When Ministry of Corporate Affairs introduced 5 entity types as options to incorporate one’s business under ‘for profit organization’, they sure knew the players very well. One such player is the single entrepreneurs; these guys are the ones who just don’t find the right match for a co-founder post. You think they did not try enough? I have personally seen some of these guys having sleepless nights, by hunting where not places, for the right match, it wouldn’t hurt if I would say it was tougher job than finding a date. There are still over 17% of entity types that are registering themselves as One Person Company. In this blog let’s unleash the answer to Is OPC still in fashion?
One Person Company, commonly known as OPC, is a kind company which has only one person as member. It is a type of Private Company, this concept of company came into force under companies act, 2013. It is mixture of sole proprietor and private company. It enjoys the complete ownership like sole proprietor and has limited liability like a company. It has been provided with concessional/relaxed requirements under the Act. It is one of the emerging concept for those people who have a great idea but do not want to share it with anyone. It can be incorporated for any kind of business like a private company but having one director. After the death of sole proprietor the business profit and loss transfer to his legal hire while in case of OPC, the nominee will get the business irrespective of legal hire of the person.
Incorporation of OPC:
Now, there is a Single Application for Incorporation of Company, Form INC-32 (SPICe), which shall be filed with the Registrar of Company, along with consent of nominee obtained in Form INC – 3 and fee as provided in the Companies (Registration offices and fees) Rules, 2014, at the time of incorporation of the company along with its memorandum and articles of association. Form DIR-12 shall be filed after INC-32.
The company shall file form INC-22 within 30 days if in case the address of correspondence and registered office address are not same.
Features of OPC:
Only One Shareholder:
Only a natural person, who is an Indian citizen or resident in India shall be eligible to incorporate a One Person Company. Explanation: The term “Resident in India” means a person who has stayed in India for a period of not less than 182 days during the immediately preceding one calendar year.
Nominee for the Shareholder: The Shareholder can nominate another person who shall become the shareholders in case of death/incapacity of the original shareholder. Such nominee can give his/her consent and such consent for being appointed as the Nominee for the sole Shareholder. Only a natural person, who is an Indian citizen and resident in India, can be a nominee for the sole member of a One Person Company.
Director:Must have a minimum of One Director, the Sole Shareholder can himself be the Sole Director. The Company may have a maximum number of 15 directors.
Restrictions on OPC:
- A person shall not be eligible to incorporate more than a One Person Company or become nominee in more than one such company.
- Minor cannot become member or nominee of the One Person Company or can hold share with beneficial interest.
- An OPC cannot be incorporated or converted into a ‘not profit company’ of the Act.
- An OPC cannot carry out Non-Banking Financial Investment activities including investment in securities of any corporate.
- An OPC cannot convert voluntarily into any kind of company unless two years have expired from the date of incorporation of One Person Company, except threshold limit (paid up share capital) is increased beyond Rs.50 Lakhs or its average annual turnover during the relevant period exceeds Rs.2 Crores i.e., if the Paid-up capital of the Company crosses Rs.50 Lakhs or the average annual turnover during the relevant period exceeds Rs.2 Crores, then the OPC has to invariably file forms with the ROC for conversion in to a Private or Public Company, with in a period of Six Months on breaching the above threshold limits.
- Requirement to appoint a nominee for incorporating a One Person Company.
Relaxation to OPC:
- No need to prepare a cash-flow statement,
- The annual return can be signed by the Director and not necessarily a Company Secretary,
- There is no necessity for an Annual General Meeting (AGM) to be held,
- Specific provisions related to general meetings and extraordinary general meetings would not apply,
- Compliance can be said to have been done if the resolutions are entered in the minute’s book of the company,
- It would be sufficient if one director signs the audited financial statements,
- OPC gets six months from the close of the financial year to file its financial statements,
- One meeting of the Board of Directors has to be conducted in each half of a calendar year and the gap between the two meetings should not be less than ninety days.
- Where the OPC is limited by shares or by guarantee enters into a contract with the sole member of the company who is also the director of the company, the company shall, unless the contract is in writing, ensure that the terms of the contract or offer are contained in a memorandum or are recorded in the minutes of the first meeting of the Board of Directors of the company held next after entering into contract.
Benefits of OPC:
Limited Liability Protection to Directors and Shareholder
All unfortunate events in business are not always under an entrepreneur’s control and hence it is important to secure the personal assets of the owner, if the business lands up in crises.
While doing business as a proprietorship firm, the personal assets of the proprietor can be at risk in the event of failure, but this is not the case for a One Person Private Limited Company, as the shareholder liability is limited to his shareholding. This means any loss or debts which is purely of business nature will not impact, personal savings or wealth of an entrepreneur.
Legal Status and Social Recognition for Your Business
One Person Company is of Private Limited Structure, this is the most popular business structure in the world. Large organizations prefer to deal with private limited companies instead of proprietorship firms.
Pvt. Ltd. business structure enjoys corporate status in society which helps the entrepreneur to attract quality workforce and helps to retain them by giving corporate designations, like directorship. These designations cannot be used by proprietorship firms.
Complete Control of the Company with the Single Owner
This leads to fast decision making and execution. Yet he/she can appoint as many as 15 directors in the OPC for administrative functions, without giving any share to them.
Helps for Testing of business model and enables Funding
The OPC business helps Startup Entrepreneurs to easily test the business model, a prototype and upon building a marketable product approach Angel investors, Venture capitalists for funding and easily convert into multi shareholder Private Limited company.
