In this article, Jojongandha Ray pursuing Diploma in Entrepreneurship Administration and Business Laws from NUJS, Kolkata, discusses the Advantages of a private company over one person company.
One Person Company
One Person Company (OPC) is a concept where a single person forms the company. In India, in the year 2005, the JJ Irani Committee recommended the formation of OPC. The idea of OPC comes from other countries, whose corporate regime primarily benefits the young entrepreneurs. Such a structure gives easy access to credit, bank loans, limited liability. Legal protection for business and access to market. OPC, by its name, means a company with one person where legal and financial liability is restricted to the company, that is only to that person. Single member company’s legal characters lie in the singularity of shareholder and the particularity of its corporate governance structure. Thus it increases the possibility for the single shareholder to abuse the rights and damage the interests of company’s creditors. In order to protect the company’s creditors, it is necessary to regulate single member company strictly and set up integrated creditors protection rules.[1] The statute defines OPC, in Section 3(1) of the Companies (Incorporation) Rules 2014, where a natural person who is an Indian citizen and resident in India shall be eligible to form an OPC. Also, at the time of incorporation, the sole member has to appoint another person as his nominee and his name shall have to be mentioned in Memorandum of Association of the OPC.
PRIVATE COMPANY
A private limited company is an ideal example of how the law has made it easy for entrepreneurs to do business. It has several advantages. They are:
- Separate Legal Entity
- Uninterrupted existence
- Fixed liability
- Capacity to sue and be sued
- Borrowing Capacity
In a private company, the business owners hold all shares of the company privately. Shareholders may operate the business themselves, or hire directors to manage the company on their behalf. Registering private limited company results in protection of personal assets, access to more resources, financial assistance and greater credibility. Section 2(68) defines private company as a company having minimum paid capital of one lakh and which in its articles –
- Restricts the right to transfer its shares
- Limits the number of its members to two hundred
Provided there are two or more people hold one or more shares jointly, then they shall be treated as one member. The definition also includes a rider which says that provided that persons who are in employment and persons who were formerly employed will not be included in the minimum statutory requirement of members. The definition clearly prohibits any invitation to the public for the subscription of the securities.[2]
DIFFERENCES BETWEEN AN OPC AND PRIVATE COMPANY
There are major differences between the two types of company. The statutory requirement in an OPC is less. It needs one member and one nominee, whereas two members are necessary for a private company. Investors prefer a private corporation because of the lack of compliance hassles and access to statutory benefits. Also, one important aspect of a private company is that it can be converted into a limited liability partnership easily, without any minimum time period compliance.Certain differences when elaborated gives rise to advantages over an OPC:
1. The person incorporating the OPC must be a natural person implying that it cannot be formed by a juristic person or an artificial person. Thus ownership is restricted to only individuals and not corporations. The owner has to be a resident in India, which means a person who stays in India for minimum of 182 days in that particular calendar year.
2. The legal structure also restricts foreign direct investment, as only foreigners and NRIs are allowed to invest in a private limited company under Automatic Approval where 100% foreign direct investment is available in most sectors. Thus, an OPC falls behind when it comes to foreign companies and MNC’s who want to incorporate their subsidiaries in Indian as an OPC. The private company is in an advantageous position as it can issue debentures and accept deposits from the public.
3. Even though the idea of OPC is to enable an individual to start his own business without the need to have a partner but, procedurally a suitable nominee has to be selected. This creates difficulties, as the nominees has a choice to withdraw their consent and thereby making it difficult for the individual to find another nominee, obtain his consent, amend his memorandum and communicate to the registrar.
4. ESOP is a very viable option for a start up who want to provide a performance appraisal system in form of stock options. But there cannot be any sweat equity shares or ESOP in an OPC. It can only be implemented if OPC converts into a private or public limited company, which can lead to an increase it capital and allot shares to third parties. Infact, in a private company, a shareholder has the privilege to transferring his shares to other shareholders. The transferability of shares is free and easy by just filing and signing a share transfer form. In an OPC, on the contrary, the question of transfer does not even arise. Also, when it comes to adding minors as shareholders, a private company can have them when fully paid up shares are transferred or passed on through transmission. But in an OPC, a minor can never be a shareholder. This reduced the chance of having a diverse shareholding or even the chance of having shareholders.
5. Moreover, an OPC cannot be incorporated under Section 8 of the Companies Act 2013, which is the formation of companies with charitable objects. It can only be converted into a private or public company only when it has existed for a minimum of two years, or it has a paid-up share capital of more than Rs. 50,00,000 or, it has an average turnover of more than Rs. 2,00,00,000. Such restrictions reduce the options for the entrepreneur and make it less flexible to change to modify the business structure.
The structure of an OPC discourages financial institutions to invest in OPC’s. They demand various credit facilities as they have a very limited liability.
6. There are a lot of procedural complexities, like the terms of conducting AGM, EGM, Quorum of meetings, restriction on voting rights or filing its financial statements, yet the incorporation of such a company requires a lot of paperwork as compared to a sole proprietorship. Procedural complexities with respect to incorporation of OPC might make this concept less attractive for sole entrepreneurs.
7. The concept of OPC is not recognised under the IT Act and hence such companies will be put in the same category as other companies for taxation purpose. Private companies have been placed under the tax bracket of 30% on total income. Thus, from the perspective of taxation, the concept of OPC becomes a less lucrative concept as it imposes heavy financial burden as compared to a sole proprietorship.
8. An OPC, consists of just one person. Companies does not prefer OPC as they feel a single person will not be able to take the responsibility of all the facets of the business. It is indeed a valid point that an individual can only have expert knowledge in one or few fields. It is difficult for him to have sound knowledge about the entire transaction and its subsequent effects. Thus this makes it a less lucrative option for other companies to do business with OPC’s and also makes it difficult for the OPC to manage everything optimally. In private companies, such is not the scenario. Even though two is statutory requirement as directors but there are others, leading separate departments who look into the different aspects of any transaction and makes every decision more encompassing of all factors.
When an OPC, limited by shares or guarantee enters into a contract with a company’s director, then such contract if not written should be recorded in minutes of the meeting or mentioned in the memorandum. Also, every contract should be informed to the Registrar of the Board within a period of fifteen days of the approval of the Board of the contracting company.
CONCLUSION
There are lot of procedural benefits given to private companies by the way of the new changes made in the Companies Act. For, example a notification has been issued with respect to Section 188 of the Companies Act 2013, whereby private companies shall not be required to obtain the approval of the board or the shareholders for the purpose of entering into a contract or arrangement with a Group company. Transactions within a group is much more simpler because of this change in law. To mention an important one, a recent notification also exempts private companies from Section 180 of the Companies Act 2013 (The Board has the power with respect to certain matters by the way of special resolution) which will avoid unnecessary delays in obtaining approval of the shareholders in specific matters. The structure of an OPC was created to make it easy for young entrepreneurs to come start their business. But in certain aspects, the legislation should make it hassle free for the OPC members. India already has a Limited Liability Partnership Act of 2008, thus the OPC structure should offer something more to make it more lucrative for entrepreneurs as private company scores over it in many aspects.
[1] Journal of Politics and Law, para 1, Vol. 5, No. 3; 2012, www.ccsenet.org/jpl
[2] Section 2(68) Companies Act 2013
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