One Person Company – easy and organized structure to start your business : By CA Ramesh Sharma

 

One Person Company (OPC) is a business entity in which there is only one owner with limited liabilities who can act both as a shareholder as well as the director. One Person Company (OPC) in India was introduced through the Companies Act, 2013 to support entrepreneurs who on their own are capable of starting a venture by allowing them to create a single person economic entity. The concept of OPC is basically to eradicate the limitation of a sole proprietorship, which is the most popular form for small businesses in India. The liability of owner is limited to the invested capital in this form.

One of the biggest advantages of a One Person Company (OPC) is that there can be only one member in an OPC, while a minimum of two members are required for incorporating and maintaining a Private Limited Company or a Limited Liability Partnership (LLP). Similar to a Private Limited Company, a One Person Company is a separate legal entity from its promoter, offering limited liability protection to its sole shareholder, while having continuity of business and being easy to incorporate. Such companies are generally created when there is only one founder/promoter for the business. Entrepreneurs whose businesses lie in early stages prefer to create OPCS instead of sole proprietorship business because of the several advantages that OPCs offer.

Difference between OPCs and Sole Proprietorships

A sole proprietorship form of business might seem very similar to one-person companies because they both involve a single person owning the business, but they’re actually exist some differences between them.

The main difference between the two is the nature of the liabilities they carry. Since an OPC is a separate legal entity distinguished from its promoter, it has its own assets and liabilities. The promoter is not personally liable to repay the debts of the company. On the other hand, sole proprietorships and their proprietors are the same persons. So, the law allows attachment and sale of promoter’s own assets in case of non-fulfilment of the business’ liabilities.

Features of a One Person Company

Here are some general features of a one-person company:

1. Private company: Section 3(1)(c) of the Companies Act says that a single person can form a company for any lawful purpose. It further describes OPCs as private companies.
2. Single-member: OPCs can have only one member or shareholder, unlike other private companies.
3. Nominee: A unique feature of OPCs that separates it from other kinds of companies is that the sole member of the company has to mention a nominee while registering the company.
4. No perpetual succession: Since there is only one member in an OPC, his death will result in the nominee choosing or rejecting to become its sole member. This does not happen in other companies as they follow the concept of perpetual succession.
5. Minimum one director: OPCs need to have minimum one person (the member) as director. They can have a maximum of 15 directors.
6. No minimum paid-up share capital: Companies Act, 2013 has not prescribed any amount as minimum paid-up capital for OPCs.
7. Special privileges: OPCs enjoy several privileges and exemptions under the Companies Act that other kinds of companies do not possess.

 

Formation of One Person Companies

A single person can form an OPC by subscribing his name to the memorandum of association and fulfilling other requirements prescribed by the Companies Act, 2013. Such memorandum must state details of a nominee who shall become the company’s sole member in case the original member dies or becomes incapable of entering into contractual relations.

This memorandum and the nominee’s consent to his nomination should be filed to the Registrar of Companies along with an application of registration. Such nominee can withdraw his name at any point in time by submission of requisite applications to the Registrar.

 

Advantages of One Person Company

1.   Organized Sector of Proprietorship Company

OPC will bring the unorganized sector of proprietorship into the organized version of a private limited company. Various small and medium enterprises, doing business as sole proprietors, might enter into the corporate domain. The organized version of OPC will open the avenues for more favorable banking facilities. Proprietors always have unlimited liability. If such a proprietor does business through an OPC, then his liability is limited.

 

2.   More opportunities, Limited liability

Since the liability of the One Person Company is limited to the extent of the value of the share you hold, the individual could take more risk in business without affecting or suffering loss of personal assets. It is the encouragement to new, young and innovative start-ups.

The most significant reason for shareholders to incorporate the ‘single-person company’ is certainly the desire for the limited liability.

 

All unfortunate events in business are not always under an entrepreneur’s control; hence it is important to secure the personal assets of the owner, if the business lands up in crises.

While doing business as a proprietorship firm, the personal assets of the proprietor can be at risk in the event of failure, but this is not the case for a One Person Private Limited Company, as the shareholder liability is limited to his shareholding. This means any loss or debts which is purely of business nature will not impact, personal savings or wealth of an entrepreneur.

If the business is unable to pay its liabilities, the individual has to pay such liabilities off in the case of sole proprietorship; and the individual is not responsible for such liabilities in the case of a one-person company.

 

An OPC gives the advantage of limited liability to entrepreneurs whereby the liability of the member will be limited to the unpaid subscription money. This benefit is not available in case of a sole proprietorship.

“Thus OPC allows an individual to take risks without risking his/her personal assets”.

 

 

3.   Legal Status and Social Recognition for Your Business

One Person Company is a Private Limited Structure; this is the most popular business structure in the world. Gives suppliers and customers a sense of confidence in business. Large organizations prefer to deal with private limited companies instead of proprietorship firms. Pvt. Ltd. business structure 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.

