Sole Proprietorship or the OPC? Interesting facts

Author’s note

A client came to me for consultancy regarding which form he should do the business, whether proprietorship or company, and dueto requirement of two director he was confused with trusting other person in the business.

Introduction

The sole proprietorship is the best form to support entrepreneurs, as it is simple, informal, and unincorporated form of business with very less annual cost involved and also negligible cost for setup but few years ago a new concept was introduced in the Companies Act, 2013 that is “One Person Company (OPC)” which slowly emerged as a kind of hybrid offering entrepreneurs the flexibility of running a single-owner business as well as seeking the advantages of a corporate structure.

As both the models involve a single owner, the legal and financial aspects in both the forms of businesses vary a lot. In this article I will be discussing a recent Bombay High Court judgment, Saravana Prasad Versus Endemol India Private Limited & Anr. and Innovative Film Academy Pvt. Ltd. Versus Endemol India Private Limited & Anr. - 2025 (7) TMI 1071 - BOMBAY HIGH COURT, which was delivered on 3 July 2025.

Before we start, let’s discuss about OPC?

Section 2(62) of the Companies Act, 2013 states that “One Person Company” means a company which has only one person as a member.

That means a private limited company with a single share holder who is an Indian citizen as well as resident in India, earlier there was some threshold with respect of paid up share capital and turnover of OPC but it was removed from Budget 2021 with a motive that OPC could grow without such restriction.

Conceptual foundations

Sole Proprietorship is not a separate legal entity, that means the proprietor or owner and business are legally and financially indistinguishable, because of which the proprietor bears unlimited liability, which also exposes the personal assets to creditors of the business, and also proprietorship have no requirement for statutory registration under any law, but that dose not means other laws like GST or Shops & Establishment act are not followed, they may be needed under state laws.

Also, a proprietorship business is taxed under individual income tax slabs and are eligible for presumptive taxation (Section 44AD/ 44ADA) for small businesses.

One Person Company (OPC) was introduced in the Companies Act, 2013 as an optional corporate form for single-member enterprises, it possesses a separate legal identity, which gives the limited liability protection to owners, that means members are liable only to the extent of unpaid value of their shares, and nobody could even touch their personal assets legally.

It requires mandatory registration with registrar of companies, Ministry of corporate affairs, including paid-up capital, DIN, DSC, and approved name via SPICE form with suffix “OPC private limited” or “One person company private limited” in the title.

Also, it is required to appoint a nominee to ensure the continuity of the business in the case of the death or incapacity of a member.

Unlike proprietorship, income of OPC is taxed at the corporate tax rates of minimum 25.168 and it is  not eligible for presumptive taxation

The Bombay high court’s ruling

In Innovative Film Academy OPC v. Endemol India, the Bombay High Court came across a situation in which the OPC and its owner both were directed by an arbitral award to deposit a sum that was disputed in the fixed deposit account. The OPC filed the petition that this treatment was wrong because of its different identity with its proprietor’s, as this award was breaching its limited liability structure.

If you are thinking about what award I am talking above, it’s an “arbitral award” that means the final and binding decision that is delivered by an arbitrator or arbitral tribunal in an arbitration proceeding or out of court settlement, to determine the rights and liabilities of the parties. It has the same effect as a civil court decree under the Arbitration and Conciliation Act, 1996, and is enforceable accordingly, though it may be set aside on limited grounds such as fraud, bias, or conflict with public policy.

The high court decision

Court main outcome was that, just because the sole director of a OPC signs a contract or a document on behalf of the company, it does not mean that the director’s personal assets can be held liable for the company’s debts or any obligations. The Court clarified that if signing as a director was treated as creating personal liability, it would defeat the main purpose for creating an OPC, which is to give the business a separate legal identity with limited liability protection.

On the other hand, in the matter of Ashok Transport Agency Versus Awadhesh Kumar And Another - 1998 (3) TMI 701 - Supreme Court had elaborated on the nature of a sole proprietorship and clarified its legal status. In this the court held that a sole proprietorship is not an independent legal entity distinct from its owner. Rather, it is merely a trade or business name under which an individual carries on business.

Therefore, any legal proceedings instituted by or against a proprietorship are, in effect, instituted by or against the proprietor himself. This judgement made it clear that our Indian law does not recognise a sole proprietorship as a artificial or juristic person in the same manner it recognises a company or LLP or a partnership firm registered under the Partnership Act, 1932.

Other Judgement in this case that the court gave was that in case of the death of the proprietor, it is only the legal representatives of the deceased proprietor who can sue or be sued in respect of the business transactions of the proprietorship and liability becomes limited to personal assets of the proprietor.

Unlike incorporated entities which enjoy perpetual succession, the life of a sole proprietorship is coterminous with that of its owner. This judgment firmly establishes the doctrine that there is no separation between the individual and the proprietorship concern, thereby reinforcing the concept of unlimited liability, whereby the owner is personally liable for all debts, obligations, and liabilities of the business.

Citation:Ashok Transport Agency Versus Awadhesh Kumar And Another - 1998 (3) TMI 701 - Supreme Court

Nowadays, to overcome this limitation, OPC’s are formed.

International angle

In international practice, this concept of single-member companies have been given recognition. The United Kingdom, through the landmark judgment of Salomon v. Salomon & Co. Ltd. (1897 AC 22), firmly established the doctrine of separate legal personality, holding that even a one-man company is distinct from its shareholder, and its liabilities cannot be fastened upon the individual.

Similarly, the jurisdictions like Singapore and the USA allow single-member private limited companies, subject to corporate governance requirements, while still conferring limited liability protection.

Hence, India’s introduction of the One Person Company (OPC) in 2013 under the Companies Act was a good step towards aligning with these global trends making the OPC provision that demonstrates India’s policy intent to modernise its corporate ecosystem and is fit for current startup culture.

Conclusion

The judicial decision given by the Bombay High Court decisively affirms the separate legal personality and limited liability of an OPC. While at first glance, sole proprietorship and OPC may appear similar, but talking fundamentally in the case of taxation, legal protections, structural rigidity, and regulatory obligations they are very different.

Question for readers:

Do you think the Bombay HC correctly reinforced the doctrine of limited liability, or does it create scope for misuse by hiding behind OPC status? You may comment the answer or mail me your viewpoint

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Author can be contacted at [email protected]