Why shouldn't you choose One Person Company (OPC) structure for your startup?

Prepared On:
15/06/22


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Introduction:

Want to Start up? Confused which form of entity structure you need to choose? Is OPC better form to start off initially? I am sure these are the questions running in your mind now. Here is why you shouldn’t choose One Person Company (OPC) as the organisation structure when you want to register your startup.

We keep getting enquiries from new age entrepreneurs to register their company as a OPC, however we strongly discourage using OPC structure to start off, for multiple reasons which we will be discussing in this article.

To start off here is a quick snapshot of pros and cons of choosing OPC

Let us now get into the details of each point by looking at the disadvantages first.

Dis-Advantages: -

Not Attractive to investors and Restrictions on FDI
  • Only a natural person who is an Indian citizen and resident in India shall be eligible to incorporate a One Person Company. Thus, discouraging foreign direct investment by disallowing foreign companies and multinational companies to incorporate their subsidiaries in India as a One Person Company.
  • Hence, an OPC will have to change their legal status to a private limited company to bring in investors.
Complications in Conversion
  • For conversion into a private limited company or a public limited company, an OPC must satisfy an eligibility criterion such as existence of minimum 2 years, paid up share capital of minimum Rs 50 lakhs and an average turnover of minimum Rs 2 crores.
  • Another reason is that conversion of OPC to private limited can be a costly affair requiring lengthy process
Restriction on Issue of ESOPs
  • An OPC can have only one shareholder, there can be no sweat equity shares or ESOPs to incentivize employees. ESOPs can only be implemented if OPC converts into a private or public limited company.
Tax Inefficiency
  • Even though one person companies are incorporated by individual members, the tax rates applicable to these companies are similar to the rates applicable to a private limited company (which is 25% to 30%).
  • Also, the dividend distributed is taxed in the hands of the shareholder (which is approx. 30%), resulting in effective tax rate of over 60%. Instead choosing proprietorship or LLP is tax efficient. To learn more about taxation of LLP read this article.
Higher Compliances Cost
  • As compared to the proprietorship, an OPC incurs high compliance costs yearly, as it is required to get its accounts audited and file the returns every financial year with the Registrar of Companies (ROC) like any other corporate entity. The costs are almost similar to costs of a private limited company.
Restrictions on Business
  • OPC cannot enter sectors having its business activities which is related to finance, bank neither it can operate its function like NBFC.
  • Non-Resident Individuals are not allowed to form an OPC in India.

However, it's not all gloomy if you still choose to start as an OPC, here are some of the advantages of OPC

Advantages: -

Limited Liability
  • OPC enjoys the benefit of limited liability, where the liability is limited to the amount of shares held by the owner.
Business Credibility
  • OPC gives suppliers and customers a sense of confidence in business. Large organizations prefer to deal with private limited companies instead of proprietorship firms. OPC enjoys corporate status in society which helps the entrepreneur to attract quality workforce.
Easy to Get Loans
  • Banking and financial institutions prefer to lend money to the company rather than proprietary firms. In most of the situation banks insist the entrepreneurs to convert their firm into a private limited company. So, it's better to register as OPC rather than proprietary firm.

Conclusion:

Now considering that the cons over-weight the pros of starting your company as OPC, we recommend entrepreneurs to choose a regular private limited instead of OPC if you have ambitious growth plan for your business. It makes all the more sense when the cost of setting up and operating a private limited is almost the same as compared to an OPC.
If you still need further information about incorporation of company please click here to reach services tab or click here to know more about comparison between LLP and private limited structure, which will help you decide if you need to choose LLP over private limited company.