The initial task before commencing a company is to select the ideal type of company for the business. It is very important to decide on the type of firm or legal entity which you want such as LLP, OPC and Proprietorship etc. before commencing a business. The entrepreneurs should carefully examine and compare the types of firms and choose the ideal type of company which would fit their business. Let us understand the aspects of the different type of companies and list out the differences between them.
Meanings:
- Proprietorship:
This is the simplest type of business where one person operates the whole business. The sole trader owns, manages and controls all the business activities and is personally liable for all of the debts. There is no distinction between the owner and the business entity.
- Partnership:
A partnership is a form of business where two or more people with the same motive of making profits come together to run a business. The partners manage the business and contribute their capital, skills and resources and in return share the profits and losses.
- Limited Liability Partnership:
A LLP is a type of partnership in which all or some of the partners have limited liability i.e. each partner is not personally liable for some other partner’s misconduct or wrongdoings. A LLP is considered as a separate legal entity and has characteristics of both, a partnership as well as a company.
- Private Limited Company:
A private limited company is a company which is privately held for small businesses. It lies between a partnership and a public owned company. It offers limited liability and its liability is limited to the extent of shares held respectively by the members.
- One Person Company:
One person company is a company which has just one member who runs the company. It is incorporated as a private company but the only difference is that it has only one member in the whole company.
Now let us see the aspects that distinguish the above types of companies from each other.
REGISTRATION:
- Proprietorship:
There is no formal registration required for proprietorship.
- Partnership:
Under partnership, registration is optional. The partnership may or may not be registered. If registered, it has to be registered under the Partnership Act, 1932.
- LLP:
A LLP has to be registered with the Ministry of Corporate Affairs under the Limited Liability Partnership Act, 2008.
- Private Limited Company:
A Private Limited Company is to be registered with the Ministry of Corporate Affairs under the Companies Act, 2013.
- OPC:
An OPC is to be registered under the Companies Act, 2013 with the Ministry Of Affairs.
NAMING GUIDELINES OF THE ENTITY:
- Proprietorship:
It is up to the sole trader to choose any name for the proprietorship. He does not require the approval for using the name, however, trademarked names should be avoided.
- Partnership:
The partners can decide on any name for the partnership. There is no approval required for using the name though trademarked names should be avoided.
- LLP:
Under LLP, the name which they have chosen has to be approved by the Registrar of Company. All similar or identical names or names that are offensive or illegal must be avoided. The name of the company should include or end with the words LLP.
- Private Limited Company:
The name approval guideline for private limited is similar to that of LLP. All similar/identical names or illegal or offensive should be avoided. The name of the company should include or end with the words Private limited company.
- OPC:
The name approval guideline for OPC is the same as LLP and Private limited company. The name of the company should include or end with the words OPC.
- LEGAL STATUS OF ENTITY:
- Proprietorship:
Proprietorship is not recognised as a separate legal entity. The sole trader is personally responsible for all the debts of the Proprietorship.
- Partnership:
Partnership is not distinguished as a separate legal entity and the partners are liable for the liabilities of the company.
- LLP:
LLP is considered as a separate legal entity under the LLP Act, 2008. The partners of LLP are not personally liable for the liabilities of the LLP.
- Private Limited Company:
Private limited company is a separate legal entity under the Companies Act, 2013 and the directors and shareholders are not personally liable for the liabilities of the Company.
- OPC:
OPC enjoys the status of a separate legal entity under the Companies Act, 2013 and the Director and the Nominee of the OPC are not personally liable for the liabilities of the OPC.
MINIMUM AND MAXIMUM NUMBER OF MEMBERS:
- Proprietorship:
Proprietorship can have only one member.
- Partnership:
The minimum number of members required are 2 for partnership and maximum number of members can be 20.
- LLP:
A minimum of 2 members are required to commence a LLP and there are no restraint on the member of members i.e. it can have unlimited partners.
- Private Limited Company:
The minimum requirement of members for Private limited company is 2 and it can have about 200 shareholders or members.
- OPC:
2 members are required to start an OPC. They are the Director and Nominee Director. OPC cannot have any members except the 2.
