Till recently, if you wanted to set up a private company, you needed at least one other person because the law mandated a minimum of two shareholders. So, for the person wanting to venture alone, the only option was proprietorship, an onerous task since it is not legally recognised as a separate entity. Now, after the recent passing of the much-hyped Companies Bill, 2012, by the RajyaSabha, there may be hope for the budding entrepreneur. The bill that aims to bring in sweeping changes in the corporate world, has also opened the doors for the entrepreneur looking to set up a company all by himself. This has been made possible by bringing in the concept of One Person Company (OPC).
Though this concept is new in India, it has been very popular abroad, including in Singapore, USA, even Europe. "Currently, it is a grey area, and only time will tell how well this works in India," says Neerav Mainkar, founder of law firm, M Neerav & Associates. However, other experts differ. According to a research paper on the New Companies Bill by law firm Nishith Desai Associates, "A one person company is a paradigm shift in the Indian corporate regime, bringing it at par with global standards." The report also states that it will provide a significant fillip to micro and small-scale businesses.
How to set up an OPC
As the name suggests, a one person company has only one shareholder, who may also be the director. However, it can have more than one director, and up to a maximum of 15.
The process of setting up an OPC is the same as that for a private limited company. To begin with, check with the registrar of companies for the availability of a name for your company. The name will carry a suffix, 'OPC', similar to the manner in which a private company uses the suffix 'pvt ltd'.
Next, assign a 'director identification number' to each director and apply for digital signatures for all of them. You then need to draft the memorandum of association and articles of association, which embody the objectives of the company. These are to be filed with the registrar.
Since the company is owned by a single person, he must nominate someone to take charge of it in case of his death or disability. The nominee must give his consent in writing, which has to be filed with the registrar. Of course, the owner can change the nominee any time he wants to, but he will have to inform the registrar. The nominee, too, can back off at a later stage, in which case the owner will have to make a fresh nomination. Once the paperwork is complete, the registrar will issue a certificate of incorporation within seven days of receiving the documents, after which you can start the business.
An OPC is exempt from certain procedural formalities, such as conducting annual general meetings, general meetings and extraordinary general meetings. No provisions have been prescribed on holding board meetings if there is only one director, but two meetings need to be organised every year if there is more than one director. Any resolution passed by the sole member must be communicated to the company and entered in the minutes book. There is, however, no relief from the provisions on audits, financial statements and accounts, which are applicable to private companies.
Benefits & drawbacks of an OPC
The biggest advantage of a one person company is that its identity is distinct from that of its owner. Therefore, if the firm is embroiled in a legal controversy, the owner will not be sued, only the company will.
Another advantage is limited liability.
Since the company is distinct from that of its owner, the personal assets of the shareholders and directors remain protected in case of a credit default. However, a proprietorship offers no such advantage.
On the other hand, an OPC is not easy to set up. For one, it requires a lot of paperwork and is a time-consuming process. You also need to factor in the cost of establishing such a firm. For instance, you need to get a lawyer or company secretary to help you draft the memorandum and articles of association.
Though you can draft them yourself, it is advisable to take professional help as these are the by-laws that govern your company. The process may cost upwards of Rs 2 lakh.
Apart from this, you need to consider the tax implications. Your company will be taxed at 30%, which may be higher than the 10-30% for a business that is not incorporated. Other types of taxes, such as the minimum alternate tax and dividend distribution tax, may also be applicable.
Is sole proprietorship better?
Despite the advantages that a one person company offers, it may not be a viable option for everyone. In contrast to a company, a proprietorship is easy to set up. The paperwork involved is minimal since it is limited to a few business-specific approvals. Of course, the risk in a proprietorship is higher as the owner is personally responsible for the business.
As far as the taxation is concerned, the income generated from the business is clubbed with the personal income. Therefore, the tax liability would depend on the slabs in which it falls. "In some cases, a proprietorship can be a tax-inefficient way of doing business. Hence, you must carefully analyse all aspects before choosing the business structure," says Vaibhav Sankla, director, H&R Block.