Business AgreementsOPC

What Are the Restrictions of a OPC?

This article we have listed out the main characteristics and limitations of a One Person Company under Indian law, according to the recent amendments announced by the MCA.

In clear words, a one-person company (OPC) is one that has only one shareholder and the minimum one director. One person company as a concept had existed in various nations for a long time before it was adopted by Indian law. In India, this company was developed in 2013 to strengthen and provide an option for sole owners to conduct their business through a company – a legal entity with minimal personal liability.

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According to statistics, 34,446 OPCs have been registered in India so far, with at least 7,600 of them registered in the last 12 months. Increased use of OPC for business has resulted in sluggish revisions to the law one person company, involving reducing compliance costs and streamlining stringent constraints.

Major Elements of a One Person Company

We have highlighted some of the major elements of OPC under Indian law, which includes in the MCA notification.

Shareholder – A single shareholder is required for a One Person Company (also referred to as member). A shareholder of an OPC must meet four eligibility criteria under Indian law:

  • He or she should be a natural person
  • He or she should be an Indian citizen
  • He or she cannot be a nominee or shareholder of more than one OPC
  • And lastly, they should not be minors.

Note – since 1 April 2021, the sole shareholder need not be a resident of India if all the necessities are met.

Nominee – An OPC’s only shareholder must select another natural person as the shareholder’s nominee, with the nominee’s approval – the objective of this condition is to allow the nominee to become the shareholder in the event of the shareholder appointing the nominee’s death or incapacitation.

Note – A nominee must meet the same eligibility conditions as a shareholder.

Director – one person company should have a minimum of one director. A shareholder who does not dwell in India for a total of 182 days in a financial year will not be qualified as a director under Indian law, and if the only shareholder does not meet this criterion, a new director who meets the residency criteria under Indian law must be chosen.

Note – This is something non-resident Indians should keep in mind if they want to form an OPC.

Capitalization requirements – There is no min capital requisite to establish one person company and the need that an OPC be changed into a public or private company when its paid-up capital surpasses  ₹  I5,000,000 or its annual turnover exceeds ₹  20,000,000 is no longer in effect as of a April 2021.

Restricted business activities – An OPC is prohibited from engaging in two sorts of business operations: first, ‘Non-Banking Financial Investment’ activities, such as investing in a body corporate’s securities. Despite the fact that the phrase “Non-Banking Financial Investment” is not defined in Indian company law, it is widely understood to apply to any activity that a Non-Banking Financial Company can engage in and second, an OPC cannot be formed as or converted into a company related to charity under the Section 8 (c) ,2013

Conversion – if a one person company wish or want to change its company into public or private limited company, it can be done anytime provided by its meeting Indian law’s minimum need for the number of directors and shareholders, as well as the given technical necessities – the limitation on volunteer changes only after two years from the date of establishment, or beyond certain thresholds for annual turnover and paid-up capital, is no longer in effect.

It simply indicates that the sole shareholder doesn’t have to wait two years, or for the annual turnover to surpass ₹ 20,000,000, or for the first put in share capital to exceed ₹ 5,000,000 before changing the One Person Company to a public or private limited company, as of 1 April 2021. As a result, the process for converting an OPC to a private or public limited partnership is also generally cost-effective.

Taxation – A One Person Company is taxed in the same way as any other domestic corporation.

Incorporation and dissolution – The process and timetable for forming an OPC are comparable to those for forming any other sort of share-capital Company, but with simpler charter paperwork. However, because the price of incorporating a company with share capital in India is mainly determined by the authorized number of directors, share capital, and the area in which it is incorporated. incorporating an One Person Company with a share capital of more than ₹1,600,000 saves a significant amount of money or else incorporating an One Person Company is just as expensive as incorporating any other type of company with share capital.

Limitations of one Person Company

Raising funds through loans or non-convertible debentures – as one Person Company can own only one shareholder, money cannot be raised up through the issuance of convertible debentures or shares until it changes to a public or private limited company. And one person’s company must restrict itself to raise funds through loans or non-convertible debentures. The same approach applies to the issuing of sweat equity shares and employee stock options – there may be some structuring choices for employee stock options that need forced OPC conversion, but these options should be carefully considered.

Reduced penalties –  One person company can now have the advantage of reduced penalties under Indian law, according to a recent modification , penalties for any non-compliance cannot surpass half of the stipulated penalty, up to a max of ₹ 200,000 for the One Person Company and ₹ 100,000 for the default officer .The maximum capital is not applicable  to all non-compliances; rather, it only applies when one-half of the suggested penalty for a non-compliance reaches ₹ 100,000 for the officer and ₹ 200,000 for the  one person company in default .

Perpetual succession and limited liability – A one-person company is a legal entity that is treated as a separate legal entity under the law, comparable to a limited liability partnership or a traditional corporation, and the lone shareholder’s liability is limited to the membership fee paid by that shareholder.

Reduced Compliances – Depending on the number of directors (only two board meetings with a 90-day break between them are allowed) and other general compliances, there may be less or no board meetings. Compared to other companies under Indian law, OPCs enjoy some, but not extensive, relaxations – key relaxations include exemption from holding annual general meetings, and fewer or no board meetings depending on the number of directors (only two board meetings with a 90-day gap between them are allowed). No requisite for statutory auditor rotation, exemption from planning a cash flow statement as part of the business statements, and auditors’ discretion to not specify whether or not there are adequate internal financial controls with reference to the one person company financial statements, and also the operating effectiveness of such controls.

Conclusion

We would say, one person company is a perfect choice for sole proprietors, since it provides them with the fundamental benefit of limiting their responsibility. And also, with the recent, start-ups, particularly those with single founders (and without co-founders) or with shoestring budgets (with necessary contractual protection), can consider incorporating an OPC and focusing on the business or the idea, until they find a co-founder or operations scale up and intend to raise funds, at which time they can convert the one person company into a private limited company. In any event, reach out to the experts at Vakilsearch for advice on the best course of action for you and your business needs.

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