In this blogpost, Neil Lopez, Student, O.P. Jindal Law School and the Diploma in Entrepreneurship Administration and Business Laws by NUJS, writes about,what is an OPC, its background and disadvantages.
The introduction of One Person Company (OPC) in India is a move that will encourage micro businesses and entrepreneurship with simpler legal compliances that will enable individuals to generate economic growth as well as employment opportunities.
The concept of OPC was introduced in the Companies Act, 2013 as an alternative to the ‘sole-proprietorship’ form of business. Under the Act, a single national person can constitute a Company. An OPC model can operate with a minimum of one shareholder and one director as against the general minimum requirement of two shareholders and directors for a private limited company. The Sole Shareholder can himself be the Sole Director.
In a May newsletter, the ministry said of OPCs, “It is expected this model will encourage small and medium enterprises…in the unorganized sector with the concept of limited liability and open avenues for more favourable banking facilities.“[1]
A One Person Company is a perfect combination of the characteristics of a company and the freedom of a sole proprietorship. The concept opens up an avenue of possibilities for entrepreneurs who can now take the advantages of limited liability and corporatization. OPC will give the young entrepreneurs the benefits of a private limited company such as access to credits, bank loans, limited liability, legal protection for business, access to market etc.
An OPC as an option for start-ups might seem very appealing, but it does come with its share of disadvantages which this article seeks to explore.
Background
The concept of One Person Company has been prevalent in the international corporate regimes of U.S.A, U.K, Singapore, China, Australia and other European countries and is based on the recommendations of the “Expert Committee on Company Law” headed by Dr. J.J.Irani in 2005 .
The Committee expressed the view that the law should recognize the potential for diversity in the forms of companies and rather than seeking to regulate specific aspects of each form, seek to provide for principles that enable economic interaction for wealth creation on the basis of clear and widely accepted principles.[2]
Disadvantages of an OPC
- Requirement to appoint a nominee for incorporating a One Person Company
The very purpose of an OPC is so that an individual by him/herself can start a business with limited liability without the need of having a partner. Though the provision of appointing a nominee was introduced with the objective of perpetual succession, this creates a lot of procedural hassle for selecting a suitable nominee, obtaining his consent etc.
Further, the nominee also has a choice to withdraw their consent to their nominations thus creating even more complications in the form of requiring the founder to nominate another person within fifteen days from such withdrawal, intimating it to the company, amending the memorandum of the company and further communicating such fact to the registrar of the company.
- Ownership limitations:
As per Rule 2.1 (1) of the Draft Rules under Companies Act, 2013 only a natural person who is an Indian citizen and resident in India shall be eligible to incorporate a One Person Company.
Thus, the person incorporating the OPC must be a natural person implying that it cannot be formed by a juristic person or an artificial person e.g. any type of company incorporated under Companies Act 2013. This restricts the ownership of only individuals and not corporations.
This provision also discourages foreign direct investment by disallowing foreign companies and multinational companies to incorporate their subsidiaries in India as a One Person Company. Hence, an OPC will have to change their legal status to a private limited company to bring in investors. Foreigners and NRIs are allowed to invest in a Private Limited Company under the Automatic Approval route where 100% FDI is available in most sectors.
- Restrictions on conversion
An OPC cannot be incorporated under Section 8 (Formation of companies with charitable objects etc) of Companies Act 2013. An OPC is also not allowed to carry out Non-Banking Financial Investment activities. This includes investing in securities of any body corporate.
An OPC can only convert into either a private or public company once the following conditions are met:
- The OPC must have been in existence for a minimum of two years; or
- It must have a paid up share capital which has increased beyond Rs. 50,00,000/- (rupees fifty lakh); or
- Its average turnover must have exceeded Rs. 2,00,00,000/- (rupees two crore).
Such restrictions stifle an entrepreneur’s desire for diversity and expansion.
- ESOPs
Since an OPC can have only one shareholder, there can be no sweat equity shares or ESOPs to incentivize employees. ESOPs can only be implemented if OPC converts into a private or public limited company. A private or public limited company can easily expand by an increase of authorized capital and further allotment of shares to even third parties.
Hence, a private company is a preferable option for start-ups who want to encourage their employees by way of stock options.
Recommendation
The following suggestions could help in the ease of doing business via the OPC route
- The restrictions regarding the distinction between natural and legal person should be done away with. A body corporate should be allowed to incorporate an OPC as a wholly owned subsidiary. An OPC should also be allowed to be incorporated by foreign individuals as well as NRIs to promote foreign investment.
- The Income Tax Act, 1961 should tax OPCs differently than include them in the same slab as private companies. An OPC has to comply with the rates of corporate tax as well as dividend distribution tax. A differential taxation method would encourage more people to adopt this mode of entrepreneurship.
- The compliance requirements should be more relaxed than before as the individual acting in his own capacity might find it hard to manage a business as well as comply with the various requirements of the MCA (statutory audit, submit annual and IT returns, etc)
Conclusion
The concept of OPC is still novel in India and an unfamiliar concept for Indian entrepreneurs. It will take some time for such a new concept to catch on. OPC’s help in providing a new platform to small and mid-level entrepreneurs. It gives them the security of limited liability which will help in providing legal protection to the unorganized Indian businesses.
However, it does have limitations such as promoter participation, mandatory conversion to the private limited company, etc. According to the experts, management of OPCs will create problems as the single person will be responsible for all the compliance and management. This concept has also been criticized on grounds of excessive incorporation formalities and tax burdens.
But OPC does have an edge over Limited Liability Partnership Act, 2008 as they not only limit the liability of the owner but extends various immunities and access to various credit and loan facilities. OPC will be a step ahead in transformation of the unorganized sector into an organized version of private limited company thus helping in the regulation of the unorganized sector of trade
OPCs are doing well in United States, U.K, Australia etc. The Government should observe the workings of such foreign businesses and try to implement the same successive values in our Indian realm. Moreover, the ‘Make in India’ and ‘Ease of Business’ policies of the new government seems promising but One Person Company is still in its infancy and only time will tell.
- Deepak Patel2014, “Why One-Person Firms Are Popular” [2016] Business Standard<http://www.business-standard.com/article/opinion/why-one-person-firms-are-popular-114102600651_1.html> accessed 30 January 2016.
[2]. ONE PERSON COMPANY (OPC) ( 2014) <https://www.icsi.edu/Docs/Webmodules/ONE%20PERSON%20COMPANY.pdf> accessed 30 January 2016.
