The One Person Company (OPC), established under the Companies Act of 2013, was a boon to solo entrepreneurs who wanted to form their firms as private limited companies but without involving any further members. As the name implies, the only member or shareholder of the firm is the centre of attention in an OPC, which distinguishes it from other corporate arrangements. This blog will explore whether a One Person Company is really incentivised or not.
Experts believe that an individual who intends to implement it through a business regime should not be obliged to do it as a group. In this case, the individual needs to be provided a platform to act efficiently, even if he or she is the only member. For this reason, the Act introduced the innovative concept of One Person Company. Furthermore, the Act provided for a few compliances for the incorporation of an OPC.
Steps by Government to Incentivise One Person Company in India
The Indian government has taken active steps to incentivise the establishment of one person companies (OPCs) as a means to help entrepreneurship and enhance the business environment within the nation. These measures are aligned with the objectives of facilitating business operations and nurturing entrepreneurial aspirations.
According to the stipulations outlined in the Companies Act of 2013, OPCs can be registered with a minimum paid-up capital of just Rs. 1 lakh. Additionally, OPCs are entitled to a range of advantageous provisions, including relaxed compliance obligations and notable income tax benefits.
The underlying rationale behind the government’s incentives towards OPCs is to inspire a broader class of entrepreneurship as a viable and attractive career path. By simplifying the process of establishing and managing a company, the government aims to create more in entrepreneurial endeavours.
Notably, the distinct feature of OPCs lies in their lenient compliance provisions, setting them apart from other corporate structures. This leniency significantly simplifies the operation of an OPC for individual entrepreneurs when compared with the demands imposed on other corporate forms.
Provisions Governing OPC Prior to Companies (Incorporation) Second Amendment Rules 2021
In order to further understand whether a One Person Company is really incentivised or not, it is essential to look at the provisions that govern OPCs presently and how they used to be prior to the 2021 amendment.
Prior to the enactment of the Companies (Incorporation) Second Amendment Rules of 2021, the regulatory framework laid out in the Companies (Incorporation) Rules of 2014 delineated the provisions concerning one person companies (OPCs):
1. Conversion Criteria for OPCs:
The rules stipulated that an OPC could undertake conversion into a public or private limited company only when its paid-up share capital exceeded 50 lakhs or its annual turnover during the specified period surpassed 2 crores. Additionally, voluntary conversion of an OPC was permissible only after a duration of 2 years from its date of incorporation.
2. Conversion of Private Companies into OPCs:
Private companies having a paid-up share capital of 50 lakhs or less or an annual turnover not exceeding 2 crores, were authorised to convert into an OPC. This transformation could be made through the passage of a special resolution during a general body meeting of the company.
3. Restrictions on Incorporator:
The incorporation of an OPC was limited to a natural person who met specific criteria. The individual had to be an Indian citizen and a resident of India. Residency entailed a minimum presence of not less than 182 days within the preceding calendar year in the country.
Reforms to Prove Whether a One Person Company is Really Incentivised
The year 2021 witnessed significant changes brought about by the Companies (Incorporation) Second Amendment Rules 2021, reflecting the Union Budget’s emphasis on nurturing innovation and supporting start-ups in India. The amendments aimed at incentivising One Person Companies (OPCs) by liberating several restrictions. By understanding these provisions, one can clearly realise whether a One Person Company is really incentivised or not.
Notable changes to the rules were as follows:
1. Conversion Flexibility to prove that a One Person Company is really incentivised:
OPCs gained freedom to convert into public or private limited companies without being bound by constraints related to paid-up share capital, annual turnover or the duration since incorporation. These changes served to increase the options available to OPCs seeking to evolve their corporate structure. This proves that a One Person Company is really incentivised.
2. Inclusion of NRIs:
The amendments welcomed Non-resident Indians (NRIs) into the fold of OPC formation, allowing them to establish OPCs and participate in nominee roles, thus opening doors for a broader entrepreneurial base, proving yet again that a One Person Company is really incentivised by the government.
3. Reduced Residency Requirement:
The stipulated residency requirement for OPC incorporation was shortened from 182 days to 120 days, easing the geographical criteria for potential OPC initiators.
These changes, in effect from April 2021, substantially boosted the appeal of OPCs. The revised provisions dismantled previous barriers and are projected to draw growing talents into OPCs. While it is acknowledged that the appeal of these incentives might not surpass that of establishing public or private limited companies, they could undoubtedly encourage aspiring sole entrepreneurs to start their business journeys by establishing an OPC that is really incentivised.
Legal, Regulatory and Compliance Imperatives for One Person Company
Establishing a One Person Company (OPC) involves specific legal, regulatory and compliance obligations which when compared with other types of companies allowed under the legal regulations, proves that a One Person Company is really incentivised.
The basic legal, regulatory and compliance obligations and features of an OPC are:
1. Incorporation Type and Membership:
- OPCs are a new type of company in India, catering to solitary ownership.
- OPCs exclusively assume the form of private companies, preventing stock exchange listing and generally having a limited number of shareholders.
2. Minimum Paid-up Capital:
- This fundamental condition demands a minimum paid-up capital of Rs. 1 lakh for OPCs. This stands in contrast to the Rs. 5 lakh requirements applicable to other company types.
3. Regulatory Flexibility:
- OPCs present a more simplified regulatory and compliance framework compared to traditional entities, reflecting their single-member structure.
Tax Implications of One-Person Company (OPC)
A One-Person Company (OPC) carries tax implications that contribute to its appeal as a business entity. This structure, which features a solitary member, brings about several benefits compared to other business models, such as sole proprietorships that once again shows that a One Person Company is really incentivised.
The tax-related advantages of an OPC are:
1. Limited Liability Protection:
One of the primary tax-related advantages of an OPC is its liability protection. The structure shields the member’s personal assets from being used to settle company debts or legal claims. Consequently, personal liability is restricted to the assets invested in the company.
2. Credibility Enhancement:
An OPC can boost the credibility of the business. While being a sole business owner might suggest hesitancy in potential clients and partners due to uncertainties about financial stability, the existence of an OPC demonstrates commitment and stability. This, in turn, can facilitate business dealings and partnerships.
3. Tax Flexibility and Planning:
OPCs provide tax flexibility, allowing the proprietor to employ tax planning strategies that can optimize tax liabilities. By separating personal and business assets, OPC owners can often achieve greater control over their tax obligations.
4. Beneficial Tax Rates:
OPCs can take advantage of beneficial tax rates applicable to corporate entities, which might be lower than individual tax rates in certain scenarios. This can lead to tax savings for the owner.
5. Income Tax Slabs and Deductions:
OPCs can use applicable income tax slabs and deductions that cater to corporate entities. This can potentially reduce the overall tax burden for the business owner.
Final Thoughts
The concept of One Person Company (OPC) in India has been introduced with the aim of providing a simplified yet effective framework for solo entrepreneurs to establish their businesses. The recent amendments and provisions in the Companies Act, such as the flexibility in conversion, inclusion of NRIs and reduced residency requirement, have aimed to enhance the appeal and sustainability of OPCs as a business structure, answering the most asked question – whether a One Person Company is really incentivised? The answer to this comes out in the affirmative as dealt in the sections above.
While OPCs hold great promise and have been incentivised through regulatory amendments, continued observation, evaluation and potential refinements are important to truly understand their effectiveness in promoting entrepreneurship, safeguarding businesses and contributing to the economic growth of India.
