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A Comparison Between a One Person Company and a Private Limited Company

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Last Updated on June 24, 2024 by Kanakkupillai

One Person Company

Definition of an OPC

Typically, these businesses are founded by a single promoter or founder. Furthermore, because of the numerous benefits one-person companies offer, entrepreneurs starting their enterprises prefer them to sole proprietorships.

An individual can create an OPC registration by executing a memorandum and meeting other conditions stipulated by the Companies Act of 2013. This Memorandum shall specify the candidate who shall be the company’s sole member in the event of the original member’s incapacity or death.

The memorandum should be delivered to the Registrar of Companies simultaneously with the registration application. The nominee may revoke his nomination whenever he chooses by presenting the required paperwork to the registrar. The member may later withdraw his nomination.

Features of an OPC

The primary traits of a one-person business are as follows:

  • Nominee: OPCs are special because just one business member must name a nominee when the business is registered.
  • No perpetual succession: The nominee can accept or deny membership in the OPC because there is only one member. This is not the case in other businesses because they do not adhere to the perpetual succession premise.
  • OPCs must have a director, at a minimum. The permitted number of directors is 15.
  • OPCs are not subject to minimum capital requirements under the 2013 Companies Act.
  • OPCs have unique privileges: Under the Companies Act, OPCs are entitled to specific exemptions and privileges that other types of businesses are not.

Advantages of an OPC

  • Safety Net: The Companies Act limits a single shareholder’s liability in the firm to the unpaid subscription money registered in his or her name. This means that his or her personal property is protected from the business’s creditors.
  • Succession: In the case of the stakeholder’s demise or incapacity, the Companies Act also allows the stakeholder to select a person to assume business control. Also, this enables the OPC to continue existing after the departure of the founding director.
  • Market Value: The benefits of a company being listed as a private limited company are also available to one-person companies established under the Companies Act.
  • Easy Credit Facilities: Banks and other financial institutions favor this type of business since it is lawful and has a permanent succession provision.
  • Easier Returns Filing: While it is required for an OPC to have its accounts audited and submit the necessary annual filings, doing so is simple with the director’s signature; a company secretary’s signature is not required.
  • Single Owner: Having a single owner is preferable to having multiple owners. Making decisions quickly and conducting business without outside interruption or ideas is tremendously advantageous. Those who feel a sense of belonging grow their enterprises.
  • Easy Funding: A private limited company can raise money through venture capital, angel investors, banking institutions, etc. if it is a one-person business. Any OPC can raise money and transform it into a private business.
  • Limited Liability: One advantage of an OPC is that the owner can take more business risks without worrying about losing any personal assets or being exposed to excessive responsibility because the one-person company’s liability is restricted to the amount of each share’s worth. It serves as a form of support for fresh, young, and creative business startups.
  • Separate legal entity: The member grants the OPC independent legal entity status. Its distinct legal status protects the sole person who incorporated the OPC. The member is not personally liable for the company’s loss; instead, his or her guilt is limited to the value of the shares he or she owns.

Disadvantages of an OPC

  • Only the firm’s members may get shares from the company.
  • The Income-tax Act does not allow OPC firms any exemptions. The corporation is subject to a flat tax rate of 25%.
  • Although OPC is a relatively small company, it is nevertheless required to complete all yearly compliances within a certain period, whether or not the company holds an annual general meeting. If OPC fails to complete the annual compliances, the company will be fined.
  • OPC cannot transition to a Section 8 corporation.
  • Suppose a business’s paid-up capital exceeds 50 lakh rupees and its annual revenue surpasses 2 crore. In that case, it is required to convert to a private or public limited company.
  • OPC cannot conduct its function as an NBFC or engage in any business activities relating to finance.
  • Before issuing any shares, a corporation must transform into another company; it cannot offer ESOS or ESOP to its employees.
  • During the company’s existence, the member must designate its nominee, who may only be a natural person.

Private Limited Company

Definition and Features

According to Section 2(68) of the Companies Act 2013, a private limited company is a distinct legal person with limited liability that is privately held. Unlike other public firms, it does not offer its shares for free transfer to the general public. With a private limited company, the firm alone is responsible for all business losses and obligations, and shareholders may not be held liable for debts acquired by the company.

