During the announcement of Budget 2021, Finance Minister Nirmala Sitharaman advertised the formation of One Person Company (OPC) by incentivizing allowing them to grow without any restriction on paid-up capital and turnover, allowing them to convert into any other type of company at any time, reducing the residency limit for an Indian citizen to setup OPC from 182 days to 120 days, and also allowing non-resident Indians to incorporate OPC in India. Although all of this may sound inviting to start One Person Company, the reality however is not so. Hence, this article details the pros and cons of setting up an OPC and why one should or should not opt for them.
Formation of One Person Company
One Person Company (OPC) means a company formed with only one person as a member, unlike the traditional manner of having at least two members like in a partnership firm.
Suppose the name of an OPC is XYZ OPC Pvt. Ltd. Herein, OPC stands for One Person Company, Pvt stands for Private meaning it’s privately owned by one person and Ltd stands for Limited meaning limited liability. Thus, business liabilities and losses will not affect the owner’s personal wealth. Therefore, the owner and company’s assets are seen as separate.
Structure of One Person Company
- There is only one shareholder under OPC who owns a 100% stake in the company. Hence by this definition, it is not possible to have any external investors for the company or give ESOPs to the employees.
- Since it is a company formation it also requires a Director. Thus, in OPC the one shareholder can also serve as the Director. While there has to be one Director minimum, there can also be a maximum of fifteen Directors. This will help in the expansion of the business.
- But there needs to be an external nominee assignment for the company. This nominee will inherit the OPC in the case of the owner’s passing. This will also ensure the perpetual continuation of the company, in the absence of the shareholder.
- An individual can open different proprietorships for their varying businesses. The PAN however can stay the same. Individual can also be shareholder and director in other companies.
- A hard restriction in OPC is that one individual can only own one OPC and they can also be nominee in only one OPC.
- The shareholding can only happen by an individual and not by any HUF or Private Limited Company. One Person Company is further 100% transferrable to another individual but not to a HUF/Pvt Ltd company.
At any juncture, if external funding or investor inclusion is necessary then OPC can convert into a private limited or public limited company. Earlier restriction of minimum 2 years for conversion is not applicable anymore. There is no limitation to how much the company can grow turnover wise.
- In a proprietorship, the proprietor can neither give a loan to his firm nor rent out his property to the firm. However, in OPC the owner can rent his property to firm and take rental fees on it and give a loan with interest on it. Along with claiming expenses on the OPC.
Limitations of One Person Company
The Companies Act, 2013, puts following restrictions on an OPC:
- OPC cannot be a Non-Banking Financial Company (NBFC).
- Section 8 trust type of companies cannot be formed.
- Cannot acquire or invest in other corporate body securities.
- Cannot have a demat account.
- Foreign nationals cannot open an OPC.
- NRIs can open an OPC if they reside in India for 120 days.
- One person can only have one OPC in India.
- There cannot be other shareholders so no ESOPs or investors are allowed.
Pros & Cons of OPC
OPC Vs Private Limited
|Registration cost||It is registered with the Ministry of Corporate Affairs (MCA). Similar registration and compliance costs.||It is registered with the Ministry of Corporate Affairs (MCA). Similar registration and compliance costs.|
|Investment||No external investment option||Can take equity funding|
|Loans||Can get loans but banks are less favourable for them||Can get loans more easily.|
|Suitability||As the name suggests, this is suitable only for small businesses with limited liability. It cannot turn into a billion dollar firm.||Has higher favourability of growing into a multi-national business.|
|Tax liability||Usually 30% tax payment but in some conditions it is 25% or 22%. If shareholder takes profit from OPC then double taxation liability as per slab rates. As a Director, can take major profit as salary and show a lower profit in OPC books for lesser tax liability and can reinvest that profit into growing the business.||Usually 30% tax payment, but in some conditions it becomes 25% or 22% based on the business turnover. Deductions are available for claim on profits earned.|
Opt for Proprietorship over OPC if
- The business is profitable from the first day itself.
- No external funding is required.
- One wants to stick with the business for a long term and not sell it forward.
- The risk factor is low for the business.
- There will be no loan requirement in the future to keep the business afloat.
- There is no liability involved with the business.
If the above points do not go with the business idea, then Private Limited would be a better option. It is advisable to open Private Limited rather than OPC. Moreover, the nominee which you were planning OPC can become the partner for Private Limited firm.
Watch the video on this article of business basics below.
Join the LLA telegram group for frequent updates and documents.
Download the telegram group and search ‘Labour Law Advisor’ or follow the link – t.me/JoinLLA