The Companies Act of 2013 is a major milestone for one person company registration in India. It enables a single person to organise a company and reap the benefits of both a sole proprietorship and a corporation. This concept became available following the implementation of the Companies Act in 2013. One of the major goals of an OPC was to encourage entrepreneurship and the corporatisation of small entrepreneurs. It has all of the benefits of a Private Limited Company, like perpetual succession and a separate legal entity, among others but the liability for an OPC differs in a number of ways from other forms of company under the Act.
Further, even though all of the shares in an OPC are owned by a single person, the fact that the company is a separate legal entity stays unaffected. One of the fundamental disadvantages of corporate formations such as sole proprietorship and partnership is the unrestricted liability imposed on the members. This frequently discourages and stifles business growth and stops members from expanding it to new boundaries. In this context, the liability for an OPC becomes a major boon for entrepreneurs looking to register their business in India.
Characteristics of an OPC (One Person Company)
An OPC has several peculiar features or characteristics, which are as follows:
1. Eligibility of Sole Member:
Only a natural person who is an Indian citizen and a resident of India is qualified to establish a one-person business and assume the role of the business’s single member.
2. Nomination of Sole Member:
An essential distinction of OPCs is that the sole member must nominate a candidate during the entity’s registration. A person is restricted from incorporating or joining multiple One Person Companies as a nominee.
3. Minor Involvement Restriction:
Minors are not permitted to possess beneficial interests in shares, become members or be nominated as candidates of the OPC.
4. Limitation on Conversion under Section 8:
The OPC cannot be incorporated or transformed into a company as per the provisions of Section 8 of the Act.
5. Prohibition on Certain Financial Operations:
Engaging in non-banking financial investment activities, such as purchasing corporate securities, is not allowed for OPC.
6. Corporate Structure Change Limitation:
The OPC is restricted from altering its corporate structure unilaterally within the first two years of incorporation. This limitation is subject to exceptions, such as a paid-up capital increase of over 50 lakh rupees or an average annual turnover surpassing two crore rupees.
7. Resignation Requirement for Dual Memberships:
If a natural person, already a member of one OPC, joins another as a nominee within 180 days, they must resign from one of the OPCs.
8. Mandatory Mention of OPC Status:
The term ‘One Person Company’ must be enclosed in brackets beneath the company name wherever the company’s name is presented, attached or engraved.
Benefits of a One Person Company (OPC)
There are a number of benefits associated with an OPC in India. These are as follows:
Limited Liability Protection:
A distinctive advantage of a One Person Company is the provision of limited liability for an OPC, which means limited liability to its proprietor. With a sole shareholder, the owner is solely accountable for the company’s debts and losses. This shields personal assets from potential business-related claims and legal actions. The detailed
Low Setup Costs:
OPCs entail minimal setup expenses in comparison to alternative corporate structures. This affordability empowers small business owners and aspiring entrepreneurs to initiate their ventures without substantial financial commitments.
Ease of Compliance:
OPCs are subject to reduced regulatory obligations compared to other corporate entities, simplifying compliance with relevant laws. This simplified compliance process is conducive to business operations and management.
Flexibility in Management:
OPCs offer operational flexibility, allowing the owner to make quick decisions without the need for extensive consultations. This adaptability accelerates decision-making processes.
Separate Legal Identity:
An OPC possesses its distinct legal identity, separate from its owner. This legal status allows the company to enter into contracts, own assets and sue or be sued in its name, enhancing business credibility.
Perpetual Succession:
The concept of perpetual succession ensures the continuity of the OPC, even in the event of the owner’s demise. This characteristic assures stakeholders of the company’s enduring existence.
Single Ownership Control:
With a solitary shareholder, the owner enjoys complete control over decision-making and operations, facilitating efficient execution of strategies.
Access to Funding:
While OPCs may start small, they can attract external investment as the business grows, enabling expansion and diversification.
Tax Advantages:
OPCs benefit from the same tax rates and exemptions as other corporate entities, offering potential tax advantages to the owner.
Professional Image:
Having a registered OPC lends professionalism and legitimacy to the business, encouraging trust among clients, partners and stakeholders.