Any business entity that runs in the form of company always enjoys an increased trust and prestige.

 

4.   Easy Funding and Bank Loans

Like a Private company, One Person Company can raise funds through venture capital, financial institutions, angel investors etc. A One Person Company can raise funds thus graduating itself to a private limited company.

Banking and financial institutions prefer to lend money to the company rather than proprietary firms. In most of the situations Banks insist the entrepreneurs to convert their firm into a Private Limited company before sanctioning funds. So, it is better to register your startup as a One Person private limited rather than proprietary firm.

 

5.   Complete Control of The Company with The Single Owner

This leads to fast decision making and execution. Yet he/she can appoint as many as 15 directors in the OPC for administrative functions, without giving any share to them.

 

6.   Adequate Safeguards

In case of death/disability of the sole person should be provided through appointment of another individual as nominee director. On the demise of the original director, the nominee director will manage the affairs of the company till the date of transmission of shares to legal heirs of the demised member.

 

7.   Benefits of being a Small-Scale Industries (S S I / MSME)

An One Person Company can avail the various benefits provided to Small Scale Industries like lower rate of Interest on loans, easy funding from bank without depositing any security to a certain limit, manifold benefits under Foreign Trade policy and others. All these benefits can be boon to any business in initial years.

 

8.   Minimum Compliance:

Very few ROC filing is to be filed with the Registrar of Companies (ROC).

One Person Company have to face little compliance burden as compared to private limited companies, hence One Person Company can more focus on other functional and core areas.

9.   Perpetual Succession

An OPC being an incorporated entity will also have the feature of perpetual succession and will make it easier for entrepreneurs to raise capital for business. The OPC is an artificial entity distinct from its owner. Creditors should therefore be warned that their claims against the business cannot be pressed against the owner.

 

10.   Tax Flexibility and Savings

In an OPC, 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 reduces the profitability of the Company and ultimately brings down taxable income of your business.

Any remuneration paid to the director will be allowed as deduction as per income tax law unlike proprietorship. Other benefits of presumptive taxation are also available subject to provisions of income tax act.

 

11.   The Only Owner – quick decision making

You, only the owner helpful in quick decision-making, controlling and managing the business without following any elongated processes and methodologies as adopted in other companies. The sense of belonging inspires to grow the business further.

 

 

Drawbacks of One Person Company

 

1.   Suitable Only for Small Business: OPC is suitable only for small business. OPC can have maximum Paid up share capital of Rs.50 Lakhs or Turnover of Rs.2 Crores. Otherwise OPC need to be converted into Private Ltd Company.

2.   A person shall not be eligible to incorporate more than a One Person Company or become nominee in more than one such company.

3.   Limited membership – minimum and maximum one person can be a share holder / member of the company.

4.   OPC cannot carry out Non-Banking Financial Investment (NBFC) activities including investment in securities.

5.   Only a natural person who is an Indian citizen and resident in India shall be eligible to incorporate an OPC, NRIs not allowed incorporating One Person Company.

Comparison - OPC vs Sole Proprietorship vs Partnership Firm

Factor	OPC	Sole Proprietorship	Partnership Firm
Distinction in ownership	Owner & business are considered as 2 separate entities	Owner & business is defined as a single entity	Concept of mutual agency exists – every partner is a principal as well as an agent
Liability	Limited to his/her investment	Unlimited liability	Unlimited liability – partners are jointly and individually liable
Taxation	Registered as a Private limited company & hence taxed under Income Tax Act for Private companies	Treated as owner’s individual income	Treated as partner’s individual income
Members	Only 1 member or shareholder	Only 1 proprietor	At least 2 persons are required to begin a partnership while the maximum number of members is 100.
Profit/Loss	Profit/Loss belongs to the single member	Profit/Loss to the single proprietor	Profit/Loss is shared between the partners in the agreed ratio of equally
Management	Easy to manage	Easy to manage	Conflicts may arise due to difference of opinions between partners

 

Though a One Person Company allows a lone Entrepreneur to operate a Corporate entity with limited liability protection, an OPC does have a few limitations. For instance, every One Person Company (OPC) must nominate a nominee Director in the MOA and AOA of the Company - who will become the owner of the OPC in case the sole Director is disabled. Also, a One Person Company must be converted into a Private Limited Company if it crosses an annual turnover of Rs.2 crores and must file audited financial statements with the Ministry of Corporate Affairs at the end of each Financial Year like all types of Companies. Therefore, it is essential for the Entrepreneur to carefully consider the features of a One Person Company before incorporation.

 

About Author: Ramesh Sharma is a Chartered Accountant, Practicing in Rajajinagar, Bangalore, can support in Business Registrations, Accounting, Audit and Taxation matters. He can be reached at +91-9900503905 or rameshkpv@gmail.com.