Recently, Delhi-based businessman Ankur Sharma registered his tour & travel services firm as a one-person company (OPC). "Right now, my priorities are to get the business started at the earliest. I plan to make it a private limited company in six-eight months," he says. As a registered legal entity under the OPC category, separate from its owner, Sharma will have easier access to bank loans and less compliance under the different provisions of the Companies Act, with liability limited to the entity's net worth.
OPCs help start-up entrepreneurs test a business model, a product or a service, before attracting new investors.
Since April this year, when the concept of OPC was introduced in the Companies Act, 2013, 479 firms have been registered as OPCs (as of August 31), data available with the Ministry of Corporate Affairs show. Through April and May, only 10 companies were registered. As the concept gained momentum, about 450 companies were registered between June and August, 68 per cent from the services sector."This concept is really beneficial for small entrepreneurs who can benefit from limited liability. We are happy OPC (registrations) are picking up," said a senior ministry official.
The Companies Act envisaged OPCs as an alternative to the 'sole-proprietorship' form of business. In a May newsletter, the ministry said of OPCs, "It is expected this model will encourage small and medium enterprises…in the unorganised sector with the concept of limited liability and open avenues for more favourable banking facilities."
In India, 70-80 per cent of business entities operate in the unorganised sector and follow a non-entity model of proprietorship company, says Balamurugan Nadar, founder, bmcgroup.in, which helps companies register themselves. Most of these are likely to be registered as OPCs, he adds.
There are many entrepreneurs who, after starting sole-proprietorship companies, are yet to graduate to a private limited company for want of more shareholders. This section will opt for the OPC model, experts say.
Though the provisions applicable to private limited companies hold good for OPCs, too, OPCs are relieved of procedural formalities such as conducting annual general meetings and meetings of boards of directors. "The OPC concept gives the dual benefit of limited liability as a corporate entity, as well the freedom to operate as a solo-prenuer," says Nadar. It allows owners to have control over the company by appointing as many as 15 directors. Also, it could help companies attract talent by offering directorship designations, which isn't possible under the sole-proprietorship model.
|HOW THEY STACK UP|
Exemptions available to OPC under the Companies Act, 2013
Experts say the OPC model supports the start-up ecosystem by allowing companies to test their business models. "As people become more aware of the benefits of an OPC, I expect a lot of start-ups to go with the OPC tag from 2016," says Saran Kumar Uppalapati, partner, SBS and Company LLP. With the government's focus on start-ups, OPCs are expected to be the popular choice.
While most players consider the rising number of OPCs a positive trend, corporate lawyers and tax experts caution the awareness about this concept is still low. Experts say an outreach programme by the ministry in this regard is the need of the hour. Syed Perwez Hussain from Svans and Associates says: "It is difficult for any company to explain the term OPC in a sale proposal contract or to create a profile with OPC attached to its name. So, people still opt for the tag of private limited company."
Start-ups, always on the lookout for investment, have to change their legal status to a private limited company before bringing in investors, says Agam Gupta, co-founder, quickcompany.in.
Many start-ups with OPC tags told Business Standard they would convert to private limited ones, as and when investors showed interest. They admitted having an OPC tag was a stopgap measure to kick-start the business and test the model. "Right now, I can take my own decisions and there are less norms to follow. But in case some investor is looking, I will convert my company to a private limited one," said Kashinath Kapte, founder, Yuvaskills Services Private Ltd (OPC).
According to the Companies Act, an OPC has to covert itself into a private or public limited company in case its paid-up capital exceeds Rs 50 lakh, or average annual turnover exceeds Rs 2 crore, for the three immediate preceding consecutive years.
"It does not take much time to covert from an OPC to a private limited company," says Gupta.
While registering as private limited companies and sole-proprietorship firms might still be the most attractive option for most entrepreneurs, many corporate law experts feel through the next two years, the number of OPCs will exceed that of private companies. For this, the government will have to step up awareness about OPCs and, at the same time, encourage sole-proprietorship firms to convert to OPCs.