The Companies Act, 2013 has introduced a new business Vehicle categorized as OPC, which is enabling a individual to form a limited liability entity and enjoy the benefits of Corporate sector. This article is referring about the pros and cons of OPC
The concept of ‘limited liability’ attached to the business vehicles such as ‘Private Limited’ or ‘Public Limited’ is the one of the major factors for choosing those as the form of entity to run a business unit. Conventional business vehicles such as ‘proprietorship’ or ‘partnership’ lacks those attraction and due to that many organized businesses are running on the ‘safe’ platform of ‘limited liability’. The limited liability means the liability of the shareholders are limited to the extent of the capital they had contributed to the company or to the extent of guarantee they had given to the company at the time of incorporation. Despite all these attractions offered by a ‘limited liability company’ or ‘limited liability partnerships’ many of the entrepreneurs are still operating their businesses as ‘proprietorship’ concern.
Considering the above fact and to bring those unorganized sector to main stream the Ministry of Corporate Affairs has introduced the concept of ‘One Person Company’(OPC) for the first time through the Companies Act,2013.
In this session I am detaining about the concept, formalities, ills and odds etc of One Person Company(OPC).
The concept and intention
The big idea behind the introduction of OPC is to attract more players from unorganized segment and help them to organise the business vehicle and to offer them better standards through implementation of Corporate Governance.
Membership. An OPC will have only one member and only a natural person and resident in India shall be eligible to incorporate a One Person Company. As per the provisions of the Act, an individual can incorporate only one ‘OPC’ and a minor is restricted to act as a member or nominee in an OPC.
Status of an OPC
One Person Company shall be treated as a Private Limited Company and the said entity is restricted to carryout Non Banking Financial Companies activities.
In order to ensure the characteristics of perpetual succession and to ensure the accountability it is required to nominate a person by the subscriber to the Memorandum at the time of incorporation of OPC. In the event of the death of the subscriber or on his incapability to enter into contracts, the nominee shall become the member of OPC.
The person so nominated can withdraw his consent at any time by giving a notice in writing (INC-3) to the company and on receipt of the said notice the company has to file necessary returns with Registrar within 30 days(INC 4) along with the details of new nominee.
The member can change the nominee at any time for any reason by intimating in writing his intention to do so to the company.
Where the paid up capital of the company exceeds Rs.50 lakhs or the average annual turnover exceeds Rs.2 crores in the relevant period the OPC shall cease to be entitled to continue and the OPC is required to convert into a Private Limited Company or to a Public Limited Company. The average turnover of the last 3 consecutive financial years are taken into account while arriving at the average figures of Rs.2 crores.
The logic behind the provision for compulsory conversion is not clear when it considering the capital and turnover as a threshold limit for the conversion. There are numerous proprietorship concerns who are having turnover of Rs.2 crore and more and many of those proprietors have more than 50 lakhs investment in those type of entities.
At the same time, the OPC can be given with an option to convert it into Private or Public Company, if the member wishes to do so. The provision for compulsory conversion based on the capital and turnover criteria is a negative side of the entire piece of legislation and the Ministry may revise the same in a more logical manner.
The intention of the drafters shall be defeated if there is too much regulation. The charm of getting the protection of limited liability is getting diluted due to the clause of compulsory conversion. It should be the free will and interest of an entrepreneur to decide on the conversion of his entity and not the capital or turnover. There is an option available for a Private Company to convert it into an OPC. The said option is very useful for many entities which was formed as a Private Company due to lack of availability of a better option like OPC.
Foreign Direct Investment in OPC. As only a resident in India can became the member of an OPC, no foreign national can constitute an OPC under the current rules.
The concept of OPC is very good when considering the intention of the law makers to brought more unorganized entities into a regulated mode.
At the same time the provisions such as compulsory conversion of OPC to be properly validated and revised to achieve the intention behind the legislation.