One person company: All you need to know

Ashok Shah, a partner at N.A. Shah Associates LLP, says, “The Companies Act 2013 introduced the concept of One Person Company (OPC) in India, which can be implemented with a single member. However, its turnover cannot exceed ₹2 crore in the preceding three years and it cannot have paid-up capital more than ₹50 lakh."

To start working as a freelancer or a sole proprietor, you don’t need to be formally registered with any authority. When it comes to starting an OPC, you need to register with the Registrar of Companies. Another point of difference is that in terms of legal and tax matters, sole proprietorship makes no distinction between the business entity and its owner. Prashant Bhojwani, partner at Dhruva Advisors LLP, said, “OPC is a legal entity separate from its member, offering limited liability protection to its sole member." This means, even if your business incurs a loss, your liability as the owner of the OPC is limited.

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Unlike a sole proprietor who has “unlimited liability", which means in case of loss your belongings can be taken into account for recovery of debt. Hence, if you are someone who is looking to limit your personal liability, the OPC route can be considered.

Another advantage of an OPC is the ease of getting loans and perpetuity. “OPCs provide perpetual succession and limited liability to businesses. They also provide transparency and distinct identity to the business, which is beneficial from the perspective of fund raising and business development. OPCs are permitted to convert into a private limited if required in the future, thereby providing continuity to the business," said Shah. Remember: As a freelancer, getting business loans isn’t as easy owing to stringent bank criteria. Options you can avail include taking a personal loan, taking loan against gold or securities or getting a credit card. An OPC, on the other hand, stands a better chance of getting a business loan based on its cash flows and supported by collateral security.

When it comes to tax, both being a freelancer and working as an OPC, are very different. “From a tax perspective, OPC is not a beneficial form as it is taxed as a private company and pays tax without any basic exemption. In addition to corporate tax, OPC is liable to dividend distribution tax when it declares dividend. OPCs have to comply with requirements of audits and maintenance of secretarial records as per the Companies Act," said Shah.

A freelancer or sole proprietor would find the tax structure friendlier than an OPC. “OPC would typically be taxable at 30% (plus surcharge and cess). Separately, on distribution of profits by OPC to its sole member, OPC would be subject to dividend distribution tax at 20.56%. On the other hand, an individual freelancer would be taxable on business profits as per applicable slab rates (maximum rate 30%, plus surcharge and cess) and no additional tax cost on withdrawal of funds from business," said Bhojwani.

When it comes to wrapping up the business, a freelancer can do so any time. An OPC needs to be shut in a legal manner and it takes around months to get the closing letter from ROC. There’s no doubt that it seems like being a freelancer comes with lesser headache than forming an OPC, but OPC makes sense in certain conditions. “Only an individual Indian citizen and resident can form an OPC. Also, an individual can be a member of only one OPC. Individuals seeking limited liability protection and funding opportunities should consider OPCs a vehicle for doing business or profession," said Bhojwani.

In short, if you want limited liability, and don’t mind the operational transparency, at a little added compliance and cost to raise funds in the future, OPC is the right route for you. But, if you’d rather keep things easy, freelancing is the route for you.