The Indian corporate scenario witnessed revolutionary changes when the Companies Act 2013 came into existence, out of which one was a one-person company. In a one-person company, one entrepreneur derives the advantage of limited liability while at the same time being the only shareholder or director of that company. The primary reason for introducing OPCs was to enable individual entrepreneurs and promote a more entrepreneurial culture in India. Let's have an elaborate look at OPCs under the Companies Act, 2013, their structure, benefits, limitations, and registration process.
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What is an OPC?
The concept of OPC is new to India, while it has been present in other countries for many years. Section 2(62) of the Companies Act, 2013 defines a One Person Company as a company which has only one person as its member. An OPC is a type of private company which can be started by a single person and enjoys the status of a corporate entity.
Some of the key highlights of an OPC are:
Only one member and one director are required.
Liability protection to the individual entrepreneur.
OPC can be converted into a private or public limited company with the growth of the organization.
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Characteristics of OPC under Companies Act, 2013
The OPC structure is something that came with the Companies Act 2013, a sort of thing that had certain very special characteristics quite differently from other business forms. OPC provides limited liability and allows single ownership; in this way, continuity is an ideal choice of forms for the single entrepreneur to search for a corporate-formal structure, but the demand for minimum compliance burden:
Single Ownership: OPCs provide full control to an individual to operate the company without interference from anyone else, thus being more suitable for a sole proprietor.
Limited Liability: This limited liability of the owner of OPC limits his liability to his investment only. Thus, personal assets are protected against any loss due to business ventures or legal claims.
Separate Legal Entity: The one-person enterprise, namely, OPC, is itself a separate legal entity of its owner, having distinct identity and liabilities.
Continuous Existence: The OPC continues even after the death of the member or owner, and its continuity is ensured because, as mentioned earlier, the nominee appointed at the very moment when it is registered during registration.
Less Compliance Obligation: Although compliance norms under OPC are tough, compared to any other form of company, they still happen to be less burdensome upon the solitary entrepreneurs because this is lesser, again.
Registration Procedure of a One-Person Company
It is actually a quite streamlined process to establish an OPC in India. This includes several very fundamental steps:
Step 1. Apply for a DSC:
As the process of registration is online from start to finish, the proposer director has to hold a DSC to digitally sign the various forms.
Step 2. Obtain a DIN:
A DIN is required by the director of the OPC and applied through Form DIR-3.
Step 3. Approval of Name:
A unique name for OPC will be selected by way of application in RUN format on the MCA website. The name should end with the words "OPC Private Limited.".
Step 4. Filing documents:
Documents like the Memorandum of Association (MOA), Articles of Association (AOA), and the consent of the nominee to the ROC.
Step 5. Issue of Certificate of Incorporation:
If the proposal is approved, the ROC issues the Certificate of Incorporation, and this then marks the creation of OPC.
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Advantages of One-Person Company
OPC offers liability protection, greater credibility, and tax benefits. It accommodates the legal framework for a private entrepreneur to engage in individual businesses with the comfort and reliability of a corporate group.
Legal Status and Limited Liability: OPC confers limited liability on its owner. That means that when the owner undergoes personal financial risks, this company gives a cushion; the owner's assets are saved.
Enhanced Credibility: Sole proprietorships cannot offer one person company a level of credibility more than that one person company will have above sole proprietorships.
Less Compliance Compared to Other Companies: OPCs do not require compliance on matters like the holding of annual general meetings, which makes handling easier.
Tax Flexibility and Savings: OPCs enjoy benefits in the form of deductions on certain expenditures, and, unlike a sole proprietorship, the income tax rate applied on OPCs is the corporate rate.
Separate Property: Since OPC is considered a separate legal entity, it can hold property in its name. It offers it some kind of protection in law, and the company can make its independent contract and deal.
Disadvantages of One-Person Company
There are several benefits, but also certain restrictions to being an OPC.
Limited Expansion: One shareholder is allowed in OPC. This limits external funding facilities. An OPC, at a certain level of turn-over, is liable to convert into either a public or a private limited company.
Only Indian Residents: As per the Companies Act, an OPC can only be formed by an Indian resident. Thus, it means that non-residents cannot become OPC.
Limited Lifespan for Growth: Scalability is constrained to scale up if the OPC's turnover crosses more than INR 2 crores or its paid-up capital crosses more than INR 50 lakh; otherwise, it automatically falls compulsorily within the categories of either being converted to a private limited or a public limited company.
