The simplest legal structure under which to run a firm is a proprietorship, according to definition. It just designates the person who owns the company and is personally liable for its debt; it does not designate a formal organisation. A sole proprietorship may carry on business under its owner’s identity or under a fictitious name. Due to its low cost and ease of setup, it is a widely used business model in India.
On the other hand, the Companies Act 2013 provides a definition for One Person Companies. The idea is novel to India and promotes businesspeople who are capable of forming a one-person economic entity and beginning an enterprise on their own. Like a business, It gives limited liability protection and is a separate legal organisation. This indicates that this type of business permits a sole proprietor to run a corporate entity.
A sole proprietorship is a business that is run and owned by one person, with no distinction made between the owner and the company. A single person is permitted to manage a corporation that is governed by its shares under the notion of a “one person company,” which is a distinct legal entity. Here is a comparison of the two mads’ features to make the concept easier to understand:
Major Differences between One Person Company vs Sole Proprietorship
- Limited and Unlimited Liability: The liability for a sole proprietorship is unlimited. This means that if a business experiences losses, the owner’s assets as well as those of the business entity must be utilised to settle the debts. In contrast, a one-person business is a distinct legal entity. As a result, the owner of this business has little recourse against its only shareholder. A sole proprietor can run a corporate entity while maintaining company continuity and having few restrictions. Before starting the incorporation process for a one-person business, it is crucial to carefully examine its features and organisational structure.
- Taxation: In a sole proprietorship firm, the income of the business is classified as the owner’s personal income. Taxation is carried out as a result. A one-person business is nevertheless subject to the appropriate taxes because it is registered as a private limited company. Since the one-person business was first established in 2013 under the Companies Act, no provisions have been made in the Income Tax Act to include specific tax regulations for it. As a result, it continues to be taxed in accordance with the provisions of the Income Tax Act as a private limited business.
- Succession: In a sole proprietorship enterprise, the owner and the company are one and the same. As a result, only the Will’s execution allows for succession. It might or might not be contested in court. On the other hand, a nominee must be chosen by the members of a one-person business for succession purposes. A nominee must be an Indian citizen by birth and a resident of the country. This means that if a member of the firm passes away, the remaining member will operate the business. In general, a one-person business continues its succession and is unaffected by the death of the member. A sole proprietorship, on the other hand, does not maintain its existence. Only if there is a will it happen.
- Compliance: A sole proprietorship business must have its books audited if its yearly turnover exceeds the threshold amount allowed by the Income Tax Act. Contrarily, in the case of a one-person business, the compliances are more stricter. This is due to the fact that the business will have to submit yearly returns and comply with all laws that apply to private limited companies. Additionally, it would have to have its accounts revised in a similar way to how a private limited business would.
- Conversion: No other business structure can be turned into a sole proprietorship firm. It won’t change no matter how much money it brings in. Instead, if the average annual turnover for three years reaches the criteria, a one-person firm must convert into a private limited company or a public limited company (as applicable). This means that a one-person business must be converted into a public or private limited company as soon as its average annual revenue surpasses INR 2 crore for three straight years or if the paid-up share capital exceeds INR 50 lakh.
What kinds of business best suits the proprietorship and one person company:
For businesses where a single person is allowed to oversee and control the business activity with the fewest legislative compliances, a proprietorship is advised. In situations where the nature of the business is straightforward and there are minimal to nonexistent financial risks involved, this form of business is chosen. Massive debts must be avoided, and a small product market is optimal. Businesses that require the least amount of capital are best conducted as sole proprietorships. Proprietorships are considered unregistered businesses. Therefore, if one is operating a firm that needs to comply with legal requirements for business registration, a proprietorship is unquestionably not the best option.
One person companies are the only types of business entities that can be founded by a single promoter. It guarantees that the company will continue to exist indefinitely unless it is formally disbanded. This indicates that it is untouched by member departure or death. In spite of this, changing the director’s shareholding, directorship, and nominee information makes it simple to transfer ownership of the company. Businesses with significant capital requirements and high financial risk factors can want to register as one-person companies. This is so that proprietorship businesses do not receive funding preference from banks and other financial institutions As a result, borrowing money from a business run by one person is simple. Since the capital is borrowed, there is a shared financial risk of the business losing its capital. It is true that a one-person business can change from a private to a public company at the whim of its members if it meets certain requirements. One-person businesses cannot, however, provide any kind of equity security. The corporation will be the only owner of the land, equipment, structure, and all other intangible assets.
Registration of a Proprietorship Firm vs. Incorporation of a One Person Company:
Business is conducted under the ownership of the person or sole proprietorship firm. Those who operate as sole proprietorships are considered unregistered businesses. The business is an autonomous commercial entity even if it does not have a separate legal entity from the owner because it is not registered with the federal government. The sole proprietorship businesses’ business names are not rigorously vetted. Due of this, the majority of business owners choose a name for their company that is recognisable but does not violate any trademarks. Therefore, a current bank account is opened in the name of the Sole Proprietorship firm to lend validity to this corporate structure.
Since it is not compulsory to register this kind of business, Reserve Bank of India has made several guidelines.
According to these guidelines, there is a list of documents that are required to open a current bank account in the name of a proprietorship firm:
1. First Sole Proprietorship Proof (Need anyone of the these):
2. Second Sole Proprietorship Proof (Need anyone of the these):
- It is only when the proprietor gives one documents from each category, the bank shall open a current bank account in the name of the firm.
Only a person who has lived in India for at least 182 days during the most recent fiscal year is eligible to incorporate a one-person business. The person who has already established a one-person company is not permitted to join or serve as a nominee for another one-person company during the same time frame. The Companies Act of 2013 outlines the incorporation process, which is overseen by the Ministry of Corporate Affairs.