What are the limitations of one person company?

One Person Company or OPC is one of the type of company which is formed with only one person as a member. It is completely different from other companies where there will be more than one members.

According to Section 2(62) of Companies Act provides that a One Person company can be formed with only one person. One Person Company has both advantages and disadvantages in it. We will be seeing more clearly in this blog about the limitations of One Person Company in India.

What are the limitations of One Person Company in India?

• Raising funds through loans:
  • One of the significant in one Person Company that it can own only one shareholder and money cannot be raised up through the issuance of convertible debentures until it changes itself into a Private Limited Company or public company.
  • One person company cannot raise funds through loans or non-convertible debentures this is one of the big limitation of the one person company.
• Only suitable for small businesses:
  • OPC will only be well suitable for a smaller firm. The OPC is not entitled to have more than one member.
  • To get funds for running the business, the OPC cannot recruit more members or shareholders. This can be major limitation for one person company.
• Not suitable for high turnover:
  • The OPC’s are not suitable for high turnover, because when there is high turnover in a business of an OPC it is automatically converted into private limited company.
  • This is positive in some aspects but it can also be a great negative impact for certain OPCs.
• Business operations are restricted:
  • The OPC is obviously restricted in Non-Banking Financial Investment activities which includes the investment in securities of any other body corporate.
  • This can be a hindrance for the successful growth of OPC in many ways are different from private limited company. If one could notice, the private limited companies will be having minimum 2 members and maximum up to 200 working in the company, whereas in one person company it cannot have more than 1 member.

What are the advantages of one person company?

• Limited Liability:
  • One of the great advantage of OPC is that it has a lot of opportunities where it can grab to perform with limited liability.
  • It means that in OPC an individual can take up risk without suffering or affecting the loss of his or her personal assets.
• Easy to Incorporate:
  • The incorporation process that is registration, formation etc. things like that are quite simple and easy, and it can be done in online through the Ministry of Corporate Affairs (MCA) portal.
  • The process is quite fast and can be completed in very few days.
• Separate Legal Entity:
  • It has the capacity to function the same way as how an entrepreneur works.
  • The One Person Company is said to be a separate legal entity. In legal view, a company is a person, which has a common seal, and perpetual succession.
  • OPC has the same authority to exercise all the functions of an incorporated person.
• Tax Benefits:
  • Basically, OPC acquires certain tax benefits which includes lower tax rates and deductions on business expenses of the one person company.
  • This absolutely helps in reducing the tax liability of OPC
• Single Ownership:
  • It is well know that in OPC single member have complete control over the company’s business and decisions are taken by that same single member.
  • This definitely brings efficiency in the business
• Better Credibility:
  • The OPC have a good credibility. If the OPC has a good credibility, then it has a good impression and can easily get a loan.
  • Hence, better credibility helps in developing the business by getting loans.

Understand more on the benefits of OPC registration.

What are the disadvantages of Private Limited Company?

• Limited access to capital:
  • Basically, the Private limited companies face problem in raising funds when compared to public companies, it is because they cannot sell shares to the public.
• Limited growth potential:
  • The significant disadvantage is that the number of shareholders in a private limited company is extremely restricted, which ultimately limits the company’s ability to expand and reduces the opportunity for large investments.

• Regulatory compliance:
  • The Private limited companies has to satisfy certain legal and regulatory requirements, which is quite time-consuming and costly.
• Lack of transparency:
  • Mostly the Private Limited Company lack transparency, it is because they function their reporting obligations properly.
• Exit restrictions:
  • In private limited company selling shares is complex, and shareholders face difficulties exiting from their investments, which further leads to lack of liquidity.

Conclusion

In conclusion, OPCs offer advantages such as limited liability, ease of incorporation, and tax benefits. Also, there are certain limitations of one person company, like restricted fund raising options, suitability primarily for small businesses, and operational restrictions.

Despite these drawbacks, the benefits of OPC registration, including simplified management and enhanced credibility, can often outweigh these constraints, making it a viable option for solo entrepreneurs seeking a formalized business structure with reduced personal risk.

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