Easy to Get Loan from Banks
Banking and financial institutions prefer to lend money to the company rather than proprietary firms. In most of the situations Banks insist the entrepreneurs to convert their firm into a Private Limited company before sanctioning funds. So it is better to register your startup as a One Person private limited rather than proprietary firm.
Tax Flexibility and Savings
In an OPC, it is possible for a company to make a valid contract with its shareholder or directors. This means as a director you can receive remuneration, as a lessor you can receive rent, as a creditor you can lend money to your own company and earn interest. Directors’ remuneration, rent and interest are deductible expenses which reduces the profitability of the Company and ultimately brings down taxable income of your business.
In case of death/disability of the sole person should be provided through appointment of another individual as nominee director. On the demise of the original director, the nominee director will manage the affairs of the company till the date of transmission of shares to legal heirs of the demised member.
Easy To Manage:
- No requirement to hold annual or Extra Ordinary General Meetings: Only the resolution shall be communicated by the member of the company and entered in the minutes book and signed and dated by the member and such date shall be deemed to be the date of meeting.
- Board Meeting: A One Person Company may conduct at least one meeting of the Board of Directors in each half of a calendar year and the gap between the two meetings shall not be less than ninety days.
- Quorum: The provisions of Section 174 (Quorum for meetings of Board) will not apply to One Person Company in which there is only one director on its Board of Directors.
- Minutes: Where the company is having only one director, all the businesses to be at the transacted meeting of the Board shall be entered into minutes book maintained under section 118. No need to hold Board Meeting in this case.
Filling with ROC:
- Very few ROC filing is to be filed with the Registrar of Companies (ROC).
- Mandatory rotation of auditor after expiry of maximum term is not applicable.
- The provisions of Section 98 and Sections 100 to 111 (both inclusive), relating to holding of general meetings, shall not apply to a One Person Company.
An OPC being an incorporated entity will also have the feature of perpetual succession and will make it easier for entrepreneurs to raise capital for business. The OPC is an artificial entity distinct from its owner. Creditors should therefore be warned that their claims against the business cannot be pressed against the owner.
One Person Companies enable small entrepreneurs to set up a company by allowing the shareholders to directly access the target market and avail credit facilities, bank loan rather than being forced to share their profits with middlemen. Thus, such companies will provide an opportunity to various small entrepreneurs like weavers, artisans etc. to start their own ventures with a formal business structure.
Disadvantages of OPC:
- One person Company can have Minimum or Maximum no. of 1 Member.
- A minor shall not be eligible to become a member or nominee of the One Person Company or can hold share with beneficial interest.
- Only a natural person who is an Indian citizen and resident in India shall be eligible to incorporate a One Person Company and shall be a nominee for the sole member of a One Person Company.
Suitable only for small business:
OPC is suitable only for small business. OPC can have maximum Paid up share capital of Rs.50Lakhs or Turnover of Rs.2 Crores. Otherwise OPC need to be converted into Private Ltd Company.
- One Person Company cannot carry out Non – Banking Financial Investment activities including investment in securities of anybody corporates.
- One Person Company cannot be incorporated or converted into a company under Section 8 of the Act.
The concept of One Person Company is not a recognized concept under IT Act and hence such companies will be put in the same tax slab as other private companies for taxation purposes. As per the Income Tax Act, 1961, private companies have been placed under the tax bracket of 30% on total income. On the other hand, sole proprietors are taxed at the rates applicable to individuals, which mean that different tax rates are applicable for different income slabs. Thus, from taxation point of view this concept seems to be a less lucrative concept as it imposes heavy financial burden as compared to a sole proprietorship.
The basic income tax rate for a one person company is 30% which may result in a higher tax as compared to the income tax slab rates of an individual (i.e. 10% to 30%).
(Proprietorships have a clear advantage here in that a proprietor is subject to individual income tax slab rates from 10% to 30% and get benefits of basic exemptions. Hence, if you select a one person company over a proprietorship you will have to give up these advantages.)
This is Very concept of a separate legal entity being created for a perpetual succession that is continuation of the company even after the death or retirement of a member is also challenged. Because the nominee whose name has been mentioned in the memorandum of association will become the member of the company in the event of death of the existing member. However it is doubtful that it would do any good for the company because the person is not being a member of the company and also not involved in the day to day operation of the company, would not be able to succeed the business after the death of the member.
Higher incorporation costs:
As compared to proprietorships: One person companies need to be registered with the registrar of companies under the Companies Act, 2013. This would entail upfront expenditure on government charges and professional fees which you will have to pay your CA or CS. Proprietorships don’t need to register with the government and hence don’t incur these incorporation charges.
Though the Act extends slew of exemptions to a One Person company in terms of conducting AGM, EGM, Quorum of meetings, restriction on voting rights or filing its financial statements, yet the incorporation of such a company requires lots of paper work as compared to a sole proprietorship. These procedural complexities with respect to incorporation of One Person Company might make this concept less attractive for sole entrepreneurs
Higher compliance costs:
Compared to proprietorships, a one person company would have recurring compliance costs yearly, as it will need to get its accounts audited and will need to file returns every year with the registrar of companies like any other company.
Separation of Owner and Control:
This is one of the characteristics of the company, which is seriously challenged by the new Companies Act, 2013, where the line between the ownership and control is blurred.
The concept of One Person Company is advantageous both for the regulators and the market players. From regulators perspective, One Person Companies by organizing the unorganized sector of proprietorship will make the regulation of these entities convenient and effective.
Wait! we can get your venture registered as a OPC in 7 working days, project powered by technology and delivered by a qualified CA, let’s connect any time soon to figure out the best for your business, happy to help, with Best regards, Wazzeer.