The OPC that has effectively replaced sole proprietorship companies, is being widely preferred by sole entrepreneurs, as this corporate entity does not make the shareholder personally liable for the debts of the company.
The Companies Act, 2013 was well received and applauded in the corporate world for a plethora of reasons. Undoubtedly, the introduction of OPC, by the Act, was one of them. While sole proprietorship was the only option available to individual entrepreneurs to commence a business, the OPC came like a boon. Here, the sole shareholder would still be handling the profits and losses of the company, single-handedly, like in the case of a sole proprietorship, but the liabilities they shoulder, differ remarkably in both cases. Learn more about Liability for an OPC.
In an OPC, although all the shares are possessed by a single person, the fact that the company is a separate legal entity remains unchanged. One of the major drawbacks presented by corporate entities like sole proprietorship and partnership is the unlimited liability thrust on the members. This often discourages and hampers the growth of the businesses and prevents the members from expanding it to new horizons.
Limited Liability of OPC
Amongst the several advantages an OPC has to offer, one striking benefit it renders is the limited Liability for an OPC to the shareholder. An OPC is a separate legal entity and therefore, the liabilities of the company are not shoved on the face of the shareholder. Most often the ups and downs in a business are erratic and often are not under the control of the owner, the member, or the director in the case of a company incorporation. Therefore, the personal assets of the business owner can’t be at risk, in case of an unfortunate event.
In the case of a proprietorship firm, the personal assets of a proprietor can be threatened in such a scenario. Thankfully, in the case of an OPC that is not the case. Here, the liability is limited to the shares held by the shareholder. This would imply that the losses or debts incurred by the OPC, which resulted merely in the due course of the business will not affect the personal property of the entrepreneur.
If this had occurred in a sole proprietorship firm, the owner should have taken the responsibility to settle the debts and liabilities. In contrast, the limited liability sported by an OPC, makes the shareholder’s liability proportional to the unpaid subscription money.
The same inference can be drawn to the contractual obligations of an company. Bearing in mind that the company is a separate legal entity, the contractual obligations of the one person company cannot hold the member obligated, even if the member holds all the shares of the company.
Lifting of the Corporate Veil in an OPC
Although the liabilities of the company are not the liabilities of the sole member by virtue of the separate legal personality of the One Person Company, the situation turns around when any unfair means is employed by the shareholder. Just like how the corporate veil is ignored in private companies when fraudulent transactions take place, the veil is disregarded in an OPC too in such cases. If the sole member of the company, tries to misappropriate the assets of the company or tries to evade the law, then the person will be held personally liable for debts and losses thus incurred.
If the shareholder makes contracts in his own name or fails to operate an individual bank account to maintain the company’s financial transactions, or if money is drawn for personal needs, then the shareholder will be personally liable for the losses incurred. The perfect blend of sole proprietorship and OPC registration.
Thus, you might have known about the Liability of an OPC and there are multiple advantages like being able to avail funds easily, limited liability, and having fewer compliances in general, make this type of company more preferable than a sole proprietorship. The concept of OPC will definitely beckon a lot of young entrepreneurs to establish their businesses proficiently. The concept of OPC has been quite successful in other countries, and the same can be anticipated in India. Reach out to Vakilsearch and get yours registered today!
