This article is written by Ravi Karan, pursuing a Diploma in Companies Act, Corporate Governance and SEBI Regulations from LawSikho.com. Here he discusses “Are One person companies (OPCs) better than sole proprietorships? How?”.
The concept of One Person Company was introduced to promote entrepreneurship among individuals who are ready to launch their product or service independently.
This implies that there is only one member/shareholder in a one-person company. But wait, then how is it different from sole proprietorship? A sole proprietorship also allows a single member-only?
The answer to this puzzle lies in a simple word “LIABILITY”.
Private Limited Companies, Limited Liability Partnerships & Public Limited Companies limits the liabilities of shareholders/partners to an extent thereby making the company liable as a legal entity. For instance, if there is a default on a loan taken by the company then the creditor can attach assets in the name of the company for recovery of the amount, however, they cannot attach the assets in the name of individuals.
In the case of sole proprietorships, the assets in the name of an individual can also be attached by the creditor for the purpose of recovery of the loan. Clearly, in case of OPCs, a cushion is provided to promoters who want limited liability but lesser compliance burden in comparison to private limited companies.
Key differences between sole proprietorships and OPCs
ONE PERSON COMPANY
Separate legal entity
Not a separate legal entity
Perpetual succession i.e. in case of death of the member, the company continues to exist
The identity of the sole proprietorship comes to an end upon death or retirement of the member
Incorporation of one-person company should be registered with ROC
No registration is required in this case.
Repayment of the loan is not the sole responsibility of the owner
Repayment of the loan is the sole responsibility of the owner
Taxation limit as per the slabs of a private limited company (30% of profits)
Taxation limit as per individual income tax slabs (5% – 30% depending on income tax slab)
Compliance requirement includes auditing of books, filing of annual returns with ROC and informs ROC in case of any change in the structure
Compliance requirement includes filing of annual return only
What is the rationale behind introducing the concept of OPC?
Dr JJ Irani’s expert panel recommended the concept of OPC in the year 2005. The committee suggested that there is a need for a business structure that provides limited liability and legal protection to the young businessman. Previously there was a requirement for at least two members to establish a limited liability company. There was no such structure available for a solo entrepreneur.
Moreover, entrepreneurs started incorporating private limited companies by adding a nominal member and assigning them a single share circumventing the law to comply with legal requirements while exercising a dominant position. Where One Person Company 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.
Limitations of sole proprietorships
- Sole means only, and proprietor refers to owner. A sole proprietorship is owned, managed, and controlled by an individual who is the recipient of all profits & bearer of all risks.
- Limited resources – Resources of a sole proprietor are limited to his/her personal savings and borrowings from others. Banks hesitate to extend long term loan to the sole proprietor.
- The limited life of a business concern – death, insolvency or illness of a proprietor affects the business and can lead to its closure.
- Unlimited liability – The owner has unlimited liability. In the case of business failure, the creditors can recover their dues not only from the business assets but also from the personal assets of the proprietor.
- Accounting compliances – Bank account on your name or firm’s name, professional tax enrollment, personal income tax filing.
- Difficulty in getting contracts – Some businesses, government agencies, consulting groups, etc. will not deal with unincorporated businesses, either because they view a sole proprietorship as not having the same level of legitimacy and professionalism as an incorporated business.
- Harder to Raise Capital – Raising capital is more difficult for sole proprietorships. Incorporated companies can raise equity financing from angel investors or venture capitalists by selling shares in the business.
- Difficult to Sell the Business – Sole proprietorships can be difficult to sell as the business is completely tied to the owner. Since there is no distinction between the assets of the owner and the assets of the business, the proper valuation of the business can be hard to achieve. Death of the owner can render the business worthless. Customer loyalty resides with the original owner of the business and may not readily transfer to a new owner.
What are the minimum requirements for registering an OPC in India?
- There should be only one director
- One nominee is mandatory
- There is total of one member/shareholder only
- The applicant should be an Indian citizen
- The paid-up capital of the company must not exceed INR 50 Lakhs and turnover should not exceed INR 2 Crores
- Documents required of the director – Scanned copy of the PAN, Copy of Passport/voter ID, latest telephone bill/bank statement, passport size photograph
- Notarized copy of rent agreement, NOC obtained from the property owner, sale deed/property deed in case of owned property
- Obtaining Digital Signature Certificate
- Obtaining Director Identification Number
- Filing of the application for approval of the name
- Drafting of MOA and AOA
- Filing of SPICe with MCA
- Issuance of certificate of incorporation
Exemptions available to OPCs under the Companies Act, 2013
- Section 96. Option to dispense with the requirement of holding an AGM
- Section 98. Power of Tribunal to call meetings of members
- Section 100. Calling of the extraordinary general meeting
- Section 101. Notice of meeting
- Section 102. Statement to be annexed to notice
- Section 103. The quorum for meetings
- Section 104. Chairman of meetings
- Section 105. Proxies
- Section 106. Restriction on voting rights
- Section 107. Voting by show of hands
- Section 108. Voting through electronic means
- Section 109. Demand for poll
- Section 110. Postal ballot
- Section 111. Circulation of members’ resolution
Mandatory conversion of OPC to a private limited company
Mandatory conversion of OPC to the private limited company takes place when an OPC has a paid-up capital of more than or equal to INR 50 lakhs or annual turnover exceeds INR 2 Cr.
Process of conversion
- Intimation to ROC
- OPC should intimate ROC about their intent to convert the company into a private limited company.
- Passing of board resolution
Resolutions should be passed by members of the company in the general meeting for the conversion of OPC to a private limited company, alteration of MOA and AOA of the company, appointment of additional directors of the company, and approval for an increase in the capital of the company if required.
- Filing of forms MGT-14 and INC-6
Filing of form MGT-14 with ROC within 30 days of passing special resolution along with certified copies of minutes of the meeting and resolution passed.Filing of Form INC-6 along with fees and documents with the concerned ROC within 30 days of passing the resolution. Within 15 days an application shall be filed to the registrar along with a copy of resolution regarding the conversion of a company into a private company.
Documents / Attachments to be attached along with the form:
- Notice to board of directors
- Copy of board resolution authorizing giving of notice
- Copy of Altered Memorandum of Association
- Copy of Altered Articles of Association
- Declaration from directors
- List of Members
- Copy of NOC from Secured Creditors
- Copy of NOC from directors and shareholders
- Last Audited Financial Statements
- It is mandatory to attach a certificate from Chartered Accountant if the conversion because of exceeding average annual turnover
- Grant of certificate – Grant of a certificate certifying the conversion of OPC to a private limited company.
The concept of one-person company has certainly nurtured the spirit of entrepreneurship in India motivating individuals to set up their own shop thereby giving much-needed impetus to the economy by providing employment opportunities. The government pondered over the idea of OPC to provide a more flexible, structured and independent form of business structure. OPC was not only an extension to sole proprietorships but also very much similar to a private limited company. However, there are several disadvantages such as keeping tax bracket of OPC at 30% which is at par with a private limited company, additional compliance cost for audit and other mandatory requirements, mandatory conversion to the private limited company upon reaching a specific milestone, prohibition on the foreign investor to invest in OPC etc. It is indeed a welcome move by the government of India to go beyond sole proprietorships, however, it appears that OPC is still work in progress and requires a thorough re-examination so as to make it a comprehensive form of business structure. Lastly, I would like to conclude that whenever you are choosing a business structure for your project, there are several factors to be considered before finalizing on the suitable form. Some of these factors are flexibility, complexity, liability, taxes, control, capital investment, licenses/permits/regulations.
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