One Person Company (OPC): Why should you know about it

The Companies Act, 2013 gives an opportunity for organizing a business in India by providing the concept of OPC which is a legal way to incorporate a company with only one member. OPC is similar to the existing concept of Sole­ proprietorship with separate legal entity different from its proprietors and promoters. OPC can run and undertake its business like Sole ­proprietorship with the status of Company. This type of Company is already in existence in some of the developed countries like Singapore, China, U.S.A and various other countries in Europe. This new concept of business will provide a new platform for those who look forward to start their own work in an easiest and organized way.

One Person Company (hereinafter mentioned as OPC) is a radical idea which came into the picture with the introduction of the Companies Act, 2013. The concept of OPC was first recommended by an expert committee constituted under the leadership of Dr. J. J. Irani in 2005. OPC is an opportunity for them who were previously hesitant from perpetuating their own ventures. OPC will provide a chance for all the young people who were in the state of confusion before starting their own business. It will not only provide them an opportunity to pass into something new but will also help them to access certain facilities like bank loans, legal shield, recognition for their business and a thorough access to the market as a separate entity.

Meaning

OPC is defined under sub-section 62 of section 2 of the Companies Act, 2013. It defines OPC as a company which has only one person as a member where all the legal and financial liabilities are limited to the company and not to its members. It is a kind of revolutionary concept in the new Companies Act, 2013, as previously under the old Companies Act, 1956 a minimum of two members were required to form a company.

Sub- Section 62 of Section 2 of the Companies Act, 2013, reads as follows:

'One Person Company means a company which has only one member'

It shall also be important to note that Section 3 classifies OPC as a Private Company for all the legal purposes with only one member. All the provisions related to the private company are applicable to an OPC, unless otherwise expressly excluded.

The only exception provided by the Act to an OPC is that according to the rules only “NATURALLY BORN” Indian who is also a resident of India is eligible to incorporate an OPC. Meaning thereby, the advantages of an OPC can only be obtained by those INDIANs who are naturally born and also a resident of India. At the same, it shall also be worth mentioning that a person cannot form more than 5 OPC’s.

OPC & Sole Proprietorship

1. Succession: – In an OPC, there is a nominee designated by the member. The nominee who will be a citizen of India and who resides in India. The nominee shall in the event of the death of the member become a member of the company and will be responsible for the compliance and working of the company, however, in the case of sole proprietorship, this can only happen through an execution of WILL which may be or may not be challenged in the court of law.
2. Limited Liability: – OPC is different from sole proprietorship because it is a completely treated as a separate legal entity and that is the distinction between the promoter and the company. The liability of the shareholder will be limited to the unpaid subscription money in his/her name. But in the case of sole proprietorship, the person/owner is alone liable for the claims which will be made against the business.
3. Tax Bracket: – According to Income Tax Act,1961 a private limited company is under the tax bracket of 25% on total income with an additional surcharge of 5% if the income exceeds 10 million with an addition to 3% of education cess. But in the case of sole proprietorship, Tax will be levied in the name of the proprietor.
4. Compliance: – OPC has to file annual returns, Compliances under other Act (if any) etc. just like a normal company and would also need to get its accounts audited in the same manner. But in the case of sole proprietorship, the proprietor would only need to get audited under the provisions of Section 44 AB of the Income Tax Act, 1961 once its turnover crosses the certain threshold prescribed in.

Benefits of OPC 

1. While doing business as a proprietorship, the personal assets of the proprietor can be at risk in the event of failure, but in the case of a One Person Private Limited Company, as the shareholder liability is limited to his shareholding. This means any loss or debts which is pure of business nature will not impact, personal savings or wealth of an entrepreneur.
2. Large organizations prefer to deal with private limited companies instead of proprietorship firms. OPC (a type of Private Limited Company) enjoys corporate status in society which helps the entrepreneur to attract quality workforce and helps to retain them by giving corporate designations, like directorship. These designations cannot be used by proprietorship firms.
3. Fast decision making in OPC. Yet he/she can appoint as many as 15 directors in the OPC for administrative functions, without giving any share to them.
4. The OPC business helps Startup Entrepreneurs to easily test the business model, Venture capitalists for funding and easily convert into multi-shareholder Private Limited Company.
5. Banking and financial institutions prefer to lend money to the company rather than proprietary firms. In most of the situations, Banks insist the entrepreneurs convert their firm into a Private Limited company before sanctioning funds or loans.
6. It is possible for a company to make a valid contract with its shareholder or directors. This means as a director you can receive remuneration, as a lessor you can receive rent, as a creditor you can lend money to your own company and earn interest. Directors’ remuneration, rent, and interest are deductible expenses which reduce the profitability of the Company and ultimately brings down the taxable income of the business.
7. OPC is one of the easiest forms of corporate entities to manage and very few ROC filings, is required to be done with the Registrar of Companies (ROC). No need to conduct Annual General Meeting(AGM).

