Before the amendment of 2013 in Companies Act in 2013, if you thought of opening a private needed at least one more person to do that as the law of Company Act, 1956 made it mandatory to two persons in order to set up a private company. In that scenario anyone who wants to be independent owner of his business needed to do it through sole proprietorship form of business which was not a legally recognized separate entity. In the recent amendment of companies’ act Section 2 (62) mentions OPC it states that “One –person Company means a company which has only one member”. There are several benefits of OPC this radical change seems to have usher a new era for persons who want to be independent owners of their company. Inclusion of OPC in Companies Act,2013 seemed to have brought up sweeping changes in the corporate world giving boost to entrepreneurship. Although this concept is new in India but it has there for quite some time in countries like Singapore, USA, or Europe. With the passage of time we will get to know the impacts of OPC in India.
One-person company seemed to have several advantages and disadvantages over when compared to Companies and Proprietorship form of business.
1.Burden of Compliance
The One Person Company is defined in the definition of “Private Limited Company” under section 2(68) of Companies Act,2013. OPC is separate distinct entity in the eyes of law. Hence an OPC will be very much similar to private companies in compliance provisions. Although being reformative in nature OPCs have been provided with a number of exemptions so they have to bear lesser compliance burden.
2. Organized sector of proprietorship Company
OPC will lead to the organized form of private limited company replacing the unorganized sector of proprietorship. There are several small and medium enterprises doing sole proprietorship form of business who mighty want to enter into the corporate domain. Organized version will provide timely banking services without any glitches. Proprietors incur unlimited liability in sole proprietorship form of business whereas, the liability in OPC is limited.
3. Limited Liability of Directors and Shareholders
Most unique feature of the OPC is the clause of limited liability. It secures the director or shareholder from unfortunate events which are not in their control. In proprietorship firm due to the unlimited liability of business assets of the shareholder is at risk but that’s not the vase in OPC. Also Company registration is pretty much easier in OPC.
4. Requirements are Minimum
Minimum 1 shareholder
Minimum 1 director
Shareholder and Director can be same individual.
Minimum 1 Nominee
Share is Rs. 1 Lac. (Minimum)
5. Social Recognition and Legal Status to Business
Being a Private Limited Structure it’s gives a sense of confidence to both suppliers and customers. Bigger organization prefer to deal with private ventures instead of proprietorship firms. Designations like Directorship helps budding startups to attract quality workforce and retain them. These advantages are not present in proprietorship firms.
6. Adequate Safeguards
There is a provision of Nominee Director in case of death or disability of the original director or shareholder. Nominee director will manage and control the affairs of the company till the date transfer of shares is completed to the legal heirs of the demised member.
7. Taking Loans is Easier
Banking institutions prefer to lend money to companies which have more credibility instead proprietary firms. It has been observed that banks advice entrepreneurs to convert their firm into a Private Limited Company before lending them money.
8. Single Owner controls the company
Ownership in single hands felicitate the smooth functioning and decision making of the company. Although up to 15 directors can be appointed in OPC for administrative tasks but giving them share is not necessary.
9. Easy to Manage
1. Holding of GM or AGM not necessary: Communication of the resolution by member and its entry in the minute’s book along with the date and signature of the member is sufficient. Date entered is considered the date of the meeting.
2. Board Meeting: There should be one meeting of Board of Directors in each half of the financial year and the gap between two meetings is capped to 90 days.
3. Quorum: Quorum mentioned under Section 174 of Companies Act will not apply to OPC as it has only one director in Board of Directors.
4. Minutes: In OPC business transacted during the meeting of the board shall be entered into minutes’ book maintained under section 118. Board meeting is not necessary in this case.
10. Filing with ROC:
1. Limited ROC filing with registrar of companies.
2. After expiry of maximum permissible term mandatory rotation of auditor is not applicable.
3. Section 100 and 111 which relates to general meetings is not applied to OPC.
11. Tax Flexibility and Savings
In OPC, company can make valid contracts with its shareholders or directors which means that you can receive remuneration as a director, rent as a lessor, lend money as a creditor and earn interest. Due to presence of deductible expenses like Director’s remuneration, rent and interest the total profit of the company slashes taxable income of the business.
12. Middlemen Eliminated:
Since there is only one director or shareholder of the company middlemen are eliminated with whom profits is ought to be shared for the tasks done by them.
DISADVANTAGES OF ONE PERSON COMPANY
1. It can have maximum or minimum of one member.
2. Minor does not qualify to become nominee or hold share in OPC.
3. Only a natural person (Indian Citizen) resident in India is eligible to form a OPC or be a Nominee for OPC.
2. Suitability for Small Business Only
OPC is suited for small business only as it can have maximum paid up share capital of Rs. 50 Lakhs or turnover of Rs.2 crores. Exceeding that limit OPC is ought to be converted into Private Ltd. Company. OPC Company registration is suitable for small business only.
3. Business Activities:
1. OPC is not allowed to carry Non-Banking Financial Investment which includes investment in securities of anybody corporates.
2. OPC is not eligible to be incorporated or converted into a company under section 8 of the Act.
4. Tax Liability:
OPC is not recognized as an entity under IT Act so being a private company it will be taxed at the same rates as other private companies. According to Income Tax Act, 1961, private companies can be taxed under the bracket of 30 percent of their total income whereas, sole proprietors have to give taxes at rates applicable to individuals which varies with change in the slabs. Hence, with the view of taxation OPC looks like a less lucrative concept due to the imposition of heavy financial burden when compared to sole proprietorship.
5. Perpetual Succession:
Doubts have been raised on the appointment of nominee also. Nominee has to control the company in the case the existing member dies. However, it is questionable whether that would do any good for the company as the nominee is neither a member of the company nor actively involved in day to day operation of the company.
6. Higher Incorporation Costs:
OPC are needed to be registered with Registrar of Companies under the Companies Act, 2013. This will cost further charges in form of payment to the CA or CS. Even with the slew of exemptions given to OPC incorporation of company requires a lot of paperwork. Due to the procedural complexities new entrepreneurs might not want to take up this option for formation of their company.
7. Higher Compliance Costs:
Yearly costs will be incurred by the member of the company as there are procedures for account audit, filing of returns like any other private company.
8. Separation of Owner and Control:
There are chances of unethical business creeping up as the line between ownership and control is somewhat blurred.
9. Other Disadvantages:
1. A person can incorporate only one OPC or become nominee of that.
2. NRIs are not eligible for incorporating the company.
3. There is a necessary requirement of appointing a nominee for the incorporation of OPC.
There are more benefits of OPC Company Registration than disadvantages but eventually any decision with regard to the business structure should be determined on case to case basis and according to the individual requirement. But it’s better to be get acquainted with the disadvantages of the before starting new proprietorship or converting one’s existing proprietorship into a One Person Company.
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