Features of a Private Limited Company

Formally registered companies must have vital documents like articles of association and taxation since they are registered as official legal entities.

  • Separate legal entity: This company’s legal identity is distinct from its owner’s. The owner’s finances are separate from those of the business. The owner’s liability does not extend to the company’s legal or debt issues.
  • Owner: They’re referred to as stockholders. There is at least one shareholder in the business. These could be people, trusts, associations, or different companies.
  • Limited liability: Shareholders are only partially liable. Their liability for the company’s debt is waived. So, stockholders only have minimal accountability if a corporation fails to pay its debts or declares bankruptcy. Shareholders’ private property cannot be used to settle debts. They merely lost the money they had put into the company.
  • Operation: The shareholders choose the Board of Directors to run the company and represent their interests. The Board of Directors is in charge of managing daily operations and making all corporate decisions. Moreover, shareholders occasionally hold the position of director.
  • Double tax: Taxes are paid by shareholders on their income. Also, corporations pay corporate taxes. This results in double taxation.

Advantages of a Private Limited Company

The benefits of a private limited company include the following:

  • Opportunity for acquiring foreign investment: Due to their tight compliance requirements, data accessibility on the website, and adherence to ROC standards, private limited firms enjoy greater trust from foreign investors. Also, if at least one director resides in India, a foreign businessperson may be elected to the board of directors of a private limited company. Due to this, foreign investors prefer investing in private limited corporations over other business entities.
  • Can own properties: A private limited business can own any sort of mobile or immovable property. Typically, the firm is accountable for its assets and obligations. In the event of a company’s dissolution, its debts are paid off to creditors in a predetermined order, lowering the shareholders’ liability.
  • Greater borrowing capacity: Many options are available to private limited companies for borrowing money. Financial institutions frequently favor providing financial support to private limited companies. Because of the openness, compliance, and limited data availability on governmental websites, they have more faith in this business entity.
  • Access to Capital: Companies can raise money in the capital market by selling shares, issuing debt securities, and receiving capital infusions from current shareholders. It is, therefore, simpler for businesses to raise money to support future growth.
  • Continuity: Even if the shareholders change, the company remains in operation. Similarly, the death of a shareholder or director does not result in the death of the business.
  • Control: The first owner may still exercise control. Also, their ownership is not diminished because the business does not sell its shares to the general public on a stock exchange.

Disadvantages of a Private Limited Company

  • Establishment: These commercial entities require additional documentation and procedures, making their formation more challenging. Legal and administrative costs associated with regulation are, therefore, high. Also, because of severe bureaucratic issues, completing legal requirements in some nations can take a long time.
  • Dividend: Dividends may not generate money for shareholders. Dividend payments cannot be made by the company and reinvested in the company (known as retained earnings). Hence, the owner receives no compensation.
  • Complexity: Operations at a business are more intricate and entail many documents, such as typical financial statements and taxation.
  • Transparency: It is more challenging for the general public or regulators to get information about corporations, such as their financial statements. Unlike a public limited company, a private limited corporation is not required by law to publish this information.
  • Conflict of interest: Directors could disregard the interests of the shareholders to pursue their interests and profits. That’s because, unlike in a sole proprietorship, where the owners make those decisions, in a corporation, the directors, not the owners, make the business decisions. Problems with agencies may then result from this.
  • Transfer of ownership: Because shares are not publicly traded through the stock exchange, older stockholders find it challenging to sell their holdings. Only with the other shareholders’ consent can they sell their shares. New shares cannot be sold on the open market either.

Comparison Between an OPC and a Pvt Ltd

Let us now compare some important parameters between an OPC and a Pvt Ltd.

