Conversion of OPC into Private Company

Overview of Conversion of OPC into a Private Company

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Over the years, the corporate landscape in India has changed tremendously. Business structures have evolved over time to cater to the growing needs of entrepreneurs, startups, and corporations. Data shows that at the end of March 2024, there were 2,663,016 companies registered in India. The Companies Act of 2013 introduced One Person Company that allowed entrepreneurs to operate their businesses single-handedly. One Person Company is generally referred as an OPC that opens doors for entrepreneurs who want to establish their business entity alone in the market. But as business grows, it needs expansion, funding, and a more organized structure to accommodate increased market demands and operations. Many entrepreneurs at this stage find the OPC designed for a one-member company may no longer be sufficient to support the growing needs of their businesses. In such cases, the conversion of an OPC into a Private Limited Company is the most suitable option. It offers many benefits like better flexibility in terms of ownership, raising more capital, better credibility in the market, and perpetual succession. The conversion allows the business to expand its operations by attracting more investors. Converting OPC into a Private Limited Company is not a tough process. It requires proper documents and an expert who shall guide you at every step. In this guide, we will walk you through the benefits, requirements, and procedures for the conversion of an OPC into a Private Limited Company in India.

What is OPC and Private Limited Company?

One Person Company (OPC)

An OPC is a business structure in which one person is allowed to form a company. Governed by the provisions of the Companies Act 2013, OPC offers the benefits of limited liability protection, fewer compliance requirements, full control over the business, and a separate legal entity. This model is ideal for small business owners who wish to start their business independently without involving partners or shareholders.

Private Limited Company (Pvt Ltd)

A Private Limited Company is one of the most common business structures in India. It is a separate legal entity, distinct from its owners. A minimum of two shareholders are required to form a Private Limited Company in India. It offers benefits like limited liability, separate legal entity, easier access to funding, transferability of ownership, perpetual succession, and various tax benefits.

Reasons to Convert OPC into a Private Limited Company

OPC may get converted into a Private Limited Company in India due to the following reasons:

1. Annual Turnover of the Business exceeds ₹2 Crores: If the annual turnover of the OPC exceeds ₹2 Crores in any financial year, then it is mandatory to convert it into a Private Limited Company.
2. Raise of Capital: The OPC has only one shareholder, which makes raising capital tough for the business. Private Limited Companies can raise funds more easily by issuing shares to investors.
3. Need for more Shareholders: As businesses grow, they often need more capital, which can be generated by bringing more shareholders into the company. An OPC is limited to only one shareholder, whereas a Private Limited Company can have a maximum of 200 shareholders.
4. Expansion of business: For the expansion of business, a better formal setup, formal organisation, multiple management layers, and better governance are required. A Private Limited Company provides better structure and flexibility to accommodate these changes in the company.
5. Flexibility in Ownership Transfer: Shares can be easily transferred in a Private Limited Company which is useful for succession and restructuring of ownership. OPC does not provide this kind of flexibility, as ownership stays confined to only a single individual.
6. Attracting Investors: For businesses looking to enter joint ventures or partnerships or attract venture capital, the Private Limited Company structure is a more suitable option than OPC.

Eligibility for Converting OPC to a Private Company

Before converting an OPC into a Private Limited Company, the following eligibility criteria must be met:

• Number of Shareholders: OPCs are owned by a single person, whereas a Private Limited Company requires a minimum of two (2) shareholders to exist in India. To convert an OPC into a Private Limited Company, you need to bring in an additional shareholder.
• Director Requirement: OPCs have only one director, whereas a Private Limited Company needs a minimum of two (2) directors. Therefore, an additional director must be appointed in order to convert an OPC into a Private Limited Company.
• Paid-up Share Capital: OPCs are allowed to have lower paid-up capital, whereas a Private Limited Company needs a minimum paid-up capital of ₹1 lakh. In some cases, this requirement can be adjusted according to the nature of the business. In order to convert an OPC into a Private Limited Company, it needs to have a paid-up capital of more than ₹1 lakh.
• Duration of Operations: The OPC must be operational for a minimum of two years before converting into a Private Limited Company. Rule 6(1) of the Companies (Incorporation) Rule, 2014 specifies that an OPC can only be converted into a Private Limited Company after it has been in operation for a minimum of two (2) years from the date of its incorporation.

Benefits of Converting OPC to a Private Limited Company

Converting an OPC to a Private Limited Company offers several advantages, such as:

1. Ease of Raising Capital

Private Limited Companies have better access to funding sources than OPCs. They can raise capital through private equity, venture capital, and angel investors. As OPCs are limited to a single shareholder, they have limited scope for raising funds. A Private Limited Company can issue shares to multiple investors, and prominent venture capitalists and private equity firms prefer investing in Private Limited Companies because of the structured nature of the organisation.

2. Expansion and Growth

The noteworthy benefit of converting an OPC into a Private Limited Company is the ability to bring multiple shareholders. A Private Limited Company can have a maximum of 200 shareholders, and new partners join the company to contribute to raising capital and network.

3. Limited Liability

Both OPCs and Private Limited Companies offer Limited Liability to their stakeholders. The liability of the owners, i.e., shareholders, is limited to their capital contribution, and their assets are protected from business-related debts.

4. Perpetual Succession

A Private Limited Company offers perpetual succession, which means it continues to exist even in the event of the death, insolvency, or incapacity of the shareholder of the company. The business remains operational without disruption, and ownership can be transferred easily. In OPC, business may end with the death of the owner or its inability to operate its business. Perpetual succession allows the company to outlive its initial owners.

5. Access to Better Business Opportunities

Converting an OPC into a Private Limited Company opens new doors for numerous business opportunities that are often not available to the OPC. Private Limited Companies have access to government tenders, large-scale projects, and many contracts. Furthermore, many large corporations and organizations prefer working with private limited companies due to their vast structure and better management than OPCs.

6. Attract Investors

Investors usually prefer investing in Private Limited Companies over OPCs because of their structured corporate governance and transparency. The Private Limited Companies have a Board of Directors, a better organisational structure and undergo more rigorous auditing and financial reports that provide investors transparency and confidence in the financial health of the company. Venture Capitalists and Angel Investors are more likely to invest in Private Limited Companies.