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July 13, 2020

Want to start a Business – Comparison between Sole Proprietorship, Partnership Firm and One Person Company

by Rubina Dsouza in Compliance Law

Want to start a business- Comparison between Sole Proprietorship, Partnership firm and One Person Company

Sole Proprietorship

Meaning

A sole proprietorship is a form of business organisation, wherein a single person owns, manages and controls, all the business activities. The individual who operates the business is called as a sole proprietor or, a sole trader.

Characteristics of a Sole Proprietorship

  1. Single Ownership: A single person owns the entire business, i.e. all the assets and property belongs to the proprietor. Accordingly, he bears all the risk associated with the enterprise.
  2. No sharing of Profit and Loss: Whatever income generated from the sole proprietorship business, it belongs to the sole proprietor only. Consequently, all the losses incurred by the firm are borne alone by the proprietor.
  3. One man’s capital: The capital required to start the business or to continue operations, is arranged and brought to the business by the sole proprietor only, either from his personal resources or by borrowing, i.e. from the bank, financial institutions, friends, relatives, etc.
  4. Unlimited Liability: The liabilities of sole proprietorship business are unlimited. In the event of loss, the personal assets of the proprietor along with the business assets will be utilized to discharge the dues of business.
  5. Less Legal Formalities: The legal requirements for formation, operation and closure of a sole proprietorship business are almost nil.
  6. One man Control: As only one person is in charge of all the activities, he has  full fledge control over it. Thus, the sole proprietor takes all the decision and executes it, in the manner he wants.
  7. There is no legal distinction between the proprietor and business: They are one and the same thing in the eyes of the law. Sole proprietor uses his own skills, intelligence and expertise to operate the business

Advantages & Disadvantages of Sole Proprietorship

Advantages of Sole ProprietorshipDisadvantages of Sole Proprietorship
Easy formation and closureNo Legal Separation
Flexibility in operationBusiness income reported as regular income
Least Record KeepingDifficult to raise capital
Simpler Taxes & AccountingHarder to sell the business
Deductible Business Losses against personal incomeLimited Resources
Quick Decision and Prompt ControlUnlimited Liability

Partnership Firm

Meaning

Partnership is an association of two or more persons to carry on a business in the capacity of co-owners. Each such person is called a partner. All the partners share the profits and losses in proportion of their respective ownership or as agreed between them.

Characteristics of a Partnership Firm

  1. Membership: At least 2 persons are required to begin a partnership while the maximum number of members is 100. All the individuals entering into partnership must be legally competent to enter into a partnership contract. Thus, minors, insolvent and lunatic persons cannot become members, but a minor can be admitted to partnership, to share profits.
  2. Unlimited liability: The members of a partnership have unlimited liability, i.e. they arejointly and individually liable for the firm’s debts and obligations. If business assets are not adequate to repay liabilities, personal assets of all or any partner can be claimed by the creditors to realise the outstanding amount.
  3. Sharing of profit and loss: The main purpose of the partnership is to share profit in the agreed ratio. In the absence of any agreement between partners, the business profits or losses are divided equally among all the partners.
  4. Mutual Agency: The partnership business is undertaken by all the partners or any of the partners, who acts on behalf of all the partners. So, every partner is a principal as well as an agent.
  5. Voluntary Registration: The registration of partnership is not mandatory, but it is recommended, as it offers certain benefits For instance in case of any conflict among partners, any partner can file suit against other partner or if there is any dispute between firm and outside party, then also the firm can file a case against that party.
  6. Continuity: There is a lack of continuity in partnership. Death, bankruptcy, retirement or insanity of any partner can lead  the partnership to end.
  7. Contractual Relationship: The relation subsisting between partners is due to the contract, which may be oral, written or implied.

Advantages & Disadvantages of Partnership Firm

Advantages of Partnership FirmDisadvantages of Partnership Firm
Ease of FormationUnlimited Liability
Better Financial Resources than a sole proprietorshipRestriction on Transfer of Interest to outsiders
Greater Managerial ResourcesMutual Conflict
Balanced JudgementInadequacy of Capital due to restriction in number of members
Economies in ManagementMutual Conflicts
Protection of InterestLack of Public Confidence
Risk ReductionNo Independent Legal Status and Limited Scope for Expansion

One Person Company

Meaning

One person company (OPC) means a company formed with only one (single) person as a member, unlike the traditional manner of having at least two members. Section 2(62) of Companies Act defines a one-person company as a company that has only one person as to its member. Furthermore, members of a company are nothing but subscribers to its memorandum of association, or its shareholders. So, an OPC is effectively a company that has only one shareholder as its member.

Characteristics of One Person Company

  1. Private company: Section 3(1)(c) of the Companies Act says that a single person can form a company for any lawful purpose. It further describes OPCs as private companies.
  2. Single-member: OPCs can have only one member or shareholder, unlike other private companies.
  3. Nominee: The sole member of the company has to mention a nominee while registering the company.
  4. No perpetual succession: Since there is only one member in an OPC, his death will result in the nominee choosing or rejecting to become its sole member. This does not happen in other companies as they follow the concept of perpetual succession.
  5. Minimum one director: OPCs need to have minimum one person (the member) as director. They can have a maximum of 15 directors.
  6. Liability : Owner’s liability is limited to his/her investment in the company
  7. No minimum paid-up share capital: Companies Act, 2013 has not prescribed any amount as minimum paid-up capital.

Advantages & Disadvantages of One Person Company (OPC)

Advantages of OPCDisadvantages of OPC
OPCs have been provided with a number of exemptions and therefore have lesser compliance related burden than a Private Limited CompanyLimited membership
Organised sector of proprietorship companySuitable only for small business
Minimum requirementsLine between the ownership and control is blurred which might result in unethical business practices
Liability of the member will be limited to the unpaid subscription moneyA person shall not be eligible to incorporate more than a One Person Company or become nominee in more than one such company
Easy to get loans from banks when compared to a proprietary firmNRIs not allowed to incorporate OPC
Complete ControlOPC cannot carry out Non Banking Financial Investment activities including investment in securities
Easy to manageOPC cannot be incorporated or converted into a company under Section 8 of the Companies Act.
 No Perpetual succession

Comparison- OPC vs Sole Proprietorship vs Partnership Firm

FactorOPCSole ProprietorshipPartnership Firm
Distinction in ownershipOwner & business are considered as 2 separate entitiesOwner & business is defined as a single entityConcept of mutual agency exists – every partner is a principal as well as an agent
LiabilityLimited to his/her investmentUnlimited liabilityUnlimited liability – partners arejointly and individually liable
TaxationRegistered as a Private limited company & hence taxed under Income Tax Act for Private companiesTreated as owner’s individual incomeTreated as partner’s individual income
MembersOnly 1 member or shareholderOnly 1 proprietorAt least 2 persons are required to begin a partnership while the maximum number of members is 100.
Profit/LossProfit/Loss belongs to the single memberProfit/Loss to the single proprietorProfit/Loss is shared between the partners in the agreed ratio of equally
ManagementEasy to manageEasy to manageConflicts may arise due to difference of opinions between partners

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