CS Divesh Goyal
“In order to succeed, we must first believe that we can.”
Section – 7 read with rule 3 & 4 of Companies (Incorporation) Rules, 2014
Till 31St March, 2014, if you wanted to set up a private company, you needed at least one other person because the law mandated a minimum of two shareholders. So, for the person wanting to venture alone, the only option was proprietorship, an onerous task since it is not legally recognized as a separate entity. Now, after the recent passing of the much-hyped Companies Act, 2013, by the Lok Sabha. The Act that aims to bring in sweeping changes in the corporate world has also opened the doors for the entrepreneur looking to set up a company all by himself. This has been made possible by bringing in the concept of One Person Company (OPC). Though this concept is new in India, it has been very popular abroad, including in Singapore, USA, even Europe. “Currently, it is a grey area, and only time will tell how well this works in India,”
“With increasing use of information technology and computers, emergence of the service sector, it is time that the entrepreneurial capabilities of the people are given an outlet for participation in economic activity. Such economic activity may take place through the creation of an economic person in the form of a company. Yet it would not be reasonable to expect that every entrepreneur who is capable of developing his ideas and participating in the market place should do it through an association of persons. We feel that it is possible for individuals to operate in the economic domain and contribute effectively. To facilitate this, the Committee recommends that the law should recognize the formation of a single person economic entity in the form of ‘One Person Company’. Such an entity may be provided with a simpler regime through exemptions so that the single entrepreneur is not compelled to fritter away his time, energy and resources on procedural matters.”
A One Person Company (OPC) Private Limited has many advantages as compared to Companies and Proprietorship firm.
Here we go with benefits of registering an OPC:
A. Compliance burden:
The One person Company includes in the definition of “Private Limited Company” given under section 2(68) of the Companies Act, 2013. Thus, an OPC will be required to comply with provisions applicable to private companies. However, OPCs have been provided with a number of exemptions and therefore have lesser compliance related burden.
B. 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 liability of the member is limited.
Corporate Affairs Minister Sachin Pilot stated in a recent press conference,
“Small entrepreneurs can now set up ‘one person companies’ to directly access target markets rather than being forced to share their profits with middlemen… This would provide tremendous opportunities for millions of people, including those working in areas like handloom, handicrafts and pottery. They are working as artisans and weavers on their own, so they don’t have the legal entity as a company. But the OPC would help them do business as an enterprise and give them an opportunity to start their own ventures with a formal business structure.”
C. Limited Liability Protection To Directors and Shareholder
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”.
D. Minimum Requirements:
E. 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.
F. 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.
G. Easy to Get Loan from Banks
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.
H. 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.
I. Easy To Manage:
J. Filling with ROC:
K. 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.
L. 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.
M. Middlemen eliminated:
One Person Companies enable small entrepreneurs to set up a company by allowing the shareholders to directly access the target market and avail credit facilities, bank loan rather than being forced to share their profits with middlemen . Thus, such companies will provide an opportunity to various small entrepreneurs like weavers, artisans etc. to start their own ventures with a formal business structure.
Disadvantages of One Person Company
B. Suitable only for small business:
OPC is suitable only for small business. OPC can have maximum Paid up share capital of Rs.50Lakhs or Turnover of Rs.2 Crores. Otherwise OPC need to be converted into Private Ltd Company.
C. Business Activities:
D. Tax Liability:
The concept of One Person Company is not a recognized concept under IT Act and hence such companies will be put in the same tax slab as other private companies for taxation purposes. As per the Income Tax Act, 1961, private companies have been placed under the tax bracket of 30% on total income. On the other hand, sole proprietors are taxed at the rates applicable to individuals, which mean that different tax rates are applicable for different income slabs. Thus, from taxation point of view this concept seems to be a less lucrative concept as it imposes heavy financial burden as compared to a sole proprietorship.
The basic income tax rate for a one person company is 30% which may result in a higher tax as compared to the income tax slab rates of an individual (i.e. 10% to 30%).
(Proprietorships have a clear advantage here in that a proprietor is subject to individual income tax slab rates from 10% to 30% and get benefits of basic exemptions. Hence, if you select a one person company over a proprietorship you will have to give up these advantages.)
E. Perpetual Succession:
This is Very concept of a separate legal entity being created for a perpetual succession that is continuation of the company even after the death or retirement of a member is also challenged. Because the nominee whose name has been mentioned in the memorandum of association will become the member of the company in the event of death of the existing member. However it is doubtful that it would do any good for the company because the person is not being a member of the company and also not involved in the day to day operation of the company, would not be able to succeed the business after the death of the member.
F. Higher incorporation costs:
As compared to proprietorships: One person companies need to be registered with the registrar of companies under the Companies Act, 2013. This would entail upfront expenditure on government charges and professional fees which you will have to pay your CA or CS. Proprietorships don’t need to register with the government and hence don’t incur these incorporation charges.
Though the Act extends slew of exemptions to a One Person company in terms of conducting AGM, EGM, Quorum of meetings, restriction on voting rights or filing its financial statements, yet the incorporation of such a company requires lots of paper work as compared to a sole proprietorship. These procedural complexities with respect to incorporation of One Person Company might make this concept less attractive for sole entrepreneurs
G. Higher compliance costs:
Compared to proprietorships: A one person company would have recurring compliance costs yearly, as it will need to get its accounts audited and will need to file returns every year with the registrar of companies like any other company.
H. Separation of Owner and Control:
This is one of the characteristics of the company ,which is seriously challenged by the new Companies Act ,2013, where the line between the ownership and control is blurred.
Which might result in unethical business practices.
I. Other Disadvantages:
The concept of One Person Company is advantageous both for the regulators and the market players. From regulators perspective, One Person Companies by organizing the unorganized sector of proprietorship will make the regulation of these entities convenient and effective.
Further, the conferment of the status of private limited company on a One Person company will not only limit the liability of sole entrepreneurs but also provide access to market players to various credit and loan facilities and hence would encourage entrepreneurship. However, this concept has been criticized on grounds of excessive procedural formalities and tax burden. Further, this concept is also being regarded as unnecessary as India already has a Limited Liability Partnership Act, 2008, which limits the liabilities of the members of a partnership.
Eventually any decision on which legal business structure to select will depend on a case by case basis and individual needs and requirements of a specific business. But, you should be aware of the above disadvantages of a one person company before either starting a new proprietorship or deciding to convert your existing proprietorship into a one person company in India.
(Author – CS Divesh Goyal, ACS is a Company Secretary in Practice from Delhi and can be contacted at email@example.com)