A sole proprietorship business is a kind of business that is run by one single individual. The lone proprietor/owner who invests in the firm has complete control of the business. He suffers all of the company’s losses and reaps all of its earnings. He can designate people to run the firm, but he will retain full ownership.
A One Person Company is essentially a firm with a single shareholder as a member. One person companies offer additional benefits such as limited liability, legal status and corporate identity, quick decision-making, flexibility in management, easy bank operation and lower taxation responsibilities. One-person companies are an excellent medium-sized business organisation structure. Converting a sole proprietorship to a one-person corporation is a good business option because it is an improved and better form of a sole proprietorship enterprise.
Benefits of Converting a Sole Proprietorship into a One Person Company
The advantages of converting sole proprietor ship into one person company are as follows:
- Limited Liability:
Converting a Sole Proprietorship into an OPC introduces a significant advantage that is limited liability. In a Sole Proprietorship, the business owner holds unlimited liability for all business debts and obligations, putting personal assets at risk in times of financial or legal troubles. However, upon converting to an OPC, the individual’s liability is limited to the invested capital, creating a protective shield for personal assets and ensuring their safeguard in times of financial challenges faced by the company. This shift provides enhanced financial security for the individual and mitigates the risks associated with personal finances.
- Separate Legal Entity:
In the eyes of the law, an OPC is deemed a distinct legal entity. This separation provides the OPC with its own identity, free from its owner’s influence. As a separate legal entity, the OPC is empowered to engage in contracts, acquire assets and initiate or defend legal actions under its own name. Such autonomy gives increased credibility upon the business, raising trust among customers, suppliers and other stakeholders.
- Perpetual Existence:
In contrast to a Sole Proprietorship, where the business’s continuity relies on the proprietor’s life, an OPC benefits from perpetual succession. This signifies that the OPC’s existence remains unaffected even if the owner passes away or chooses to retire. Changes in ownership do not disrupt the OPC’s operations, ensuring seamless continuity and stability for the business.
- Easy Transferability:
Converting to an OPC allows for the transferability of shares. This feature makes it easier for the owner to bring in new investors or transfer ownership to family members or partners. It facilitates the infusion of capital into the business and also offers an exit route for the owner when needed.
- Fewer Compliance Requirements:
OPCs have fewer compliance requirements compared to other types of companies. The regulatory burden is lower, making it easier for the owner to comply with legal formalities and focus on business operations.
- Tax Benefits:
Certain tax advantages may be enjoyed by OPCs, including tax deductions and allowances, contributing to the reduction of the overall tax liability. Furthermore, in some instances, OPCs might be subject to lower tax rates compared to individual business owners, potentially resulting in cost savings and heightened profitability.
- Improved Funding Opportunities:
Converting to an OPC can open up new avenues for raising capital. An OPC can issue shares to investors, allowing them to become shareholders and contribute financially to the company’s growth. This infusion of capital can be instrumental in expanding the business, investing in new projects or improving existing operations. Additionally, an OPC may find it easier to attract funding from financial institutions compared to a Sole Proprietorship.
- Professional Image:
Operating as an OPC presents a more structured and regulated business image. This enhanced professionalism can instil confidence in customers, suppliers and potential partners, leading to better business opportunities and stronger long-term relationships.
Limited Statutory Audit:
OPCs with a turnover below a specific threshold are exempted from the requirement of conducting a statutory audit. This exemption reduces compliance costs for smaller businesses and provides a financial advantage over other forms of companies that may require mandatory audits.
Documents Needed for Proprietorship to Convert into a One Person Company
There are numerous documents needed for a sole proprietorship to convert into an OPC. These are:
- Details of the Director: Comprehensive information about the individual who will be the sole director of the OPC, including name, address, contact details and any other relevant particulars.
- No-Objection Certificate (NOC): Obtain NOCs from relevant parties like creditors, customers and suppliers, indicating their non-objection to the conversion and willingness to continue association with the new OPC.
- Memorandum of Association (MOA) and Articles of Association (AOA): Draft and submit these important documents that define the OPC’s constitution, objectives and operational scope, following Indian corporate laws.
- Address Proof: Provide valid address proof of the registered office for the newly formed OPC, which can be in the form of a rental agreement, utility bills or other verifying documents.
- Certificate of Incorporation: The CoI serves as legal proof of the OPC’s existence and incorporation date and is issues by the Registrar after scrutiny of all documents.
- Ownership Proof: This includes proof of ownership for the existing sole proprietorship, like say property deeds, lease agreements, etc.
Procedure for Conversion of Proprietorship into One Person Company (OPC)
Converting a sole proprietorship into a One Person Company (OPC) involves several steps and legal procedures. The conversion process includes the following steps:
- Eligibility Check: Ensure that the sole proprietor meets the eligibility criteria for converting the business into an OPC. The following conditions must be satisfied:
- The sole proprietor must be a natural person and an Indian citizen.
- Only one person should be the member of the OPC.
- The sole proprietor should not be a member or nominee of any other OPC.
- Obtain Digital Signature Certificate: The proprietor needs to obtain a Digital Signature Certificate as it is required for online filing and verification of documents with the Ministry of Corporate Affairs.
- Apply for Director Identification Number: If the sole proprietor does not already have a DIN, they need to apply for it. DIN is a unique identification number allotted to individuals who wish to be directors of companies in India.
- Choose a Suitable Name for the OPC: Select a name for the OPC following the naming guidelines prescribed by the Companies Act, 2013. The name should be unique, not identical or similar to any existing company or trademark.
- Preparation of Documents: Gather the necessary documents, including identity proof, address proof, PAN card, passport-sized photographs and other required documents.
- Board Meeting: Hold a board meeting of the sole proprietorship to pass a resolution for conversion into an OPC. The proprietor will become the sole director of the OPC.
- Drafting of Memorandum and Articles of Association: Draft the Memorandum of Association and Articles of Association of the OPC. These documents define the company’s objectives, rules and regulations.
- Obtain No Objection Certificate: Obtain a No Objection Certificate from the sole proprietor to ensure that the proprietor has no objections to the conversion into an OPC.
- Filing of Forms with the Registrar of Companies: Prepare the required forms like INC-32, INC-33 and INC-34 that contain information about the company and its directors and submit them to the Registrar of Companies along with the necessary documents and fees.
- RoC Approval: The RoC will review the submitted documents and forms. If everything is in order, the RoC will issue a Certificate of Incorporation for the OPC.
Final Thoughts
Converting a sole proprietorship into a One Person Company (OPC) in India presents various advantages, such as limited liability, reduced individual responsibility, access to capital, enhanced credibility, ease of ownership transfer and potential tax benefits. By undergoing this transformation, entrepreneurs can elevate their businesses to a more structured and regulated platform, encouraging growth and expansion.
The OPC framework offers greater financial security, instils confidence in stakeholders and facilitates strategic decision-making. However, careful consideration of individual needs and seeking professional advice from experts like at StartupFino are very important. Overall, the conversion to an OPC represents a prudent choice for small business owners seeking a better business organisation with ample growth opportunities.
