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This article is written by Anith Johnson, pursuing Diploma in Company Law Course from Lawsikho. In this article, the author gives a brief overview of One Person Company (OPC).

Introduction

One person company is a prevalent business structure in various developed countries such as the UK, and other European countries. It was recommended for the first time in Dr. JJ Irani report on company law in 2005. Companies Act, 2013 introduced a new business model called One Person Company (OPC) to promote entrepreneurship among small businesses. There are various benefits and exemptions of incorporating an OPC as compared to sole proprietorship. The erstwhile Companies Act, 1956 mandated at least two shareholders for incorporating a private company and it was creating an obstacle for a lot of businessmen who wanted to start alone but was scared of unlimited liability under sole proprietorship.

Statutory provisions

An OPC is a separate legal entity having a single shareholder. Section 2(62) of Companies Act, 2013 defines OPC as a company that has only one person as a member. Section 3 of Companies Act, 2013 classifies OPC as a private company by subscribing to his/her name in the memorandum and it has to comply with the requirements of this act in respect of incorporation. OPC is not permitted to carry out Non-banking financial activities such as investments in securities of other companies. It can also not be incorporated as a Non-Profit Organization (NPO).   

Eligibility Criteria- Rule 3 of the Companies (Incorporation) Rules, 2014 provides for the eligibility criteria to start an OPC and they are as follows:

  • Natural person who is Indian and resident of India;
  • Person cannot be member in any other OPC;
  • Person cannot be a nominee in more than one OPC;
  • Member or nominee cannot be a minor;

Nominee- It is mandatory to appoint a nominee in an OPC so that he/she shall continue the operations of the company in the event of death or incapacity to run contracts of the member. The memorandum of association shall contain the name of the nominee and a prior written consent shall be taken before appointment of a nominee. The nominee can withdraw his consent by giving a written notice and the sole member shall appoint another nominee within 15 days of receipt of such notice.

Board Meeting- As per section 173(5) of Companies Act, 2013 if an OPC has more than one director then it shall conduct a board meeting in each half of the year and the gap between the two meetings should not be less than 90 days.

However, this provision is not applicable and an OPC is exempted from conducting board meeting if it has only one director on its board. 

Financial Statements- As per section 137(1) of Companies Act, 2013 an OPC member has to file a copy of the consolidated financial statement to the registrar within 180 days from the closure of the financial year. The statements shall be the signed by the director of the OPC. Consolidated financial statements shall include a balance sheet and statement of profit and loss.

Conversion- As per Rule 3 of the Companies (Incorporation) Rules, 2014 an OPC can be converted into any other company under the following circumstances:

  • The legal entity has completed two years of existence;
  • Paid-up share capital crosses than 50 lakhs; 
  • Annual turnover is more than Rs. 2 crores during the current financial year.
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Advantages of One Person Company

There are various benefits of incorporating an OPC. Some of the advantages of starting an OPC are as follows:

  • Separate identityAn OPC has a separate identity even though it has only one shareholder. Having a distinct identity from that of its owner itself creates a brand value for the company and customers find it more reliable. 
  • Lesser Compliance requirement- OPC has to comply with lesser requirements under Companies Act, 2013 as compared to private and public companies.  For eg. An OPC with only one director does not have to conduct an Annual general meeting or board meeting, unlike Private or Public Company.
  • Quick decision making- Since the shareholder is the sole authority and decision-maker it is easier for him to make quick decisions for the company. He is not dependent on other people for approval and decision making which gives him complete freedom to make decisions on behalf of the company.
  • Succession- At the time of incorporation the sole member has to appoint a nominee. If the member is not able to continue the operations due to death or some unforeseen circumstances then nominee will be responsible to continue the business of the company.
  • Limited Liability- Unlike sole proprietorship, the member of an OPC will not be held personally liable and it is limited to the extent of the value of the share in his company. Personal assets of the members will not be affected and he can take more risks and explore opportunities. 
  • Authorised Capital- The minimum capital requirement to incorporate an OPC is only Rs. 1 Lakh rupees. This model of business is favorable for small entrepreneurs who want to start independently. 