- LIABILITY OF THE MEMBER(S):
- Proprietorship:
The proprietor has unlimited liability and is liable for all the liabilities of the proprietorship.
- Partnership:
Partners have unlimited liability and are responsible for all the liabilities of the firm.
- LLP:
The partners in LLP have limited liability and are liable only to the extent of their contribution in LLP.
- Private Limited Company:
The shareholders have limited liability and are liable only to the extent of their share capital.
- OPC:
The director and the nominee have limited liability and are liable only to the extent of their capital in the company.
- FOREIGN OWNERSHIP:
- Proprietorship:
Foreigners cannot start a proprietorship.
- Partnership:
Foreigners are not allowed to start a partnership.
- LLP:
The foreigners can only invest in a LLP with prior approval of RBI and FIPB.
- Private Limited Company:
Foreigners can only invest in a Private limited company under the Automatic Approval route in most sectors.
- OPC:
The only member of OPC i.e. the director and nominee director cannot be foreigners.
- TRANFERABILITY:
- Proprietorship:
The ownership cannot be transferred.
- Partnership:
The ownership of partnership is no transferable.
- LLP:
The ownership of a LLP can be transferred.
- Private Limited Company:
The ownership of a private limited company can be transferred by way of shares.
- OPC:
The ownership of an OPC can be transferred.
- EXISTENCE OR SURVIVABILILITY:
- Proprietorship:
The existence and continuation of the business depends solely on the proprietorship.
- Partnership:
The existence of a partnership firm depends on the partners. They can dissolve the partnership voluntarily or the firm can be dissolved in case of death of a partner.
- LLP:
The existence of LLP is not dependent on the partners. It can be dissolved voluntarily or by order of the Company law.
- Private Limited Company:
The existence of the company is not dependent on its directors or shareholders. It could be dissolved voluntarily or by Regulatory authorities.
- OPC:
Existence of an OPC is not dependent on the Director or the Nominee Director. It can be dissolved voluntarily or by Regulatory Authorities.
TAXATION:
- Proprietorship:
The tax in levied on the sole proprietor on the basis of his income.
- Partnership:
Partnership profits are taxed at 30% plus surcharge and cess as applicable.
- LLP:
LLP profits are taxed at 30% plus surcharge and cess as applicable.
- Private Limited Company:
Private Limited Company profits are taxed at 30% plus surcharge and cess as applicable.
- OPC:
OPC profits are taxed at 30% plus surcharge and cess as applicable.
ANNUAL FILINGS:
- Proprietorship:
There are no requirements for proprietorship to file for annual filing. Income tax must be filed on the basis of the income of the Proprietorship.
- Partnership:
There are no requirements to file annual filings. Only Income tax must be filed for the Partnership.
- LLP:
It is mandatory for LLP to file Annual Statement of Accounts and Solvency and Annual Return with the Registrar each year. Income tax must also be filed for the LLP.
- Private Limited Company:
A private limited company must file Annual Accounts and Annual returns with Registrar of companies each year. Income tax must also be filed for the company.
- OPC:
AN OPC must file Annual Accounts and Annual returns with Registrar of companies each year. Income tax must also be filed for the OPC.
The Companies Act, 2013, proved to be revolutionary as it introduced many different concepts in the corporate world of India and it proposed new ways of conducting business. It gave a new light to conducting of business for the businessmen and entrepreneurs.
One Person Company was one such new concept introduced in the Companies Act, 2013. It was initiated with a view to supporting entrepreneurs who on their own are capable of starting a venture by allowing them to create a single person economic entity.
One Person Company is defined in Sub- Section 62 of Section 2 of The Companies Act, 2013, which reads as follows:
‘One Person Company means a company which has only one member’
It shall also be important to note that Section 3 classifies OPC as a Private Company for all the legal purposes with only one member. These companies have only one promoter or founder for the business. OPC is very similar to sole proprietorship but the main difference between OPC and Sole Proprietorship is their liabilities. In OPC, the founder is not personally liable for the debts of the company as OPC is a separate legal entity whereas in Sole Proprietorship, the founder is personally liable for all the debts and all the assets and liabilities are tied directly to him. Entrepreneurs opt for OPC instead of Sole Proprietorship due to its many advantages.
