One Person Company

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The much-awaited Companies Bill, 2013 got the President’s assent on 29 August 2013 and has led to introduction of new rules to improve corporate governance, raise levels of transparency and further strengthen regulations for corporates. The 2013 Act has made significant changes to the provisions of law and has introduced several new concepts as well.

OPC has been defined in section 2(62) of the 2013 Act as a company which has only one person as a member.

Basics of a One Person Company :

  1. OPC needs to be registered as a private company with one member and at least one director.
  2. OPC would be referred to as a separate legal entity, the liability of the shareholder/director bein limited.
  3. Adequate safeguards in case of death/disability of the sole person should be provided through appointment of another individual as nominee director.
  4. Letters ‘OPC’ to be suffixed with the name of OPCs to distinguish it from other companies.

How to set up a One Person Company :

As the name suggests, a one person company has only one shareholder, who may also be the director. However, it can have more than one director, and up to a maximum of 15.

  1. Check with the registrar of companies for the availability of a name for your company. The name will carry a suffix, ‘OPC’, similar to the manner in which a private company uses the suffix ‘pvt ltd’.
  2. Assign a ‘director identification number’ to each director and apply for digital signatures for all of them
  3. The memorandum of an OPC shall indicate the name of another person, with his prior written consent, who shall, in the event of the subscriber’s death or his incapacity to contract become the member of the company.
  4. The written consent of such person shall also be filed with the registrar of companies at the time of incorporation of the OPC along with its memorandum and articles.
  5. The words ‘‘One Person Company’’ must be mentioned in brackets below the name of such company, wherever its name is printed, affixed or engraved. [Second proviso to Section 12(3)]
  6.  A person can incorporate a maximum of 5 OPCs. [Rule 2.1(2)]
  7.  Only natural persons can incorporate an OPC. Also, the person incorporating an OPC must be an Indian citizen who has stayed in India for at least 182 days during the immediately preceding one financial year. [Rule 2.1(1)

Once the paperwork is complete, the registrar will issue a certificate of incorporation within seven days of receiving the documents, after which you can start the business.

Conversion of an OPC to a Private Limited Company :

  1. OPC can get itself converted into a private or public company after increasing the minimum number of members and directors to two or minimum of seven members and three directors as the case may be, and by maintaining the minimum paid-up capital as per requirements of the 2013 Act for such class of company and by making due compliance of section 18 of the 2013 Act for conversion. [Rule 2.4(6)]
  2. The Rules prescribe certain circumstances when an OPC will be mandatorily required to convert into a private or public company.In terms of Rule 2.4, where

The Paid up share capital > Rs. 50 lacs or

Average Annual Turnover for the preceding 3 consecutive years > Rs. 2 crores

it will not be entitled to continue as an OPC. Such OPC shall be required to convert itself into either a private company or a public company in accordance with the provisions of section 18 of the 2013 Act:

  1.  within 6 months of the date on which its paid up share capital is increased beyond 50 lakh rupees; or
  2.  the last day of the period immediately preceding three consecutive financial years during which its average annual turnover exceeded 2 crore rupees; or
  3.  the close of the financial year during which its balance sheet total exceeded 1 crore rupees, as the case may be,. The OPC is required to alter its memorandum and articles by passing an ordinary or special resolution in accordance with sub-section 5 (3) of section 122 of the 2013 Act to give effect to the conversion and to make necessary changes incidental thereto.

Benefits of an OPC

  1. An OPC gives the advantage of limited liability to entrepreneurs whereby the liability of the member will be limited to the unpaid subscription money. This benefit is not available in case of a sole proprietorship.
  2. 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. Also, since it will have lesser compliance burden compared to private companies, it can be preferred mode of business for small industries.
  3. An OPC is exempt from certain procedural formalities, such as conducting annual general meetings, general meetings and extraordinary general meetings. No provisions have been prescribed on holding board meetings.. There is, however, no relief from the provisions on audits, financial statements and accounts, which are applicable to private companies..
  4. The biggest advantage of a one person company is that its identity is distinct from that of its owner. Therefore, if the firm is embroiled in a legal controversy, the owner will not be sued, only the company will.
  5. Another advantage is limited liability.Since the company is distinct from that of its owner, the personal assets of the shareholders and directors remain protected in case of a credit default. However, a proprietorship offers no such advantage.

Conclusion

While the idea of an OPC looks promising, doing business in OPC structure may effectively result in higher tax implications on the businesses as the rate of taxation on companies is higher. Also, since a company is a separate legal entity, the distribution of dividend by an OPC may attract dividend distribution tax. Sole proprietors, on the other hand are taxed at the rates applicable to individuals, i.e., differential rates for different slabs of income.

How about sole proprietorship ?

In contrast to a company, a proprietorship is easy to set up. The paperwork involved is minimal since it is limited to a few business-specific approvals. Of course, the risk in a proprietorship is higher as the owner is personally responsible for the business.

As far as the taxation is concerned, the income generated from the business is clubbed with the personal income. Therefore, the tax liability would depend on the slabs in which it falls. “In some cases, a proprietorship can be a tax-inefficient way of doing business.

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