a single individual, while a company is a separate legal entity from its owners (shareholders). Both have their advantages and disadvantages, and the choice between the two will depend on a variety of factors, including the size and nature of the business, the amount of investment required, and the personal preferences of the owner. In general, a company offers more protection against personal liability and greater potential for growth and expansion, but is more complex and expensive to set up and maintain. A sole proprietorship is simpler and less expensive to set up, but the owner is personally liable for all the debts and liabilities of the business. Ultimately, the decision between a company and a sole proprietorship will depend on the specific needs and circumstances of the business owner.
SOLE PROPRIETORSHIP
A sole proprietorship is a business owned and run by a single individual. It is the simplest form of business entity, with no legal distinction between the owner and the business. The owner has complete control over the business and is personally responsible for all its debts and liabilities.
A. Advantages of Sole Proprietorship:
i.Easy and Inexpensive to Set Up: A sole proprietorship is easy and inexpensive to set up. There are no formalities or legal requirements to be met, other than obtaining any necessary licenses or permits.
ii.Complete Control: The owner has complete control over the business and can make all the decisions regarding its operations, without any interference from others. No formal legal structure or compliance requirements
iii.Profits are taxed as the owner's personal income, which may result in lower tax rates
iv.Privacy and confidentiality maintained, as there is no need to disclose business information to the public
B. Disadvantages of Sole Proprietorship:
I. Unlimited Liability: The owner is personally liable for all the debts and liabilities of the business. This means that the owner's personal assets can be used to pay off any debts or liabilities incurred by the business.
II. Limited Resources: A sole proprietorship is limited in terms of the resources it can access, such as capital and expertise. This can limit the growth and development of the business.
III. Difficult to expand or scale the business beyond the owner's resources and capabilities: One of the biggest limitations of a sole proprietorship is that it can be difficult to expand or scale the business beyond the owner's resources and capabilities. This is because a sole proprietorship is typically financed and operated by a single individual, who may not have the financial, human, or other resources needed to grow the business.
For example, a sole proprietorship that provides professional services such as accounting or legal advice may find it challenging to expand beyond the capacity of the owner to provide services. Similarly, a sole proprietorship that requires large capital investments or significant infrastructure, such as a manufacturing or construction business, may struggle to finance growth without external funding or investment.
IV. Limited potential for tax planning: This is because a sole proprietorship is considered a pass-through entity for tax purposes, which means that the owner is taxed on all profits generated by the business as personal income.
V. While this can result in lower tax rates for small businesses, it can also limit the ability to defer taxes or take advantage of tax planning strategies that may be available to other types of businesses. For example, corporations may be able to retain earnings within the business and defer taxes on those earnings until they are distributed to shareholders.
ONE PERSON COMPANY
A company is a separate legal entity from its owners (shareholders). It is formed by filing certain documents with the Registrar of Companies and is regulated by the Companies Act of Indian law. A company can be either a private limited company or a public limited company. In a private limited company, the number of shareholders is limited to 200, and the shares cannot be publicly traded. In a public limited company, there is no limit on the number of shareholders, and the shares can be publicly traded.
A. Advantages of Company:
I. Limited Liability: A company has limited liability, which means that the shareholders are only liable for the amount of their investment in the company. This means that their personal assets are not at risk if the company runs into financial difficulties or faces legal action.
II. Perpetual Existence: A company has a perpetual existence, which means that it can continue to exist even after the death of its shareholders. This provides continuity and stability to the business.
B. Disadvantages of Company:
I. Time-consuming and Expensive to Set Up: Setting up a company can be time-consuming and expensive, as it involves various legal formalities and compliance requirements.
II. Subject to Regulation and Compliance Requirements: Companies in India are subject to various regulations and compliance requirements, such as filing annual returns, holding annual general meetings, maintaining proper accounting records, and complying with various regulations relating to taxation, labour, environment, and corporate governance.
Illustration:
Suppose Mr. B wants to start a software company. He decides to set up a private limited company. He chooses a unique name for the company and applies for a Director Identification Number (DIN) and Digital Signature Certificate (DSC) for himself and his co-founder. They prepare the Memorandum of Association (MOA) and Articles of Association (AOA), which define the company's objectives, activities, and rules for governing its internal affairs.
COMPANY VS SOLE PROPRIETORSHIP
1. Ownership: A Sole Proprietorship is not considered a separate legal entity from its owner, meaning the owner and the business are one and the same. On the other hand, an OPC is a separate legal entity that is distinct from its owner. This means that the owner of an OPC is not personally liable for the debts and obligations of the company beyond the amount of their shareholding in the company.
2. Statutory Compliance: Sole Proprietorships are generally not required to comply with many legal formalities. They are not required to register with the Registrar of Companies (ROC), nor are they required to file annual returns or hold annual general meetings. In contrast, an OPC must comply with all the statutory requirements applicable to private limited companies, such as registration with the ROC, filing of annual returns, and holding of annual general meetings.
