Explore the intricate differences between One Person Company (OPC) and Private Limited Company (Pvt Ltd) in terms of incorporation, governance, compliance, and post-incorporation dynamics.
If you’re looking to start your own business, the first step is to choose a suitable legal structure for your venture. The Companies Act of 2013 regulates the different types of business entities in India. OPC and Private Limited Company are the two most popular types of business structures that are chosen by most entrepreneurs.
Both of them have their own distinctive features, benefits & compliances. In this article, we aim to help you understand both the business entities, so that you can make an informed decision while you’re registering your business.
Introduction to OPC and Private Limited Company
OPC
One Person Company (OPC) is a business structure introduced under the Section 2(62) of the Companies Act 2013 which enables one individual to establish and operate a business single handedly. This business structure is beneficial for people who have their business at an early stage and do not want to deal with multiple compliances that other business structures have to follow.
Private Limited Company
Private Limited Company (PLC) is a widely popular business structure which requires at least 2 individuals and a maximum of 200 people to act as shareholders of the business. Governed by the Companies Act of 2013, PLC’s provide a unique legal identity which means that the company and business owners are treated as separate entities. This business structure is more popular because of the credibility, scalability & flexibility it allows to the owners and leaves more room for growth & expansion.
Importance of understanding the differences
It is important for entrepreneurs to know & fully understand the distinction between both of these business structures. Choosing a business structure is an important decision as it impacts the ownership structure, liability protection, compliance requirements, capital needs, flexibility, scalability as well as succession planning in your business. Therefore, it is important to select the right business type while considering factors like the nature of your business, funding needs, and future growth plans, making this understanding crucial for informed decision-making.
What Is a One Person Company (OPC)?
Definition of OPC
A One Person Company (OPC), as the name suggests, is a type of business entity where there is only one shareholder. This business type allows a single individual to own and operate the entire business. The concept of OPC was recently introduced in India governed by the Companies Act of 2013 to promote solo entrepreneurs and early stage startups who wish to run a successful business while enjoying the benefits of limited liability.
Legal framework and governing laws
The concept of OPC is governed under the Section 2(62) of the Companies Act of 2013. It acts as a simple business entity specifically for solo entrepreneurs who wish to run their own business without the complications of a traditional business registration. The main idea behind the OPC’s is to encourage & promote single individuals to start their own venture without worrying about the complexities involved in starting a traditional company.
Key Features of an OPC
- Limited liability of the sole owner: Unlike a sole proprietorship, where the personal liability of a business owner is unlimited, in an OPC, the personal assets of the owner are protected. Therefore, if your business is under debt or faces any financial loss, then only the company assets i.e the amount you invested in the company is at risk and your personal assets are safe.
- Single shareholder requirement: As the name suggests, an OPC was introduced specially for solo business owners. This business structure allows a single individual to be the sole owner of the company which means one can have complete control over the business operations. Thus, you don’t need to rely upon any other shareholders for your business decisions.
- Restrictions on converting OPC into other forms: Although OPC as a business structure offers you a lot of freedom & flexibility, there are also some limitations which you need to understand. In case your yearly turnover exceeds an amount of INR 2 Crores or if your paid up capital exceeds INR 50 Lacs, you will be liable to convert your OPC to either a public or private limited company. This is essential so that scaling and growing businesses follow appropriate governance & compliance requirements.
- Perpetual succession: One of the key features of an OPC is that your business will not cease to exist even after the cessation of the sole owner. When you register as an OPC, you are required to appoint a nominee who will step in and run your business and keep it stable. This helps bring more credibility and reassurance to your company.
What Is a Private Limited Company?
Definition of a Private Limited Company
A Private Limited Company (PLC) is a business structure which is governed under Section 2(68) of Companies Act, 2013. In this structure, the ownership of business can be shared between a minimum of 2 and a maximum of 200 shareholders. This business structure is quite popular as it offers limited liability protection and is often best suited for businesses that want to scale, raise funds and/or attract investors as it is easier to transfer shares amongst shareholders.
Legal Requirements and Governing Regulations
The concept of PLC is governed under the Section 2(68) of Companies Act, 2013. This business structure allows entrepreneurs the freedom to run their operations in accordance with a clear legal framework while enjoying the protection of limited liability & structured governance. A Private Limited Company is legally recognized as a separate entity which means that the personal assets of the owners are protected.
