Although the terms “proprietorship” and “one person company” give the same idea of Business being run and managed by one owner but there are major differences between the two.
Proprietorship is a very common and traditional form of business in India. Because of its simple features, it is widely adopted by people to set up their own businesses. It is often confused with “One Person Company”, a concept newly introduced by the Companies Act 2013.
The concept of OPC was introduced to organize the unorganized sector of proprietorship firms and other entities. For those who want to start their own ventures with a structure of organized business, OPC provides a good option as compared to proprietorship. It will not only help Small business persons to grow in Indian entrepreneurship but also give them global recognition.
Following are some of the major differences between the two forms of Business-
1. Recognition – An OPC is recognized under Companies Act, 2013. To form an OPC, one has to fulfill all the procedures laid down in the Act. There is no such requirement for Proprietorship.
2. Conditions on the owner – An OPC can be formed only by an adult Individual who is a citizen of India as well as a Resident. There is no such conditions for Proprietors.
3. Management – The owner may appoint director(s) to run manage the business or can run it himself. In Proprietorship the owner himself runs the business.
4. Separate entity – In proprietorship, there is no distinction between the owner and the business. Whereas in OPC, identity of the business and that of owner’s is separate.
5. Liability – The owner of a proprietorship suffers from unlimited liability. He is personally liable if the business suffers a loss. But the owner of an OPC is not personally liable for the losses of the business.
6. Taxation – An OPC is taxed as per the provisions of Income Tax Act as a Private Limited Company. In case of proprietorship, the income of the business is considered as the income of the owner and he is taxed accordingly.
7. Succession – An OPC needs to have a nominee designated by the members, the record of which is also registered with the Registrar. In the event of death of the member or him becoming incompetent to contract, the Nominee becomes the member of the company. In case of proprietorship, succession can take place through execution of a Last testament or will.
8. Compliances – An OPC has to meet all such compliances such as filing of annual returns, financial statements, maintenance of books of accounts, holding of meetings and so on, as mentioned in the Companies Act. There’s no such compliances for a proprietorship
9. Audit of Accounts – OPC has to get it accounts audited by a Chartered Accountant. On the other hand, a sole proprietorship will only need to get its accounts audited under the provisions of Section 44 AB of the Income Tax Act if its turnover exceeds the threshold limit.
10. Conversion – An OPC must convert itself into a private or public limited company the moment it has an average turnover of over Rs. 2 crore for three years or a paid-up share capital of over Rs. 50 lakh. A sole proprietorship, on the other hand, may remain one no matter what its revenues are.
Nikita Bhatia is the co-founder of VenturEasy, an online platform for Company registration, book-keeping, accounting, tax consultancy and legal compliances in India. A Chartered Accountant and company secretary by profession, she has wide experience in the fields of audit, accountancy, taxation and corporate governance.