Features of OPC:
- The only exception provided by the Act to an OPC is that according to the rules only “NATURALLY-BORN” Indian who is also a resident of India is eligible to incorporate an OPC i.e. the advantages of an OPC can only be obtained by those Indians who are naturally born and also a resident of India.
- OPCs can have only one member or shareholder unlike other companies.
- The minimum number of person as directors in OPCs is one and maximum is 15 directors.
- Another distinguishing feature of OPC is that at the time of registering the sole member has to mention a nominee.
- OPCs enjoy special privileges and exemptions under the Companies Act.
Let us see who all are eligible to incorporate an OPC:
- Only a natural person who is Indian Citizen and resident in India can incorporate OPC.
- Resident in India means a person who had resided in India for a period not lesser than 182 days in the prior calendar year.
- Legal entities like company or LLP cannot incorporate an OPC.
- Minimum authorised capital is Rs 1,00,000.
- Businesses involved in financial activities cannot be incorporated as an OPC.
- OPC cannot continue working when it’s paid up share capital is in excess of 50 lakhs and turnover is in excess of 2 crores so it must be converted to a private limited company.
- A minor is prohibited from being a member of OPC.
- PROCEDURE OF REGISTRATION OF AN OPC:
The process for incorporation of an OPC is divided into four steps:
- Obtaining Digital Signature Certificate (DSC)
- Obtaining Director Identification Number (DIN)
- Obtaining Name Approval
- Incorporation Filing
7. DSC is to be obtained by the sole promoter and nominee for the registration process. It can be obtained by submitting the following documents:
Address proof
Aadhar card
Passport size photos of applicant
PAN Card
- After obtaining the DSC, DIN must be obtained by the sole promoter and nominee. No additional documents are required for obtaining DIN.
- The next step is to apply for name reservation of the company. 1 preferred name is to be submitted along with the significance of choosing that name. Up to 6 name options can be submitted and all the names given have to conform to the naming standards and the name must include or end with the words OPC.
- After getting the name approved from MCA, signed Memorandum of Association (MOA) and Articles of Association (AOA) is to be submitted to the Registrar of Companies (ROC). The other documents to be submitted along with the MOA and AOA are identity proof, address proof, affidavits and declarations of the sole promoter. Affidavit and consent of the proposed Director is also to be attached with FORM INC-9.
- All the above documents are to be submitted to SPICe form, SPICe- MOA, SPICe-AOA.
- After verification, the Registrar of Companies (ROC) will approve and issue a Certificate of Incorporation and the business can commence.
OPC aims at encouraging solo entrepreneurs to set up a company all by themselves. One of the biggest advantages of an OPC is that there can be only one member in an OPC, whereas a minimum of two members are required for incorporating and maintaining a Private Limited Company or a Limited Liability Partnership.
OPC is already established and popular in foreign countries, including countries such as USA, Singapore, etc. It is a new concept in India and it is proving to be favourable due to its many advantages. Similar to a Company, an OPC is a separate legal entity from its members, offers limited liability protection to its shareholders and is easy to incorporate.
Some other advantages of OPCS are:
- Less compliance burden: OPC s are required to comply with the provisions applicable to private companies but OPCs are provided with many exemptions and therefore have less compliance burden.
- Single owner: Only one person runs the whole business. thus he has all the right to make decisions and control over the business which leads to quick and effective working of the business as he doesn’t have to get consent or wait for anybody else’s approval over the work.
- Limited liability: unlike, sole proprietorship, the person’s liability is only up to the extent of the value of shares they hold and their personal assets will not be bound with the company.
- Minimum requirements:
Minimum 1 Shareholder
Minimum 1 Director
The director and shareholder can be the same person
Minimum 1 Nominee
Letters ‘OPC’ to be suffixed with the name of OPCs to distinguish it from other companies
The above advantages prove that OPCs are easy to incorporate and manage the company. It is also beneficial for the small scale industries and young entrepreneurs. It is for those solo entrepreneurs who need 100% control of the business. However, it also has certain disadvantages which have to be carefully considered before converting or forming an OPC.
