12/6/2015

SoleProprietorshipv.OnePersonCompanyandwhatyouneedtodotosetupasoleproprietorshipiPleaders

SexualHarassmentatWorkplaceinIndia:Let'sStopit
TogetherFREEebookLaunched
Search...

LATEST POSTS

DownloadNow!

42
Shares

Sole Proprietorship v. One Person Company and what

4

26

Home/General/SoleProprietorshipv.OnePersonCompanyandwhatyouneed
todotosetupasoleproprietorship

11

you need to do to set up a sole proprietorship

Postedby:Ramanuj inGeneral

May21,2014

1Comment

IPLEADERS LAW ENGINE

PostViews:3,851
Share on Facebook

Share on Twitter

Search

SoleproprietorshiporOnePersonCompany?

ThisarticlewaswrittenbyHimanilRainaofNALSAR.Thiswouldhelpyoutomakeup
yourmindaboutwhethertostartasoleproprietorshiporaOnePersonCompany,and
whatregistrationsyouwouldneedtocarryonbusinessaswell.OvertoHimanil.
For anyone wishing to start a business of their own the primary issue of the greatest
importance is the legal skeleton they wish to chose upon which they wish to prop up
theirbusiness.Broadlyspeakingthereare4typesoflegalstructuresthatcanbechosen
when one wishes to start their business: Self proprietorship, partnership, LLP or a
company.
Eachofthesestructureshavemanyvariationswhichcomewiththeirownbenefitsand
http://blog.ipleaders.in/onepersoncompanysoleproprietorshiphowtosetp/

1/4

12/6/2015

SoleProprietorshipv.OnePersonCompanyandwhatyouneedtodotosetupasoleproprietorshipiPleaders

drawbacks.Whichformischosenbyanindividualbusinessultimatelydependsonthe
characteristics and needs of the business. In this piece the author talks about what a
sole proprietorship business is and examines its advantages and drawbacks. The
necessitiesneedingtobefulfilledasperlaw(tax&shop&establishmentsregistrations)
to start a self proprietorship are explained. Towards the end a sole proprietorship is
compared with a One Person Company with similarities and differences elucidated
upon.

WHAT IS A SOLE PROPRIETORSHIP

Sole means single whilst proprietorship means ownership. Sole Proprietorship is a
business enterprise that is owned and controlled by one person who possesses the
entireauthority&responsibilitywithrespecttothebusiness.Thepracticalimplication
of such an arrangement is that an owner alone gets the entire profit but he is also
personallyliable.Thisissoasaproprietorshipisnotadistinctentityuntoitself,rather
the business and its owner are identical. This form of business is ideally suited to
businesseswherethenatureofthebusinessissimpleandtheproductsmarketissmall.
Businesswithsmallcapitalrequirementsandlowlevelsofriskareaptforbeingrunas
soleproprietorships.

THE ADVANTAGES OF A SOLE PROPRIETORSHIP

Adefiningfeatureofsoleproprietorshipsistheeaseandinformalitywithwhichitcan
becreatedanddissolved.Sincenoformalregistrationisneededthereisnocostatallin
setting up a self proprietorship (except for certain tax related and business specific
registrations). Since one person owns the business and has absolute control he can
alwaysmakequickdecisionsandbeflexibleaswell(sinceevenfundamentalchangesto
the business are subject only to his will). Retention of complete control over the
financesofthebusinessallofwhoseprofitsflowtotheownermeansthatthisformof
business organization gives a very strong incentive for work to the business owner.
Often the sole proprietorship business model is found in lines of work where close
personal relations are maintained since the sole proprietor is capable of ensuring
adequateoneononerelationswithbothemployeesandcustomers.Ensuringthesafety
ofbusinesssecretsisalsoamucheasiertaskinthisformofbusinessorganizationthan
anyother.

DISADVANTAGES OF A SOLE PROPRIETORSHIP

Theproblemswiththesoleproprietorshipmodelofbusinessarefourfold.Firstly,itcan
exist only for as long as the owner exists (an end can be put to the business by the
owners death or insolvency). Secondly, expansion of the business beyond a certain
pointbecomesverytoughassincetheproprietorcannotbeanexpertineveryaspectof
business management more employees are needed. However, good quality employees
(whoselongtermaimisoftensharingthebenefitsofownership)aredifficulttoattract
owingtotheindividualcentricmodelthatcharacterizessoleproprietorship.Thethird
problemrelatestodifficultiesencounteredintheraisingofcapitalbyasingleperson.
Lackofcredibilityissomethingthathinderstheflowofcapitalandthusexpansionof
thesizeofthebusinessnotwithstandingtheextentofthesuccessofthebusinessorits
product.Lastly,soleproprietorshaveunlimitedliability.Thismeansthatinasituation
whereasoleproprietorfailstomeethisdebtsorbusinessobligationsandalawsuitis
filed by a consumer then the personal properties of the proprietor could also be
disposedoftosatisfythedebts.

