One person company

With the new Company Law bill passed by the Parliament, “One Person Company (OPC)” will come to reality in our country.

It is essentially a legal entity which functions on the same principle as a Company, but with only one member and one shareholder. It can be an alternative option for Individuals, who runs risky proprietorship business.

The main differences between the two structures are :

Limited Liability
In a one person company the liability of the single shareholder will be limited to the unpaid subscriptttion money in his name. whereas there is no such limitation in the case of a Proprietorship

Automatic Succession
In an OPC, there is a designated individual who shall, in the event of the death of the subscriber become the member of the company and be responsible for the running of the company.
In the case of a proprietorship this can happen only through a will, which again may be subject to challenge in a court of law.

Tax Implications
While the concept of OPC’s does not exist in tax laws yet, We can safely expect them to be under the same tax brackets as other companies ( 30%  plus surcharge, MAT etc) further, provisions of dividend distribution tax would also be applicable on the company.
 
A proprietorship on the other hand is taxed at rates applicable on individuals (  basic exemption up to Rs 1,80,000 for the year 2012-13, slab rates etc.) and there is no tax on withdrawal of profits from the business. Making proprietorships more lucrative from a tax perspective, as compared to one person companies.

Trust factor
One would expect an OPC to inspire more trust in lenders given the incorporation process and the automatic succession.

Compliance Costs
An OPC would have to file annual returns etc just like a normal company and would also need to get its accounts audited in the same manner.
On the other hand a proprietorship would only need to get audited under the provisions of section 44AB of the income tax act once its turnover crosses are certain threshold.
 

Although the exact rules are not clear, the following rules have been proposed -

1. Firstly, the person is to give a separate name and legal identity to the Company, under which all the activities of the business are to be carried on. This ensures that a separate legal entity is formed.
2. Secondly, the person has to nominate a name with that person’s written consent as a nominee to the OPC. This person will be the default and ad hoc member in case of the existing sole member’s death or disability. This provision will ensure perpetuity and continuity to the life of the Company. The golden rule of “members may come and go, but the Company must live on” holds good.
3. Finally, every One Person Company should bear the letters “OPC” in brackets after it’s registered name, wherever it may be printed, affixed or engraved.