Disadvantages of One Person Company

  • Tax Rate- There are no tax benefits for OPC and it is a big disadvantage. It is considered as a private company under the Income Tax Act, 1961 and it is taxed at 30% on total income. 
  • Less incentives for employees- Employee Stock Option Scheme (ESOP) is an encouraging factor for employees in any organization. But ESOP is not allowed under OPC as there is restriction in the transfer of shares. This can be very demotivating for the employees as they want to get rewarded for their hard work and dedication. 
  • High Turnover not allowed- If an OPC has a turnover more than Rs. 2 Crores then it automatically get converted into a Private company. OPC is not suitable for startups which have a high growth potential and can easily cross the required turnover.
  • Restriction on conversion- An OPC cannot be voluntarily converted into a private company before two years of its incorporation. 

Procedure for Incorporation

  • Digital Signature Certificate (DSC)- The sole director has to obtain DSC to incorporate OPC. DSC is required for filing of reports, financial statements, etc. The documents required for obtaining DSC are as follows:
  1. Documents showing identity proof such as PAN Card, Aadhaar card or Driver license.
  2. Documents showing address proof such as Aadhar card, Driver license or any utility bill which is not older than 3 months.
  3. Email ID.
  4. Self-Attested Copies of any ID.
  5. Passport Size Photograph.
  • Simplified Proforma for Incorporating Company Electronically plus (SPICe+) – SPICe+ form is divided into two parts. Part A of the form is applied for reservation of name and part B of the form deals with the incorporation of the company. SPICe+ offers more than 10 services. 

Part A

The director who wishes to incorporate OPC has to fill the details of the company and has to get the name approved by the Ministry of corporate affairs. Earlier Reserve Unique Name (RUN) was used for approval of names but now it is only used for changing of names.

Part B

After completion of Part A then the director can continue with Part B. The applicant has to fill details of the OPC such as registered office, capital structure, etc. The applicant also has to attach relevant documents while registering for OPC. The director also has to appoint a nominee who will be considered as the successor. The name of the person shall be mentioned in the Memorandum of the company and prior consent shall be taken by the nominee. The consent of the nominee shall be taken in Form No. INC-3 and it will be also filed at the time of incorporation.

The applicant can also file for Director Identification Number (DIN), Permanent Account Number (PAN), and Tax Deduction and Collection Account Number (TAN) along with the incorporation of OPC. 

AGILE PRO 

It is mandatory to fill the AGILE Pro form at the time of the Incorporation of OPC. Registration of Goods and Services (GSTIN), Employee State Insurance Corporation (ESIC) registration, Employees Provident Fund Organisation (EPFO), Profession Tax Registration and Opening of Bank Account can be done with AGILE Pro. 

An affidavit of the director is also filed at the time of incorporation. After that a certification of incorporation will be provided by the Ministry of Corporate Affairs (MCA). 

Key Differences between OPC and Sole Proprietorship 

Classifications

OPC

Sole Proprietorship

Liability

There is limited liability of the single shareholder. It is limited to the investment made by a single shareholder. This is one of the biggest advantages.

There is unlimited liability in a sole proprietorship. Creditors can come after the personal assets of the proprietor.

Entity

OPC is considered to be a separate legal entity from its sole shareholder. 

The Proprietor and business are considered to be the same entity.

Tax Rate

OPC is taxed at 30% of the total revenue. It is registered as a private company and thus it is treated similarly under the Income Tax Act, 1961.

It is taxed according to the slabs such as 5%, 10%, etc. under the Income Tax Act, 1961 on the income of the sole proprietor. 

Succession

The director will appoint a Nominee. Nominee will be responsible for the activities of the company if the director is not able to continue.

The business ends with the death of the proprietor as it is the same entity. However, business can be transferred through execution of a will. 

Registration

Registration is mandatory for OPC.

Registration is not mandatory for sole proprietorship. 

Conversion

OPC has to be mandatorily converted if it crosses the turnover of Rs. 2 crores.

There is no conversion required under a sole proprietorship.

Conclusion

OPC is a combination of both private company and sole proprietorship. It has both advantages and disadvantages but it is definitely beneficial for small entrepreneurs. It will help small entrepreneurs in getting loans and availing other benefits under SSI. Even though exemptions are provided to OPC but it should follow Corporate Governance norms and should not indulge in fraud or illegal activities. 


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