LEGAL REQUIREMENTS FOR RUNNING A SOLE

PROPRIETORSHIP BUSINESS
One of the positive features of a sole proprietorship is that there are legal formalities
thatneedtobecompliedwithtostartit.Whilenoformalregistrationisneededtostart
asoleproprietorshipthereareothertaxationandbusinessrelatedformalitiesthatneed
to be complied with. To begin with its generally a good idea to come up with a trade
name for the business and get it trademarked. Following the same a bank should be
http://blog.ipleaders.in/onepersoncompanysoleproprietorshiphowtosetp/

2/4

12/6/2015

SoleProprietorshipv.OnePersonCompanyandwhatyouneedtodotosetupasoleproprietorshipiPleaders

visitedandtheformforaproprietorshipfirmbeaskedfor.Thebusinesscanberunout
of home but if the proprietor wishes to run it out of a commercial place then the
provisionsoftheShop&EstablishmentsActneedtobecompliedwith,theprovisionsof
the Act themselves vary across states. Generally there are provisions requiring an
establishmentsownertogethisestablishmentregisteredalongwithafeethatmaybe
specified (information such as the managers name, the establishment address and
name and its category may need to be provided). Opening and closing hours are
specifiedinadditiontonormsrelatingtoworkandothermiscellaneousactivities.
ItismandatoryfortheproprietortopossessaPANcard(sinceallthereturnsarefiled
intheproprietorsname).BusinesseswithaturnoverexceedingRs9lakhneedtopaya
10% service tax and hence need to be registered. If the business of the proprietor
involves the procurement and sale of taxable goods in the state then registration for
VAT (Value Added Tax) is needed. If the buying or sale of taxable goods is across
differentstatesthenregistrationforCST(CentralSalesTax)isneeded.Iftheproprietor
wishestoengageininternationaltradeheneedstoobtainanImporter&ExporterCode
fromtheDirectorGeneralofForeignTrade.AProfessionalTaxissomethingthathasto
bepaidtothegovernmentaswelliftheproprietorhasemployees.Thelevyofthistax
varies across states with some not having it and others collecting it annually. The
Employee State Insurance Act, 1948 requires registration under it if 10 people are
employedinafactoryand20peopleinestablishmentsotherthanafactory.

DIFFERENTIATING BETWEEN A SOLE PROPRIETORSHIP

& A ONE PERSON COMPANY
TheconceptofaOnePersonCompanywhichhasexistedinmanynationsabroadhas
recently gained recognition with the Companies Act 2013. A One Person Company
creates a separate legal entity as contrasted with a sole proprietorship where the
proprietor and the entity are one and the same. An OPC allows for the limitation of
liability whereas in a sole proprietorship liability is unrestricted and extends to the
individuals assets. A perceived benefit in starting an OPC is that it can help attract
investors who were not keen to invest in a sole proprietorship owing to the risks
imposedbyunlimitedliability.AnOPCisalsoexemptfromtheneedtoconductgeneral
meetingsandboardmeeting.Thatsaidallresolutionspassedhavetobeenteredinthe
minutesbookandprovisionsrelatingtofinancialstatementsandaccountsandaudits
arestillapplicable.Inasoleproprietorshipbycontrastauditswouldneedtobecarried
outonlyaspertheIncomeTaxActontheturnoverexceedingthethreshold.Thebiggest
deterrenttochosinganOPCoverasoleproprietorshipisthatanOPCwouldbecharged
at the 30% base tax rate, minimum alternative tax (18.5%) and dividend distribution
tax (15%) as well. The process of setting up an OPC requires time and paperwork.
Expenses in the form of hiring a lawyer and a company secretary to do the necessary
draftingworkareanotherdeterrent.Furtherareasonwhymanyindividualswouldbe
interestedinstartinganOPCisthepossibilitythatitcouldbeconvertedintoaPrivate
Limited Company in the future. This is something that should be technically possible
butpracticallydifficultatpresentduetolackofclarityinrulesandregulations.

Share on Facebook

Previous:

Share on Twitter

What happens when a person cannot

payhisdebtsandbecomesbankruptor
insolvent?

Next:

EmployersGuidetoEmployeeState
InsuranceLawsconceptsand
compliance

ABOUT RAMANUJ
Ramanuj Mukherjee is a corporate lawyer turned entrepreneur and an
alumnus of National University of Juridical Sciences. He is a cofounder of
iPleaders, and goes by the designation of Principal Integrator and Chief
Philosopher.Whenheisnotbusytryingtofigureouthowtomakelawmore
accessibletoeveryone,helovestodowritingandspeakinggigs.Hegenerally
blogsatAFirstTasteofLaw.YoucanfindhimonGoogle+.
http://blog.ipleaders.in/onepersoncompanysoleproprietorshiphowtosetp/

3/4

12/6/2015

SoleProprietorshipv.OnePersonCompanyandwhatyouneedtodotosetupasoleproprietorshipiPleaders

RELATED ARTICLES

3reasonswhyyoumay The story of the Indian Basic Mooting Mistakes

want to drop whatever Premoot for the Vis that every beginner
you are doing and Moots
makes
November23,2015
change the direction of November23,2015
yourlife
November23,2015

ONE COMMENT
Pingback:Soleproprietorshipvs.OPCIstaxationthedecisivefactor?iPleaders

LEAVE A REPLY
Youremailaddresswillnotbepublished.Requiredfieldsaremarked*
Name*
Maheshkumar

Email*
mahe21.mech@gmail.com

Website

DearSir,
Thanksforyourveryusefulsharingabout

I'm not a robot

reCAPTCHA
Privacy - Terms

PostComment

Copyright2015,AllRightsReserved.|PoweredbyiPleaders|DesignedbyDonnieAshok

http://blog.ipleaders.in/onepersoncompanysoleproprietorshiphowtosetp/

4/4