Company IncorporationOPC

Whether a One Person Company Is Really Incentivised

There were a few erstwhile requisites with respect to the incorporation of an OPC that were considered to be too stringent. The Companies (Incorporation) Amendment Rules 2021, lifted those provisions, thereby encouraging the incorporation of OPCs.  

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The One Person Company (OPC), incorporated under the Companies Act, 2013, came down as a blessing to solo entrepreneurs who intended to incorporate their businesses as private limited companies, but without including any additional members to the business. As the name reads out, in an OPC, the center of attention is the sole member or the shareholder of the company, which makes it unique from other corporate structures.

It was opined by experts that, an individual who has a path-breaking idea and wishes to implement it by means of a business regime, shall not be forced to do it as an association of persons. The individual, in this instance, deserves to be given a platform to operate effectively, even as a sole member.  It was for this very reason that the Act came up with the novel concept of One Person Company. Additionally, the Act also endorsed a few compliances for the incorporation of an OPC.

Provisions Pertaining to OPC Prior to Companies (Incorporation) Second Amendment Rules 2021:

Before the amendment, the Companies (Incorporation) Rules, 2014, stated that:

  • An OPC can convert into a public or private limited company only when the paid-up share capital exceeds 50 lakhs or the yearly turnover during the said period exceeds 2 crores. Further, the voluntary conversion of an OPC was permitted only after 2 years of its incorporation
  • A private company having a paid-up share capital of 50 lakhs or less, or an annual turnover of 2 crores or less may convert into an OPC by passing a special resolution in the company’s general body meeting
  • An OPC can be incorporated only by a natural person, who is an Indian citizen and a resident of India. Being a resident meant that a person should have stayed in India for a period that is not less than 182 days during the preceding calendar year.

Changes Made by The Companies (Incorporation) Second Amendment Rules 2021:

The Union Budget 2021, focussed on encouraging start-ups and innovators and therefore took steps to incentivise the OPCs. The restrictions that were laid to incorporate OPCs were lifted. The main changes implemented in the rules as an effort to incentivise the OPCs are:

  •   The OPCs were allowed to be converted into public or private limited companies regardless of the paid-up share capital and annual turnover and irrespective of the number of years since their incorporation
  •   Non-resident Indians (NRIs) were allowed to form OPCs and were also allowed to play the role of nominees
  •   The residency tenure was cut short from 182 days to 120 days.

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Thus, diluting the prerequisites, incentivised the OPCs considerably since the provisions came into effect in April 2021. Without a shadow of doubt, lifting the restrictions with respect to the incorporation of OPCs would lure a number of raw talents into entrepreneurship. The stringent provisos with respect to the conversion of OPC to a public or private limited company would have definitely hindered the growth of the company. The new rules would see an increase in the number of OPCs being incorporated and even a larger number being converted into public and private establishments.

Although the incentives thus proposed are opined not to be as attractive as to make one prefer OPC over a public or a private limited company, this could definitely encourage sole entrepreneurs to take their first step. So, whether an OPC is really incentivised by these proposals is something we have to wait and observe, as it might be too early to judge the situation now.

Furthermore, there are expert opinions that state that the prerequisite that mandates only a natural person to incorporate an OPC is limiting the scope of the company. It is expected that real incentivisation would happen when other public or private limited companies can become a member of an OPC.  Also, the act mandates that a shareholder cannot be a member of more than 1 OPC. Additionally, effective tax structuring is the need of the hour for OPCs which is now considered to be non-existent. Although these suggestions may seem to be too far-fetched, achieving these could mean that the OPCs have been really incentivised.

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