Till recently, old Companies Act 1956 required at least two people to form a company. New Companies Act 2013, has introduced a new concept called One Person Company which provides an opportunity to Indian entrepreneurs to enter the corporate world alone instead of adding a family member or friend.
One Person Company concept is very popular abroad including in countries like USA, Europe and Singapore.
Many small or medium enterprises in India are doing business as sole proprietors which are now an unorganised sector. These people might enter into organised version of private limited company.
Before taking a decision on whether to incorporate One Person Company or to carry on the business of sole proprietorship, we suggest you to go through following benefits of One Person Company and Sole Proprietorship business.
Benefits of One Person Company in comparison to Sole Proprietorship form of business
There are many benefits of incorporating One Person Company in India. Below we have listed those benefits that are relevant in comparison to sole proprietorship business.
Business Registration certificate
One Person can easily form a company to get its business registered with registrar of companies as a separate legal entity. Generally sole proprietorship businesses are not registered with government of India except few businesses which are registered under sales tax and service tax based on the type of business they do.
New companies act 2013, required all type of One Person Company to get it registered with registrar of companies. After registration a certificate of incorporation will be issued as a proof of registration.
Due to business registration, credibility of One Person Company while working with customers and vendors will be high in comparison to sole proprietorship business.
Business can be transferred to nominee shareholder
Generally in a sole proprietorship business, the legal heirs get percentage of proprietorship business. Sometime legal battle to get hold of the property and other assets of business among legal heirs is difficult. Business gets affected if these issues are not settled soon.
In One Person Company, we have a concept of nominee shareholder. Nominee of a person is required to be mentioned by which company will be taken over by the nominee shareholder in case of death of sole owner. Nominee can also be changed at any time by the sole owner of One Person Company. This means, in case of One Person Company, ownership of business will be defined clearly.
Personal Liability not effected – limited liability
In One Person Company, liability of sole owner will be limited up to the amount invested as share capital. This means, in case of recovery of company’s loan, personal assets like house, cars and others will not be touched unless personal guarantee has been provided by directors. However, a proprietorship offers no such advantages i.e. business liability can be recovered from personal assets of owner.
Benefits of Sole Proprietorship business in comparison to One Person Company
One of the biggest drawbacks of One Person Company in comparison to sole proprietorship business is that it’s tax liability. One Person Company is taxed at the rate of 30% on its Net taxable income of the financial year.
Sole proprietorship’s income gets clubbed into the individual’s income and then taxed in the hands of sole owner. This means, in case of proprietorship business, income will be taxable based on the slab rates that are applicable to individual and tax deduction under different sections of income tax act will also be available.
A person in lower tax bracket will be benefited by having a proprietorship business compare to 30% tax rate of One Person Company.
Below, we have listed certain other benefits of sole proprietorship business in comparison to One Person Company.
- Sole Proprietorship business can get started without any registration. In case of any difficulty, the owner can close down the business without much legal compliance. However, in case of One Person Company, the sole owner has to follow legal procedures to get out of the business and close the company.
- Minimum paid up capital required to form a One Person Company is Rs.100000 whereas; in proprietorship business such requirement is not there.
- “One Person Company” has to be mentioned below the name of the company in bracket.
- Legal formalities like board meeting, general meeting, audits and other compliance will be increased for One Person Company in comparison to sole proprietorship business.
- Books of accounts and other paper works will be increased and more work force will be required for these compliance. Due to this cost will also go up as legal professionals and registration fee will be higher in case One Person Company.
For small business, sole proprietorship is still more viable in comparison to One Person Company. If you are aiming for a long term solution with more credibility of your business and ready to take on the legal compliance requirements and cost then you can start with One Person Company.
Before you start, we suggest you to consult either a chartered accountant or company secretary or any other legal professionals to have a better understanding on One Person Company.