When you have made up your mind that you want to set up a Company, but you have not decided about which type of Company you want to register? Companies are of various types which includes One Person Company, Private Limited Company, Public Limited Company, Limited Liability Partnership etc.
- 1 What is a One Person Company?
- 2 What is a Private Limited Company?
- 3 Similarities between One Person Company and Private Limited Company
- 4 Difference between One Person Company and Private Limited Company
What is a One Person Company?
In the former Companies Act 1956 a minimum of two directors and shareholders were required to form a private limited company. However with the advent of the Companies Act 2013 , A company can be formed with just one Director and one member. One Person Company OPC is a Company which has a separate existence, but is owned by a single member.
One Person Company is a blend of Sole-Proprietorship and Company form of business. The concept brought in extravagant possibilities for sole proprietors and individual entrepreneurs who can take the advantages of Limited liability and corporatization.
What is a Private Limited Company?
Private Limited Company is an entity which is different from its Shareholders or Directors. To incorporate a private limited company, a minimum of two shareholders is necessary. A minimum of two shareholders and a maximum of up to 200 shareholders are allowed in a private limited company. The shareholders could be natural persons or companies, including foreign companies. Private companies can also be bifurcated into Private Limited Company – Limited by Shares and Private Limited Company – Limited by guarantee. Private Limited Company has limited liability i.e., the liability of the shareholders of the Company is limited. The personal assets of the shareholders are not at risk in case of liquidation of the Company.
Now, let us understand the basic difference between paid-up capital and authorized capital. Let’s consider the petrol tank of a vehicle. The maximum limit of the tank is assumed to be 3 litres. While filing in the petrol you decided to fill in only 2 litres because that was your need. When this example is applied to a Company, 3 litres is the authorized capital while 2 litres is the paid up capital.
Similarities between One Person Company and Private Limited Company
1. Governing Law
One Person Company and Private limited company both are governed by the Companies Act, 2013
2. Registration Process
One Person Company as well as private limited company is required to be registered with the Ministry of Corporate Affairs.
3. Limited Liability
In case of One Person Company the sole owner and in case of Private Limited Company all the shareholders have limited liability to the extent of the value of their shares.
Both One Person Company and private limited company are separate legal entities from its member i.e., the personal assets of the shareholders are not liable for any loss incurred by the business.
As the concept of One Person Company is not recognized under Income Tax Act, income of both the entities is taxed with the same rate according to the provisions of Income Tax Act.
In both companies the appointment of auditor is obligatory within 30 days from the date of incorporation for statutory audit, irrespective of the share capital or turnover of the company.
Difference between One Person Company and Private Limited Company
1. Name of entity
As the name suggest, in case of One person Company, the company name has to have a suffix (OPC) and in case of private limited company, the name of company has to end with suffix Private Limited. Generally an OPC is incorporated as OPC Pvt. Ltd. or OPC Private Limited .
2. Minimum Capital Required
There is no mandatory requirement for a minimum paid up capital. However when the paid up capital exceeds Rs. 50 lakh, One Person Company must mandatorily convert to a private limited company ( Pvt. Ltd.) while in case of Private Limited Company, the Companies Amendment Act, 2015 relaxed the minimum requirement for paid up capital. Therefore, there is now no requirement for any minimum capital to be invested to start a private limited company.
3. Minimum Number of Member
In case of One Person Company, minimum and maximum 1 member is allowed while in case of a Private Limited Company the minimum numbers of members required are 2 and the maximum numbers of member that a private limited Company can have is 200.
4. Minimum Number of directors
In a One Person Company, the minimum number of directors to start a company is 1 while in a Private limited Company the minimum number of directors to start a company is 2. Both the entities can have maximum 15.
A One Person Company can be converted into Private Limited Company after two years of its incorporation or when its turnover exceeds the threshold limit.
6. Annual Filings
In case of One Person Company Financial statements and annual return required to be filed with the registrar while in case of Private Limited Company annual accounts and annual return are required to be filed with the ROC.
7. Transferability of shares
In case of One Person Company, shares can be transferred only by altering the Memorandum of Association. In Private Limited Company, shares can be transferred easily.
8. Board Meeting
In One Person Company, One board meeting must be held in each half of the calendar year and the gap between the meetings must be at least 90 days. In case of one director, no need to hold a board meeting . In case of a Private Limited Company, one board meeting must be held in each quarter of the calendar year and the maximum gap between two meetings can be 120 days.
Comparison Table One Person Company vs Private Limited Company
Reasons Why You Should Choose Private Limited Company Over One Person Company
1. Easy Fund Raising
Funding is considered as the most essential step for starting, maintaining, and growing a business. Private Limited Company can raise their shares from different investors. Thus, a private limited company is the ideal type of business entity for growing businesses.
2. Improve Business Credibility
In today’s time customers, vendors and investors look for credibility in the businesses they deal with. When the credibility is not available it makes it hard to acquire reputed customers, or acquire credit from dealers. In a private limited company, the information relating to the company is made accessible in a widely searchable database. This feature makes it easy to validate the existence of the business, improving business credibility.
3. Chase Multiple Opportunities
Starting a private limited company, would allow the promoter to pursue multiple opportunities as the business evolves over time. Thus allowing the company to grow in various sectors and chase further opportunities thereon.
4. Explore International Market
Investments and collaborations with foreign industries play a significant role in the expedition to become a multinational corporation. Private limited companies are allowed Foreign Direct Investment of up to 100%. Thus incorporating a Private Limited Company can be fruitful.
5. No Complex Incorporation Method as of One Person Company
The person incorporating the One Person Company must be a natural person that means that it cannot be formed by any artificial person. Thus ownership is restricted to only individuals and not corporations. For incorporation of Private Limited Company there is no such restriction hence this is an added advantage that Private Limited Company has over One Person Company.
6. Taxation Benefits
The concept of One Person Company is not recognized under the Income Tax Act and hence it has been put in the same category as other companies for taxation purpose.Private companies have been placed under the tax bracket of 30% on total income. Thus,from the perspective of taxation, the concept of One Person Company becomes a less profitable concept as it imposes heavy financial load. So when the taxation procedure is same and Private Companies are offering so many other benefits a person must choose private Limited Company over One Person Company.
7. No need of Nominee as required for One Person Company
Even though the idea of One Person Company is to enable an individual to start his own business without the need to have a partner but, procedural a suitable nominee has to be selected. This creates difficulties,as the nominee has a choice to withdraw their consent and the possibilities of withdrawing are quite large in today’s growing competition. Thereby it is making it difficult for the individual to find another nominee, obtain his/her consent, amend the memorandum and communicate to the registrar.
The confusion between a Private Limited Company and a One Person Company makes people go for an incorrect choice which results in loss. There are lots of practical benefits given to private companies by way of new changes made in the Companies Act. One Person Company and Private Limited Companies have many similarities but what makes Private Limited Company different is the hassle free incorporation and transferability. The taxation procedure are same for both entities as there are no separate provisions made for One Person Company related to taxation. Private Limited Company has edge over OPC in many aspects. Thus people should opt for Private Limited Company because at certain point of time they will have to convert their one person company into Private Limited Company.
We hope after reading the article all your confusion related to Private Limited Company and One Person Company is resolved, in case, the doubt still persists, don’t hesitate to contact us.
We at AFLEO are always there to help you!!