5 Main disadvantages of One Person Company

One Person Company (OPC) is a legal firm formed by an individual person. It unites the advantages of a sole proprietorship and a private limited. Gives the sole owner limited liability while keeping management simple. There are both advantages and disadvantages of One Person Company.

This new form of company was formed in 2013. This new business entity was introduced under the Companies Act of 2013. OPC is an amazing option for one who wants to start their company single-handedly. It is so much benefit for entrepreneurs and small businesses. It has started to encourage self-employment in the country.

What is a One Person Company?

A One Person Company is a type of business entity in India introduced under the Companies Act, 2013. A single entrepreneur is allowed to operate a corporate entity with limited liability protection. Unlike traditional companies, an OPC can be formed with just one director and one shareholder, who can be the same individual.

This structure provides the advantages of limited liability and separate legal identity, while also simplifying compliance requirements compared to other types of companies. OPCs are designed to encourage individual entrepreneurship, offering a straightforward path for solo business owners to establish a formal company.

What are the features of One Person Company?

• Single Member:
  • A single person will be both a shareholder and director of an OPC. It allows only one member as an owner.
• Limited Liability:
  • The members’ responsibility is limited to the amount they invest in shares. Here, if the company loses money, the members’ belongings are safe.
• A Legal Entity is Separate:
  • An OPC is its own entity, separate from its members. A company can own things, make deals, and take legal action. They can be taken to court under their name.
• Issued Capital and Basic Authorized:
  • To start an OPC, you need at least Rs. 1 lakh as authorized capital. The paid-up capital cannot exceed the authorized capital.
• Nominee Appointment:
  • Appointing a nominee is required during the incorporation of OPC. A member must choose a nominee to take over the affairs. This is to cop up in case of a member’s death or incapacity.

Procedure for incorporating OPC

Steps to follow while incorporating OPC:

1. DSC and DIN: Get a Digital Signature Certificate and Director Identification Number for a single director.
2. Name Approval: Get permission from the Registrar of Companies by submitting Form SPICe+ for your chosen name.
3. Draft MOA and AOA: Outline the Memorandum and Article of Association. Then file with the Registrar of Companies along with Form SPICe+.
4. Certificate of Incorporation: Get a Certificate of Incorporation (COI) from ROC.
5. Bank Account: Create a bank account for a company.
6. PAN and TDN: Apply and get a PAN card and Tax Deduction and Collection Account number (TAN).
7. GST Registration: Get your GST registration done.

What are the advantages of One Person Company?

1. Easy to Get Funds:
   • Fundraising is easy in OPC from angel investors and other sources. Financial institutions lend money to companies more than sole proprietorships. As OPC is a private firm, getting funds becomes easier.

2. Simple Incorporation:
   • OPC implementation is a simple thing because it only needs one member. A member with a nominee is necessary, and they can be a director too. You at least need Rs. 1 lakh to start a One Person Company. There’s no mandatory minimum amount of money you must put in initially. There are some disadvantages of One Person Company.

3. Legal Status:
   • The legal status of OPC is separate and protects the individual former. The OPC has its own legal identity. Liability of the member is limited to their shares. They are not personally responsible for the loss of the company. As a result, creditors can sue the OPC instead of the director.

4. Continuous Succession:
   • Even with a single person, OPC has infinite succession. Appointing a nominee is a must in OPC incorporation. A nominee takes over the company after the death of a member.

5. Lower Compliances:
   • OPC is exempted from some compliance requirements. This is because of the Companies Act 2013. The OPC doesn’t have to prepare a cash flow statement. The company secretary doesn’t have to sign the annual returns. Only the director can sign them.

What are the disadvantages of One Person Company?

1. Ownership and Leadership:
   • OPC is a single person company, and all decisions are taken by a solo member. Here, ownership and management will be indistinguishable. Single member can also be the director. The barrier between ownership and leadership leads to unethical activities.

2. Designed for Small Businesses:
   • An OPC fits well for a small company setup. OPC can have only one member at any given time. This system affects in raising more funds to grow high. As the company grows, it becomes harder for new members to join.

3. Limited Business Operations:
   • OPCs are prohibited from investing in corporate securities. Engaging in investing money without using traditional banks is forbidden. Converting into a charity is impossible under Section 8 of the Companies Act, 2013. This is one of the main Disadvantages of One Person Company.

4. Requirement of Nominee:
   • An OPC needs a nominee who will take over the company’s affairs. In case of death or incapability of a member, nominee is crucial. This could be one of the disadvantages of One Person Company. This stops you from maintaining complete control over the company.

5. Restricted Options for Names:
   • Another disadvantage of a One Person Company must include “One Person Company” in its name. It limits the available name options for the business.

Conclusion

Overall, there are many advantages and disadvantages of One Person Company. It focuses on limited liability, fundraising, ease of incorporation, etc. Being designed for small businesses might make it harder to grow and raise funds. But there are some notable disadvantages of One Person Company. The primary disadvantages of One Person Company are leadership and ownership. This might lead to ethical challenges.

A nominee is necessary, but it limits your complete control over the company. The requirement to include “One Person Company” in the naming might restrict branding opportunities. Before choosing a business structure, entrepreneurs should think about the advantages and disadvantages of One Person Company based on their goals and needs.

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