Tax Advantage: The same is not available with an OPC vis-à-vis its comparison with partners and LLPs. Tax treatment is comparable to the companies that become onerous for many times of small and medium-scale entrepreneurs.
Ineligibility for NBFC Operations: OPCs are prohibited to carry out non-banking financial investment activities. In other words, an OPC cannot invest in other corporate bodies' securities.
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Compliance Requirements for an OPC
Although OPCs are relatively less compliant, they still have to comply with some specific provisions of the Companies Act:
Board Meetings: OPC is exempted from carrying out successive board meetings. Yet, it has to conduct one meeting in every half of the year.
Annual financial statements: OPCs should have their annual financial statements prepared and audited by a Chartered Accountant, which is certified.
Annual Return: The OPC shall make an annual return in respect of its existence as such to the Registrar, which is the ROC. This, though not being the mandatory annual general meetings, adds transparency and accountability.
Annual income tax return: OPC has to file income tax returns annually, and its return for any year would have all other relevant tax compliance also.
Conversion of OPC into Private or Public Company
OPC has to convert into a Private or Public Company under the Companies Act, in case its financial turnover crosses certain thresholds
Voluntary Conversion: OPC can be converted into a private limited or public limited company only if two years have passed since its incorporation.
Mandatory Conversion: Whenever the paid-up capital of an OPC exceeds INR 50 lakh or the annual turnover goes beyond INR 2 crore, this is needed to be converted either as a private or a public company.
For the above purpose, one has to file forms at ROC: INC-5 in the case of mandatory conversion, while for voluntary conversion, filing INC-6 is involved.
Comparison between One-Person Company and Sole Proprietorship
In comparison, an OPC is highly different from sole proprietorship in legal structure, liability, and continuity. Sole proprietorship provides a single person who will handle all the work as owner-manager. One thing, though, about this structure: it offers little to no liability, whereas the OPC has some limited liability with a legal distinction; thus, an OPC can be more secure for one person running an entire venture.
Legal Structure: OPC is a separate legal entity. Sole proprietorship does not have any separate identity of its own.
Liability: OPCs provide limited liability protection. Sole proprietors are personally liable for all debts and losses.
Continuity: OPCs can have a nominee who takes over in case of the owner's demise. Sole proprietorships do not survive.
Taxation: OPC is taxed as a company but the sole proprietorship is taxable as an individual, hence their tax brackets and deductions.
Future and Scope of One-Person Company in India
It has huge potential in India, with its huge base of entrepreneurs and small business owners. It thus offers an ideal structure for people who want to scale up their business without having to rely on multiple investors or partners. New startups find it attractive, not only because of the liability protection but also ease of compliance.
In this midst of a booming digital business, consultancy services, and freelancers, OPCs are a formally corporatized identity with almost no legal and compliance burden. Over time, the government has amended various provisions related to OPCs that are easy to start up and function. This attests to a supporting approach toward this business model.
Conclusion
This Companies Act, 2013 opened new doors to Indian entrepreneurs under the One Person Company. It provides a corporate form that is suitable for one-member companies and balances its advantages of limited liability with the flexibility of a sole proprietorship. However, there are limits on expansions and funding, about which the potential business owner needs to be informed.
With growing attention being paid to Indian start-ups and small businesses, OPCs are emerging as a favorite option for people who plan formalization and scaling of the venture. With the changing regulatory scenario and the proposed changes in the Companies Act, OPCs will become more attractive in the future, making the solo entrepreneur even stronger.
One Person Company under Companies Act, 2013 FAQs
1. What is a One Person Company (OPC)?
OPC stands for One Person Company, which is a new form of company structure introduced by the Companies Act, 2013. It permits a single person to form a private company with limited liability, having a separate legal existence.
2. Who can form an OPC in India?
Only a natural person who is citizen of India and who is a resident in India can form an OPC. OPC cannot be formed by non-residents and minor individuals.
3. How is an OPC different from a sole proprietorship?
An OPC is a separate legal entity from its owner and offers the protection of limited liability; the owner, in a sole proprietorship, does not have separate legal identity, and he is personally liable for all debts.
4. Can an OPC have more than one director?
An OPC may have a variety of directors, but it shall have only one shareholder. The sole shareholder usually plays the role of the director but may nominate other individuals as directors as well.
5. Do I have to provide a nominee for my OPC?
Yes, I have to give a nominee. In the event that the single member of my OPC dies or becomes incapacitated, then my nominee steps into his ownership of OPC.
