The decision of what business structure is best for their company is typically confusing for new business owners. In general, OPCs and sole proprietorships are similar, but there are certain differences discussed below. Here’s what you need to know about choosing the right business structure.
Those who want complete control over their business have two choices: a one-person company or a sole proprietorship. Both have advantages and disadvantages, and one cannot claim that one is better than the other, but rather that one is better suited to meet one’s needs.
Sole proprietorships are better for small businesses, while one-person enterprises are better for medium-sized companies. Let’s compare the two so we can decide which is better for your business.
Promoter’s Liability
A sole proprietor is completely unprotected since their liability is limitless. Creditors can force the business’s proprietor to sell his or her personal property in order to repay the business’ debts if the company is unable to fulfill its obligations. A sole proprietorship does not exist as a separate legal entity from its owner.
Unlike directors of companies with more than one employee, one-person companies are fully protected. Since the entity and its director are separate legal entities, the director’s personal assets will always be protected. Therefore, if you do not have much risk in your company, a sole proprietorship may be appropriate, but if it is the opposite, a one-person company is preferable.
Start-up Costs
Due to the lack of formal registration, a sole proprietorship is an affordable option. You will only need a GST registration and a license under the Shops & Establishments Act if you are a sole proprietor. You won’t burn a hole in your pocket by paying for these ancillary registrations.
Additionally to the above registrations, a one-person company must also comply with various compliances and undergo incorporation procedures. Considering the numerous other benefits of the structure, this is a significant expense that is worthwhile.
Succession
In the event of the death of a sole proprietor, his or her business assets and liabilities are transferred to his or her children/heirs, and their business license expires. They must obtain a new business license if they want to keep the business going.
Nevertheless, a business can survive even if its owner dies under perpetual succession. Upon the death or incapacity of an OPC owner, the nominee will continue the business operations until they can be transferred to the owner’s heirs. Afterward, the heirs can continue to operate the business without having to form a new entity.
Annual Compliances
Generally, sole proprietorships are only required to file income taxes and keep their books in order, while one-person companies also need to have their books and balance sheets audited, file annual reports, and notify the RoC of any changes to their structure. Businesses with one employee should budget for compliance costs of at least $10K per year.
The Takeaway
Industry-specific compliance costs should be considered. Your business adventures will be low-risk if you become a sole proprietor. Start a one-person company if your business involves a significant amount of risk and you want it to be more official and credible. Finally, make sure that you choose based on the nature of your business.
You can get expert advice on choosing the right business structure from a professional legal service provider such as Vakilsearch. Get in touch with our experts today!
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