Ideal for Small Ventures:
OPCs suit entrepreneurs seeking to establish and manage their enterprises single-handedly, without the complexities of a larger corporation.
Limited Liability For an OPC
As stated previously, the liability for an OPC is limited. The Limited liability for an OPC can be understood through the following:
Separation of Liability for an OPC:
A prominent advantage inherent to an OPC pertains to its limited liability provision, i.e. limited liability for an OPC or limited liability for its proprietor. By virtue of being a distinct legal entity, the liability for an OPC remains distinct from that of the shareholder. The volatile nature of business often places it beyond the direct control of the owner or director. Consequently, an OPC ensures that the personal assets of the business proprietor remain safeguarded in unforeseen circumstances.
Protection of Personal Assets:
In contrast to a proprietorship firm, where the proprietor’s personal assets could be jeopardised, OPCs provide a protective shield. Here, liability for an OPC is confined to the shares held by the shareholder. Thus, losses or debts incurred during the regular course of business do not encroach upon the entrepreneur’s personal assets.
Mitigating Debts and Liabilities:
While a proprietorship firm would compel the owner to shoulder debts and liabilities personally, an OPC’s limited liability feature curtails such obligations. Instead, the shareholder’s liability is proportional to the extent of the unpaid subscription funds.
Contractual Obligations:
The distinct legal identity of an OPC extends to its contractual obligations. Despite a member’s ownership of all shares in the company, contractual commitments of the OPC cannot bind the member. This fortifies the concept of separate legal entity and upholds the shareholder’s detachment from contractual liabilities.
Lifting of the Corporate Veil in One Person Company (OPC)
Liability for an OPC can be further understood through a clear understanding of the corporate veil in an OPC. The detailed explanation is given below:
Unfair Means and Corporate Veil:
While the separate legal identity of an One Person Company (OPC) safeguards the sole member from the liability for an OPC, exceptions arise in cases of misuse. Similar to private companies, where fraudulent activities can lead to the lifting of the corporate veil, the same principle applies to OPCs and in such cases the liability for an OPC and its proprietor may get mixed. If the sole member employs unfair practices, the corporate veil can be disregarded and liability for an OPC can be imposed upon him.
Personal Liability for Unfair Practices:
In instances where the sole member manipulates the company’s assets or engages in unlawful conduct, the protection of separate legal identity dissolves and so does liability for an OPC. Such actions render the individual personally accountable for the debts and losses incurred by the company.
Individual Contracts and Financial Transactions:
If the shareholder enters contracts in their personal name or fails to maintain a separate bank account for the company’s financial dealings or utilises company funds for personal purposes, the shareholder assumes personal liability for resultant losses.
Balancing Limited Liability and Accountability:
Understanding the interplay of limited liability and accountability in OPCs is essential. While OPCs offer advantages like streamlined fund acquisition, reduced compliance obligations and limited liability, misuse of this structure can lead to personal liabilities for the sole member and dilution of the separation between liability for an OPC and the sole member.
The OPC framework, despite these considerations, remains an appealing choice for entrepreneurs. Its benefits, including ease of fund access and liability mitigation, position it as an attractive alternative to sole proprietorships. With its success in other countries, the concept of OPC holds the potential to go well within India’s entrepreneurial landscape.
Final Thoughts
The arrival of OPC registration through the Companies Act of 2013 has brought exciting changes to how businesses operate in India. Designed to blend the benefits of being alone in charge (like sole proprietorships) with the strengths of bigger companies, OPCs are a new way for such sole entrepreneurs. These changes were made to help small businesses and encourage people to try new things. One significant benefit that entrepreneurs gain from registering an OPC is the liability for an OPC as has been discussed throughout this blog.
OPCs provide the advantage of maintaining a clear distinction between personal and business assets, thus facilitating enhanced organisation. Additionally, the initial setup costs associated with OPCs are comparatively lower and adherence to regulatory protocols is more simplified. Despite the presence of certain regulations pertaining to equitable practices, OPCs remain a very good option for entrepreneurs. It represents an option that can effectively help individuals to realise their entrepreneurial aspirations and also presenting an opportunity to redefine the business landscape in the Indian context.
For more information on Liability for an OPC, connect with our experts at StartupFino.