 Main Reason for induction

The main reason for consideration and introduction of the concept of OPC on the lines of what has been introduced in various other countries is to encourage the sole proprietors to enter into the organized sector of business and to restrict the liability of the proprietor to the extent of the liability of the company. The other reasons being advocated are that the concept will help foreign companies to form their subsidiaries conveniently which would encourage foreign funds to flow into India, to bring the small and medium enterprises within the domain of corporate entity and so on.

Criticisms

Limited Liability Partnership Act, (LLP Act) 2008 was enacted on January 7, 2009. The LLP Act was introduced with the objective of providing limited liability for the partners in business, besides bringing all the small and medium enterprises from the unorganized sector to organized sector. The concept of LLP has not been successful and till date approximately only 10,000 entities are registered. The LLP model of business is not fully encouraged even by professionals. The success of the very concept is doubtful to some extent due to some reasons which have been mentioned below:

1. The existing proprietors are free to raise funds from their relatives, friends, and others when the need arises. On the other hand, an OPC, being a private limited company, is not permitted to borrow from others.

2. Several existing private limited companies may be as good as proprietorship firms but such private companies may consider and introduce several other shareholders, up to a limit of 200. On the other hand, the capital of the OPC is only to the extent of available funds of the person who owns OPC.

3. The concept of nomination is slowly being introduced in bank accounts, share trading etc., but has not come into the business enterprises. Normally, the existing proprietorship business assets are shared by the legal heirs which may be more than one. Conversion of existing proprietorship business into OPC requires providing one nominee which may not be acceptable to the other family members.

4. Foreign companies may not be able to incorporate their subsidiaries as OPC’s as the subscriber has to be only an individual and that too, with a nomination of another individual. The concept of the subsidiary company is that the entire shares are held by the holding company and therefore, it is not possible for MNCs to incorporate their subsidiaries as OPCs.

5. The expectation that the bankers will provide funds easily to OPCs seems unrealistic. At present, bankers do insist on collateral and other securities for extending credit facilities to small individual business entrepreneurs. Since the OPC now allows the same individual proprietors to claim limited liability, the risk avenue is more to the bankers.

6. Above all, the requirement of filing documents with the Regulator may not encourage small business entrepreneurs to incorporate as or to switch over to OPCs.

Process of Incorporation

The process is shown in the table below:

Note:  The process of incorporation changes. The table shows the latest step for incorporating a Company. Form INC-32 has a new mandatory feature which applies for PAN and TAN.

OPC and Foreign Jurisdictions

UK:

UK Companies Act, 2006 and the Companies (Single Member) Private Companies Regulations 1992 provides for such concept.

Singapore:

Company Amendment Act of 2004 and other regulations.

United Arab Emirates:

One Person Company was recognized with only Articles of Association.

United States of America:

In US several states have given their assent to the formation and operation of a company with a single member they call as Limited Liability Company.

Salient Features

An OPC can be formed in any below categories:

a. Company limited by guarantee
b. Company limited by shares

The prerequisites for an OPC limited by shares:
a. Shall have a minimum paid up capital of INR 1 Lac.
b. Restricts the right to transfer its shares.
c. Prohibits any invitations to the public to subscribe for the securities of the company.

An OPC is required to give a legal identity by specifying a name under which the activities of the business could be carried on. The words ‘One Person Company’ should be mentioned below the name of the company, wherever the name is affixed, used or engraved. The member of an OPC has to nominate a nominee with the nominee’s written consent in Form INC-3 and file it with the Registrar of Companies (RoC). This nominee in the event of death or in event of any other incapacity shall become a member of an OPC. The member of an OPC at any time can change the name of the nominee providing a notice to the RoC in such manner as prescribed. On account of Death of a member, the nominee is automatically entitled to all shares and liabilities of OPC.

Conclusion
OPCs are authoritative because they would give entrepreneurs capabilities for participation in economic activity and such economic activity which may take place through the creation of an economic person in the form of a company. However, there has been criticism in certain quarters against the formation of such a company as it may give room for evasion of public funds and tax liability by an individual.

OPC will provide greater flexibility to an individual to manage his business effectively and efficiently and at the same time to grab the benefits of a company. The concept of OPC will also help many foreign companies, which need to appoint a minimum of two nominees now when they form a wholly-owned subsidiary. OPC will open the doors for more favourable banking facilities, particularly loans, to such proprietors. Besides, the concept will boost flow of foreign funds in India as the requirement of nominee shareholder would be done away with.

SOURCE:

http://www.legalservicesindia.com/article/print.php?art_id=1722
http://www.mondaq.com/india/x/278154/Corporate+Commercial+Law/One+Person+Company+A+Concept+For+New+Age+Business+Ownership
https://www.indiary.org/en/legal-advice/A-New-Business-Concept-in-India—One-Person-Company-(OPC)–2-79-92

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