Traditionally, small businesses follow either a proprietorship or partnership as a vehicle of their choice to run their businesses. Few choose the private limited company road. I, however, am quite fascinated with the One Person Company (“OPC”) option given to small businesses by the Companies Act, 2013.
In small businesses, a proprietor, need not register his entity; he is free to contract with anyone; and he is free to raise capital from any one, without any restrictions. The down side though, is that a proprietor often exposes himself to unlimited liability. In other words, the personal assets of the proprietor may be at risk in the event of a failure. In today’s time, a proprietorship concern makes sense only where business remains small, or if the foreseeable risk remains manageable.
An OPC is a hybrid form of a proprietorship concern, which enables the proprietor to enter into the corporate framework. A company requires at least two individuals to be incorporated, the OPC, however, as the name suggests, requires only one person, thereby, allowing a businessman to enjoy the autonomy as he did in a proprietorship concern. The most significant reason for a shareholder/businessman to opt for an OPC is to limit his liability. Unlike a proprietorship concern, a shareholder’s liability is limited to his shareholding in the OPC, and takes away the risk of personal liability in the event of loss or failure of business.
Of course, OPCs come with their own set of disadvantages such as–one person cannot have more than one OPC to his name; the director has to nominate his successor in the memorandum of association; less freedom to raise capital from individual sources etc. Additionally, most of the laws, are not formulated with OPCs in mind, therefore, the shareholder runs the risk of incurring costs in terms of statutory compliances. An OPC, however, is suitable only for small businesses, i.e., if the OPC’s turnover exceeds Rs. 20 million, the Companies Act mandates it to be converted into a private limited company, with two directors!
That said, OPC gives serious businessmen an opportunity to bring their entity under the corporate umbrella, and gives them certain legal protection which is not available to a proprietor. Although an OPC might inconvenience the shareholder in him to comply a variety of laws, which he might otherwise not need to. When one considers the benefit/protection that comes with the OPC, it is a small price to pay….