Good News for Small Business – One Person Company Now Possible In India

There is good news for small businesses & entrepreneurs in the corporate bracket. The Companies Bill 2012 has incorporated One Person Company (OPC) in India, an enterprise much prevalent in the Europe, USA, China, Singapore and even several countries in the Gulf region.

One Person Company has been commenced out of the need of flying solo and having limited liability firms. In a nutshell, it is legal entity which functions on the same principle as a Company, but has only one member and one shareholder.

“It will bring in a more structured arrangement and bring in the unorganized sector of proprietorship firms in the organised version of private limited company,” said Pavan Kumar Vijay, Group Founder, Corporate Professionals.

It will be further be a benefactor for FDI in India as the requirement for a nominee shareholder has been overruled in OPCs. More its limited liability clause states that, the company being distinct from that of its owner, the personal assets of the shareholders and directors remain protected in case of a credit default.

“OPC will give greater flexibility to an individual or a professional to manage his business efficiently and at the same time enjoy the benefits of a company,” said Lalit Kumar, Partner, J. Sagar Associates, a law firm.

However, one must note that the tax implications of OPC are much higher than of sole proprietorship. The OPC is charged at a base tax rate of 30% along with other applicable taxes like minimum alternative tax (base tax rate 18.5%), dividend distribution tax (base tax rate 15%) and others. The tax incidence is the main deterrent for setting up of OPC.

Every One Person Company should bear the letters “OPC” in brackets after it’s registered name, wherever it may be printed, affixed or engraved.

A minimum capital of Rs. 1 lakh is required for the commencement of the company. It is exempted from certain company regulations such as conducting annual general meetings, general meetings and extraordinary general meetings. The Companies Bill states that two meetings need to be organised every year if there is more than one director. If any resolution passed by the sole member, it must be communicated to the company and entered in the minute book. There are, however, no relaxations from the provisions on audit and financial statement.

The following procedure is you provide each director with Director Identification Number (DIN) and apply for digital signatures for all of them. Draft the memorandum of association and articles of association follows. All these are to be filed with the registrar of companies (ROC). The registrar will issue a certificate of incorporation within seven days of receiving the documents, after which the OPC can commence.

The original subscriber must delegate a nominee to serve in his capacity in case of death or incapacity to continue. The nominee must give his consent in writing, which has to be filed with the ROC. The owner can change the nominee any time, but prior to that he will have to inform the ROC. The nominee, too, can back off at a later stage, in which case the owner will have to make a fresh nomination.

Is Private Limited better?

One Person Company is still in its infancy in India. It is best suited for small proprietors learning to swim in deep waters. Moreover, expansion of a company can be easily done only by the increase of authorized capital and further allotment of shares. The preference of investors is also inclined towards the companies as they can issue shares to third parties and also have a supervisory board. Even the employees can be given incentives by Employee Stock Option Plan (ESOP). So, if you already have a private limited company, you need not shut shop as the pros here exceed that of OPCs by far.

Did sole proprietorship just get bowled over by OPC?

The unconventional ways of sole proprietorship is still more viable to some than One Person Company. Structuring a sole proprietorship is easier than that of OPC. The documentation required is minimal in lieu to certain business retrospectives. But it must be considered that the risk in a proprietorship is higher as the owner is personally responsible for the business.

“In some cases, a proprietorship can be a tax-inefficient way of doing business. Hence, you must carefully analyse all aspects before choosing the business structure,” says Vaibhav Sankla, director, H&R Block.

One Person Company is yet in its stage of infancy and is in a grey area in India. But corporate professionals predict an emergence of the traditional concept of sole proprietorship, elevating it in the corporate world.