Selecting the right business structure is vital in running your startup company with ease.
If you have been on the fence to decide which legal structure to choose for your startup company, this blog will help you decide and understand the same.
If you are a solo entrepreneur and want to start your startup company without waiting for anyone else to join you, you have the following options for you.
- Sole Proprietor
- One Person Company
1. Sole Proprietor:
If you do not want a separate legal structure for your business, this is the easiest, convenient, and most cost-effective option to start. To start as a Sole Proprietor, what you need is:
- Personal identity proof
- Address proof
With these documents ready, decide on the name of your startup company. I highly recommend checking the proposed name with a lawyer for any trademark issues. You do not want to build the foundation of your business with a name you cannot own. We also recommend registering the website, and social media handles with the name of your business immediately.
Once that is sorted, you can now proceed with applying for at least two government registrations in the name of your business. File the MSME registration and the shop act if you are working from the office, or professional tax registration, depending on if that is applicable in your state. These registrations will take anywhere from 1 day to 1 week to get done and, the process is online.
After you have got these registrations in place, open a bank account (current account) in your business name. I highly recommend you not to use your savings account for business purposes. Having a different bank account for your business and your personal transactions will save you a lot of time and energy while sorting out your business transactions from your personal transactions.
Who can start a business as a Sole Proprietor?
If you are a professional (like a fashion designer, freelancer, CA, Doctor, Architect, etc.) or someone doing trading or manufacturing, the transaction volume is not big.
Refrain from being a proprietor if:
– You want to build a legacy business which will run even after you are gone
– You are not willing to take personal responsibility for all the liabilities you take for your business
– You want to have a better tax structure
2. OPC: One Person Company
One Person Company is a more formal and corporate structure you will have for your business where you are both the owner and director. This option is suitable for small businesses as once you cross an annual turnover of INR 2 crores for years, you will need to convert your OPC to a Private Limited Company.
If you want to start a business as a solo entrepreneur and limit your business liability to the capital employed, OPC will be the best option for you.
Although you will be the sole owner of the OPC, you will also be the shareholder and the OPC director.
How to register your business as a One Person Company?
1. Obtain a DSC so that you can sign all the online documents using the DSC. DSC can be issued by filing a DSC application and providing your ID and address proof. Time took – 1 day.
2. Using DSC, apply for DIN for you. Director Identification Number (DIN) will be issued by MCA and is public information. DIN is linked to all the companies in which you are a director.
3. Once you obtain DIN, you can apply for the OPC name. MCA will ensure your name is unique to your business. After application, you get a response from MCA within 2-3 days. Try not to pick a generic name to avoid getting objections/queries from MCA that delay the process.
4. After the name has approved, file incorporation documents with MCA within 30 days, failing which the approved name will lapse and, you will need to revisit step 3 above.
5. If all the documents are drafted clearly, and MCA raises no queries concerning the Company’s object or otherwise, MCA will issue a Certificate of Incorporation for the OPC. Along with COI, you will also receive PAN and TAN of the OPC in the certificate.
BONUS TIP- Using this COI, you can proceed with opening the bank account. Once you open the bank account, don’t forget to transfer the capital from your personal account to your business bank account.
If you are in a fix to decide whether to start your business as a sole proprietor or a one-person company, I have compiled the comparison between the two options on major criteria, which will help you decide which option to choose.
1. LIABILITY – This is the main criteria on which OPC scores best over a sole proprietor. In OPC, the owner’s liability is only to the extent of capital infused in the Company whereas, the sole proprietor has the personal liability to make any loss in the business. E.g., if the sole proprietor faults on a bank loan, the bank will confiscate the owner’s house to recover the money, which will not be the case for the OPC owner.
2. TAXATION – OPC is taxed at corporate tax i.e. 22% for FY 2018-19 & 15% for a new manufacturing company. The proprietor is taxed at normal rates applicable to individuals and is eligible for all the deductions applicable to individuals.
3. COMPLIANCE – OPC needs to get a yearly audit done as a Company and file an annual return with MCA and Income Tax. The proprietor will only need to file his income tax return annually. No audit for him up to the turnover of INR 2 crores/50 lakhs for professionals.
4. GROWTH – As the business grows, OPC needs to be converted into a private limited company. No such restrictions for a proprietor
5. SUCCESSION – OPC appoints a nominee at the time of incorporation. Shares get transferred to the nominee in case of the death of the owner. The proprietor has to make a will for the transfer of the business to anyone. Hence, the business dies with the proprietor.
BONUS TIP – If you want to run a perpetual business that grows beyond you as a person, but you are not sure to incorporate a company just yet, OPC gives a great option to continue business at a low cost and convert into a Company as you Grow.