3. Funding: Sole Proprietorships are generally not eligible for external funding, as they are not considered a separate legal entity from their owner. This means that the owner of a Sole Proprietorship would need to fund the business with their own personal funds. An OPC, on the other hand, is a separate legal entity that can raise capital from investors by issuing shares.
4. Management: In a Sole Proprietorship, the owner has complete control over the business and makes all the decisions. In an OPC, the owner can appoint a director to manage the day-to-day operations of the company. This can be beneficial for the owner, as it allows them to focus on strategic decision-making rather than getting bogged down in day-to-day operations.
5. Taxation: Sole Proprietorships are taxed as individual taxpayers, meaning that the owner's personal income tax rate applies to the business profits. In an OPC, the company is taxed separately from its owner. This can be beneficial for the owner, as it can result in a lower tax rate for the business profits.
REGISTRATION OF A PROPRIETORSHIP FIRM VS. INCORPORATION OF A ONE PERSON COMPANY
Proprietorship Firm:
i. Business is done in the name of the individual or the owner of the Sole Proprietorship Firm.
ii. Sole proprietorships fall under the category of unregistered business.
iii. It is an independent business entity as it is not registered with the Central government.
iv. Business name of the sole proprietorship firms is not stringently verified.
v. A current bank account is established in the name of the Sole Proprietorship firm to provide legitimacy in this business structure.
vi. Reserve Bank of India has made several guidelines for opening a current bank account in the name of a proprietorship firm.
DOCUMENTS REQUIRED
A list of documents is required to open a current bank account in the name of a proprietorship firm, which includes the following proofs:
First Sole Proprietorship Proof (Need anyone of the following):
i. Certificate of registration that may be in the form of a Trade License; issued by local, state, or Central government.
ii. Mandi license or APMC, Labour License or its registration certificate.
iii. Professional Tax registration certificate.
iv. Excise & Customs Department Registration Certificate.
v. Weight & Measurement Act Registration Certificate.
vi. Permission or license from the Police Department.
vii. Regional Transport Office Permit/Registration Certificate.
viii. State/Central Pollution Control Board’s Consent to Operate.
ix. Certificate Issued by SEZ, STP, EHTP, DTA, and EPZ in the name of the entity.
x. IEC Certificate along with PAN Card (if PAN is quoted on the IEC Certificate).
xi. If the business is located in a rural area, a Gram Panchayat Certificate (should be on letterhead and not more than 3 months old) is also required.
xii. District Industries Centre (DIC)/ Small Scale Industries (SSI) Certificate that should be duly stamped and signed by issuing authority.
xiii. Factory Registration Certificate in the name of the entity.
xiv. SEBI Registration Certificate in the name of the entity.
Second Sole Proprietorship Proof (Need anyone of the following):
i. Registration of firm with Employee Provident Fund Organization or Employee State Insurance Corporation.
ii. Last available Income/ Wealth Tax Assessment order in the name of the firm.
iii. The latest copy of Electricity Bill or a Telephone Bill not more than 3 months old.
iv. Water Tax bill paid to Municipal Body/ Corporations (not more than 6 months old).
v. Property Tax bill in the name of the firm, which should not be more than calendar one-year-old from the bill issuance date along with Tax receipts for property tax paid to Municipal Body / Corporations.
vi. Weight & Measurement Act Certificate of Verification.
Sole Proprietor Identity Proof (Need anyone of the following):
i. PAN card is mandatory.
ii. One can attach anyone of the documents among; Passport, Voter ID, Driving License, Aadhar Card, Senior Citizens card, Fisherman ID Card issued by state or central government, or an arms license.
Sole Proprietor Address Proof (Need anyone of the following):
i. All of the documents mentioned in the identity proof can be used as address proof.
ii. Utility bills (Electricity bill, Telephone bill, Water Bill) not older than 3 months can also be considered.
iii. Property tax bill less than one-year-old along with Tax payment receipts are an important form of address proof.
iv. Consumer gas connection card/Passbook along with the receipt of gas supply not older than 3 months and the registered lease agreement can also be considered.
CONCLUSION
In conclusion, choosing the right business structure is crucial for any entrepreneur starting a new business. While a proprietorship firm and a one person company have different structures and legal identities, business owners must consider various factors such as their long-term goals, risk appetite, and financial situation before making a decision. Proprietorship firms are simple to set up and operate, but provide no protection from personal liability, whereas one person companies offer greater protection and access to external funding, but require more compliance and formalities.
For new business entities, starting with a sole proprietorship structure can be a good option to reduce costs, but it's important to protect the brand through trademark registration to prevent others from using it. As the business grows, it may be beneficial to transition to a one person company to access external funding and limit personal liability. Ultimately, the decision on the business structure should align with the business owner's long-term goals and needs.
Comments