Drawbacks of One Person Company (OPC)

If you are planning to register one person company then you MUST know the drawbacks of One Person Company registration.

A) One of the biggest disadvantage of company registration is that the owner of one person company cannot incorporate or register another one person company and the nominee of one person company cannot become nominee in another opc.

B) ) Maximum Turnover and Capital Limit

As per Rule 6 of Company (Incorporation) Rules, 2014

• Where the paid up share capital of an One Person Company exceeds Rs 50 lakh (fifty lakh rupees) and its average annual turnover during the relevant period exceeds Rs 2 crore ( two crore rupees), it shall cease to be entitled to continue as a One Person Company.

How average annual turnover is calculated ?

Average annual turnover is calculated of 3 immediately previous years. If any of the above two conditions are satisfied then OPC cannot continue its business.

• Such One Person Company shall be required to convert itself, within six months of the date on which its paid up share capital is increased beyond fifty lakh rupees or the last day of the relevant period during which its average annual turnover exceeds two crore rupees as the case may be, into either a private company with minimum of two members and two directors or a public company with at least of seven members and three directors in accordance with the provisions of Section 18 of the Act.

This is one of the biggest restriction in the expansion of business or profession under one person company.

If One Person Company or any officer of the One Person Company contravenes the provisions of these rules, One Person Company or any officer of the One Person Company shall be punishable with fine which may extend to ten thousand rupees and with a further fine which may extend to one thousand rupees for every day after the first during which such contravention continues.

C) Most of the people think that registration as one person company is less costly than registration of private limited company. But this is not actually true. Since the registration of private limited company requires at least two persons while registration of one person company also requires two persons (one is owner and the other is nominee). The registration fee and the stamp duty is dependent on the amount of authorised capital. It does not matter whether the company is OPC or Private limited, the registration fee and the stamp duty is same.

The only difference in registration is that OPC requires the digital signature certificate of one director while the private limited requires the digital signature certificate of at least two directors.

D) Most of the people think that after registration of one Person Company, there may be less compliance than private limited. But this is a myth. The compliance of one person company and private limited are same.

A one person company is also required:

1.  to file Income Tax return (ITR)
2. to file annual return with Registrar of companies (ROC)
3. to get its account audited by the chartered accountant in practice.
4. to file its GST returns
5. to file its TDS Returns etc.

There is no difference on the part of post registration compliance.

E) The one person company CANNOT attract the investors as it cannot issue shares or divide the ownership as it has only one owner. On the contrary the private limited company can have maximum 200 members. Therefore private limited company can issue shares and attract investors in the business. The only way to raise funds in one person company is loan. Even banks and financial institutions while granting loan gives much preference to private limited company than the one person company.

F) The name of one person company ends with the word ‘’ (OPC) Private Limited’’. The word here ‘’OPC’’ instead of increasing it actually downgrades the value of business in the industry. It has been seen that when a person sees the name of the company as OPC then a perception is build that it is a company of low potential as it is very small. While private limited company has higher reputation in the industry than one person company.

We discussed the drawbacks of one person company whether it is registration, compliance, finance, expansion, reputation etc. it lacks behind the private limited company.

Therefore in my opinion if you are planning to form company then you should consider private limited company instead of one person company as the cost of registration and post compliance are same.