The concept of One Person Company was introduced by the Companies Act 2013 to provide the ease of sole proprietorship firm with the benefits of a company. One person company is formed by a single person who can act as both the director of the company and the shareholder at the same time. Prior to the introduction of the concept of one person company the single person was not empowered to form a company as minimum two people were required to form a private limited company. However, the one person company empowers a sole member to incorporate a company. Just like every coin has two sides along with multiple benefits there are also certain disadvantages associated with the one person company.
Advantages of One Person Company
1. Separate legal identity- The legal identity of the one person company is separate from its member. Thus the company can on its own undertake all transaction that a natural person can undertake.
2. Limited liability - Unlike sole proprietorship firm the liability of the member of One Person Company is limited to his share only. Thus there is no burden of unlimited liability on the member of One Person Company.
3. Ease of Formation- As compared to other forms of companies like the private limited company or the public limited it is easier to incorporate a one person company.
4. Control- Only single member owns and manages the operations of the one person company thus he enjoys the sole control over the operations of the company.
5. Benefits under income tax law- In a one person company, any remuneration paid to the director will be allowed as deduction as per income tax law, unlike sole proprietorship firm. Further, there are certain other tax benefits which a one-person company can enjoy.
6. Business credibility- Setting up sole proprietorship firm rather than One Person Company helps the business entity to gain legal status. A legal status further helps to set up a brand image of the company in the market and thus improve its credibility.
7. Minimum Requirements- In order to incorporate a One Person Company only one person is required who can act as both the director and shareholder of the company. Further, a nominee is also required who can take charge of company in the absence of the sole member.
8. Perpetual succession- The OPC being a separate legal entity enjoys the benefits of perpetual succession. Thus the life of an OPC does not end with the life of the member.
9. Less Compliance- Compared to other forms of companies like the private limited company, public limited company etc the compliance requirement like conducting the board meeting or the general meeting of one person company are very less.
Disadvantages of One Person Company
1. The number of members - One person company can have minimum and maximum 1 member only. This prevents any two members or more members from creating a one-person company. Further only an Indian resident shall be eligible to incorporate a one person company or become a nominee for the one person company. This restriction prevents Non -residential Indian from incorporating a one person company.
2. Restriction on minor member- A minor is not empowered to incorporate a One Person Company neither he can become a nominee of the One Person Company.
3. Limit on Turnover- The business structure OPC is mainly suitable for the small business entities. OPC can have maximum Paid up share capital of Rs.50Lakhs or Turnover of Rs.2 Crores. In case the share capital or the turnover of the one person company exceeds the prescribed limit then OPC needs to be converted itself into Private Ltd Company.
4. Restriction on Business activity- One Person Company is not empowered to carry out non-banking financial investment activities including investing in the securities of any company. Further, it can also not be converted into section 8 company.
5. Compliances cost- When compared to sole proprietorship form of the company the compliance cost of one person company is much higher as there are yearly compliances requirements in One person company. Like other forms of companies, one person company is required to maintain the annual records and submit annual statements.
6. Nominee appointment- In order to incorporate a one person company, it is mandatory to appoint a nominee. Thus a person needs to find a nominee and appoint him mandatorily in order to incorporate a one person company.