Key Features of a Private Limited Company
- Minimum and maximum number of shareholders: The ownership structure of a private limited company allows a minimum of 2 and a maximum of 200 shareholders. This ownership structure makes the concept of PLC makes it ideal for startups, closely held businesses & family businesses.
- Limited liability of members: PLC offers limited liability to its shareholders which means that in case the business suffers any financial loss or is under debt, the personal assets of the shareholders remain unaffected. This helps the owners to take calculated risks for better returns.
- Restrictions on share transfer: Unlike public companies, PLC’s poses several restrictions on transfer of shares to the general public. You can not freely transfer/trade shares across the public however, the transaction of shares among shareholders is allowed.
- Separate legal entity: A Private Limited Company is considered as a legal entity. It means that the company and its resources are independent from its owners and even if the shareholders change, the identity of the company remains intact.
Key Differences Between OPC and Private Limited Company
Ownership Structure
- OPC (One Person Company): As the name suggests, an OPC is owned and managed by a single person. This structure is perfect for solo entrepreneurs who want to maintain full control over the business while enjoying the benefits of a corporate setup.
- Private Limited Company: A Pvt Ltd company, on the other hand, requires a minimum of two shareholders and can have up to 200. It allows for greater collaboration among partners and is often preferred for businesses aiming for growth and outside funding.
Legal and Compliance Requirements
- OPC: With fewer compliance requirements, OPCs are easier to manage. They don’t require annual general meetings (AGMs) and have more relaxed auditing regulations.
- Private Limited Company: Pvt Ltd companies must follow stricter compliance rules, including annual audits, board meetings, and regular tax filings. The governance structure ensures transparency, which makes it more attractive to investors.
Capital Requirements and Funding Options
- OPC: There are no mandatory minimum capital requirements, which makes it a flexible option for smaller businesses. However, fundraising options are limited, as OPCs cannot raise capital from private equity or venture capital investors.
- Private Limited Company: Pvt Ltd companies can access a wider range of funding options, including private equity, venture capital, and loans, which makes them suitable for businesses planning significant growth.
Tax Implications
- OPC: OPCs benefit from lower tax rates and certain exemptions, making them appealing for small business owners with limited income.
- Private Limited Company: Pvt Ltd companies face corporate tax rates and may benefit from tax exemptions depending on their business activities. They also have the ability to distribute profits as dividends, though dividends are subject to taxation.
Conversion and Exit Strategies
- Conversion: If an OPC exceeds a turnover of INR 2 crores or paid-up capital of INR 50 lakhs, it is required to convert into a Pvt Ltd company. Conversely, a Pvt Ltd company cannot convert into an OPC.
- Exit Strategies: Pvt Ltd companies offer more exit options, including mergers and acquisitions, which provide opportunities for investors and founders to transition smoothly
Pros and Cons of OPC and Private Limited Company
Advantages of an OPC
- Ideal for solo entrepreneurs who want control without sharing ownership.
- Lower compliance requirements, with fewer legal formalities and simpler operations.
Disadvantages of an OPC
- Limited growth due to restrictions on raising capital from investors.
- Restrictions on business activities and the inability to scale beyond certain thresholds.
Advantages of a Private Limited Company
- Multiple shareholders enable collaborative decision-making and easier succession planning.
- Higher credibility with better access to funding and more opportunities for business expansion.
Disadvantages of a Private Limited Company
- Complex compliance requirements with annual audits and frequent tax filings.
- Higher costs for incorporation, operations, and legal maintenance.
Conclusion
Choosing between an OPC and a Private Limited Company depends on your business goals and needs. If you are a solo entrepreneur looking for an easy-to-manage structure with minimal compliance, an OPC might be the right fit.
However, if you need growth opportunities and access to external funding, a Pvt Ltd company will better suit your ambitions. Carefully assess your future plans, ownership preferences, and operational needs before making the final decision.
FAQs on OPC and Private Limited Company
What is the difference between OPC and Private Limited Company?
An OPC is owned by a single person, with simpler compliance requirements, while a Pvt Ltd company requires at least two shareholders and offers more growth opportunities through funding options.
Can an OPC be converted into a Private Limited Company?
Yes, if an OPC’s turnover exceeds INR 2 crores or paid-up capital crosses INR 50 lakhs, it must convert into a Pvt Ltd company.
What are the tax benefits of an OPC compared to a Private Limited Company?
Both entities are subject to corporate tax, but Private Limited Companies may have more opportunities for tax exemptions and deductions, especially regarding dividends and profits.