Particulars One-Person Company Private Limited Company
Recommended for Individual proprietor Multiple promoters
Minimum owners 1 Owner & 1 nominee 2 Shareholders
Maximum owners 1 Owner 200 Shareholders
Board of directors At least 1 director At least 2 directors
Shareholding 100% of shares held by a single person A single person cannot hold 100% of shares. A minimum of two shareholders is required.
External investment Difficult to obtain Easily available
Credibility Low High
Compliance requirements Annual return filing. No board meetings if only one director &no general meetings. Annual return filing, board Meetings &general meetings
NRI or foreign nationals Only Indian citizens and Indian nationals are allowed to start NRIs or foreign nationals are also allowed to start and manage
Mandatory conversion If annual turnover exceeds Rs. 2 crores or paid-up capital exceeds Rs. 50 lakhs, then mandatory conversion into a private limited company No mandatory conversion
Procedure Obtain DSC (digital signature certificate), obtain DIN (director identification number), name approval, file for incorporation &file nominee details. Obtain DSC (digital signature Certificate), DIN (directors’ Identification Number), Name approval &filing for Incorporation.
Law applicable Companies Act 2013 Companies Act 2013
Minimum share capital No minimum share capital is necessary. If capital exceeds 50 lakhs, OPC gets converted to a Pvt. Ltd. No requirement for minimum share capital
Board meeting One meeting in each half of the year. The gap between the two meetings must be at least 90 days. One meeting in each quarter of the year. The maximum gap between the two meetings can be 120 days.
Statutory audit Compulsory Compulsory
Annual filing Financial statements and annual returns are to be filed with the registrar Annual accounts and annual returns are to be filed with RoC
Liability Limited Limited
Transferability of shares This can be made by altering MOA It can be easily transferred
Foreign direct investment Not eligible for FDI Eligible via automatic route
Suitable to which type Individuals whose capital requirements are 50 lakhs and turnover is less than 2 crore. Business, trade, manufacturers, large industrial establishments
Company name Should end with (OPC) Pvt. Ltd./(OPC) Ltd. It should end with Pvt. Ltd.

Conclusion

Key factors to consider when choosing between an OPC and a Pvt Ltd

While many of the business above models can be used to launch a firm, there are a few things to consider. Some factors that need to be taken into account are as follows:

  • Continuity of Existence: Knowing the right type of business structure is crucial if one hopes to protect the business for the future financial stability of the business’s family members. This will help maintain the legacy of the company.
  • Complex Procedures: Businesses with fewer employees overseeing their operations must choose a straightforward business structure. To choose the best legal structure with the least operational complexity, several procedures, and compliance standards must be followed when starting and running a business.
  • Liabilities: By selecting a business model with limited liabilities, one can take risks without worrying about losing personal assets. Doing so will protect the company from potential losses and debts. The investment necessary for the efficient operation of the firm is one of the most crucial things to consider when selecting a business structure. Maintaining all requirements aligned with the company’s capabilities is vital for the firm to prosper.
  • Nature of business: The type of business structure you choose for your enterprise is perhaps the most significant of all the considerations before choosing a business structure. The basic aim and duration of an organization within the selected industry are referred to as the “nature of a business.”
  • Government regulations and control: Besides being formally registered, business entities may need specific licenses to operate. Depending on the type of business and its operations, a firm may need municipal, state, and federal licenses. Corporate entities also need to follow all government regulations.

The future outlook for a one-person company

Although the idea of an OPC is still very novel and revolutionary in Indian entrepreneurship, it will take time for such a novel idea to be implemented completely. But, as and when time passes, an OPC will have a bright future and be accepted as a successful company concept.

An OPC will significantly impact the industry in the next few years, and Indian entrepreneurship will benefit from this. Expectedly, there will be successful joint ventures, mergers, and foreign investments. When the expert committee of Dr. J.J. Irani proposed the idea of an OPC in India, it was only intended to organize the private sector of entrepreneurship and create a structured, organized business with a different legal entity. This is exactly what is anticipated to happen, along with significant growth in the Indian economy, which will benefit the nation globally.

The future outlook for a Private Limited Company

Small, privately held businesses with limited liability are frequently private limited companies. The company can only have a small number of shareholders due to its tiny size and private ownership (e.g. 50 shareholders in the UK). Many SMEs operate as private limited companies because it enables them to decrease personal risk and seek protection from personal liability while also enabling them to raise money by selling shares.

According to a new survey, allocators overwhelmingly prefer private markets over public ones when investing in 30-year economic trends like AI. The respondents thought private enterprises were best positioned to respond to significant changes given the 30-year time horizon for some trends. Over 200 investors responded to the study, representing roughly $10 trillion in assets, including pensions, sovereign wealth funds, foundations, and endowments.

Based on what we’ve covered so far, we believe that this blog will interest all readers interested in learning more about the minor and significant differences between a private limited business and a one-person firm.

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