Deciding between Sole Proprietorship & Company for your new business entity? Learn the key differences & make an informed decision that suits your needs best.
SOLE PROPRIETORSHIP VS. COMPANY
Starting a business needs a lot of planning and correct decision making. The most difficult decision for an entrepreneur while starting a business is to decide the best legal and capital structure for the business.
There are various legal structures that one can choose for their business, namely,
- Sole proprietorship
- Company etc.
The most common among these are the sole proprietorship and company and we are going to cover the key differences among these to help you make a correct and informed decision that suits you the best.
1. SOLE PROPRIETORSHIP
Sole proprietorship form of business is the best suited for a new entrepreneur, it is owned and operated by a single person. It is known to be the simplest form of business among all. For a person who likes 100% control over all the activities and decision making, sole proprietorship is the way to go! With few tax requirements and lower capital and compliance needs, it is easier to manage this form of business. But like every coin has two sides, sole proprietorship also has its cons which we will discuss further in detail under this article.
2. Company or Body Corporate
A company is the form of business where the owner and the company are seen as two separate legal entities, the company is owned by the shareholders but managed through directors. Though its not the simplest form of business but it offers limited liability to the shareholders and also separate legal entity. Furthermore, companies have various sources for funding. But as I said every coin has two sides, these advantages are available as the cost of paperwork, compliances and management complexities.
Now let’s discuss the key differences between both so as to better understand which form of business is better suited according to your needs.
I. Ownership
Under a sole proprietorship, it is owned and operated by a single person, all the financial, managerial and planning decision making is in the hands of the proprietor and therefore has control over the whole business.
In contrast, under the corporate structure of business, the company is owned by the shareholders by purchasing the shares of the company hence the shareholders are the owners of that much proportion and the decision making is done by the directors in the company.
II. Liability
Under sole proprietorship, as the proprietor is the only person therefore the liability is personal and unlimited which means that even their personal assets can be used to pay off the liability and dues of the business.
On the contrary, in a company, as the shareholders are owners of the proportion of shares held, their liability is also limited to that proportion and their personal assets are protected even under the worst-case scenarios.
III. Taxation
Under sole proprietorship, the proprietor is taxed on his personal income tax return. The income of the business is seen as the income of the proprietor and are reported in the proprietor’s tax return.
On the other hand, company is taxed separately from its shareholders. The company is taxed on the profit it generated during the year and the shareholders are taxed on the dividends they receive from the company.
IV. Legal Status
A sole proprietor and his business are seen as a single entity in the law’s eyes, which means the owner will be held personally liable for all the business’s liabilities and legal obligations.
Whereas, under the corporate structure, the business that is company and the shareholders, that is owners are seen as two separate legal entities which means all the contracts are entered into in the company’s name and the company can be sued and can sue in its own name, without the shareholders being held responsible for the company’s deeds.
V. Complexity and costs
Setting up sole proprietorship is the easiest among all forms of businesses. It does not require any legal formalities or much paperwork as compared to other forms of businesses. The setting up as well as closure of sole proprietorship business is an easy task.
On the other hand, to start a company, one has to go through name reservation* then incorporation procedure which requires time as well as money. The paperwork is also very much in companies as one has to maintain all the requisite statutory registers as well as file various forms time to time. The legal and administrative costs for a company are very high, let alone the penalties for non-compliances. Not only the incorporation and going concern is worrisome, the dissolution procedure of a company also takes up a lot of time and money.
* Name Reservation
The name reservation is required under the Companies Act, 2013, the promoters of the company have to decide on a name for the company. Then promoters have to check for the availability for the name on the MCA portal to see if the name is already taken by a company and in the IP public search to see if the name is trademarked by any company or individual. If the name is available then the promoters proceed to reserve the name for the company.
How is getting a trademark better?
A trademark is an intellectual property which any person, be it an individual, a sole proprietorship, a partnership firm, a trust or a company can take. Getting a trademark registration helps the person get protection from the name being used by any other person in relation to his or her business. On use of a registered trademark by any third party without proper consent of the owner of trademark, can cause serious legal actions against the third party.
Under trademark, one can get the brand name, tagline, logo, or any signature sound of the brand trademarked. It provides protection against any person from using the name, logo, tagline etc. of your brand be it an individual or a company.
On the other hand, when we talk about name reservation of a company, it only ensures that no one can use the same name for their company or business. Your brand or your logo is not protected at all. The name reservation by a company only ensures protection against the name of the company used by any other company.
CONCLUSION
In conclusion, it is recommended to a person to opt for sole proprietorship in the starting phase of the business as it will save a lot of cost till the business has reached its break even point and to get the protection against anyone using the name of your brand and work on the goodwill created by you, on should apply for trademark under the relevant trademark class for both name and logo of the brand.
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