An OPC is a distinct business model which allows a single entrepreneur to own and run a business, enjoying the benefits of limited liability and a distinct legal identity. The OPC has been established under the Companies Act of 2013 and would be an ideal solution for a sole proprietor seeking to grow their enterprise while still retaining full control.
Before the creation of OPCs, entrepreneurs could either be proprietors with unlimited liability or set up a private limited company with a minimum requirement of two members. The problem is solved in the OPC, whereby a single promoter can form the company that involves the advantages of a corporate form.
An OPC has only one owner and is said to be completely owned by a sole shareholder. A nominated director has been stipulated in the provisions in case of the incapacitation of the owner, thereby giving limited liability that safeguards personal assets, while fewer compliance obligations have been put upon it than on private limited companies.
Startups, freelancers and small business owners can use OPCs to increase their credibility and streamline business operations. However, there are some limitations, such as restrictions on investment and the need to convert into a private or public company when crossing certain turnover thresholds. The OPC model significantly changes the landscape for individual entrepreneurs within India’s business ecosystem.
Legal Provisions of Turnover and Paid Up Capital Limit of One Person Company
An OPC is governed by the Companies Act of 2013 and the Companies Incorporation Rules of 2014. Such a structure, in turn, offers several benefits, such as limited liability, a separate legal identity, less bureaucratic hurdles, and less strict requirements regarding turnover and paid-up capital, with specific financial thresholds. All these factors define whether an OPC would continue to be an OPC, merge with a private company, or become a public company.
Financial Criteria of Turnover and Paid-Up Capital under the Companies Act of 2013
As per Section 2(62) of the Companies Act 2013, an OPC can be formed with a single member and has minimum compliance requirements. However, Section 18 and Rule 6 of the Companies (Incorporation) Rules, 2014, lay down some financial conditions that determine the classification of an OPC.
The paid-up capital shall be capped at ₹50 lakh and annual turnover at ₹2 crores. An OPC exceeding such thresholds shall be liable to convert into a private or public company within six months from the date it exceeded such limits.
Amendment in 2021 – Removal of Paid Up Capital & Turnover Limits
The Companies (Incorporation) Second Amendment Rules, 2021, that have come into force from January 25, 2021, have removed the conditions of paid-up capital and turnover. OPCs will now be able to operate irrespective of their performance and without requiring any conversion under the new rules applicable from April 1, 2021.
However, due to this, an OPC need not convert into a private or public company based on financial parameters, which gives more freedom to the entrepreneurs.
Voluntary and Compulsory Conversion of One Person Company (OPC)
- Voluntary Conversion
According to Rule 6(1) of the Companies (Incorporation) Rules, 2014, a One Person Company has the right to be converted either into a private or public company at any time after fulfilling the relevant regulatory requirements. This will depend on the passing of an appropriate resolution. In addition, the company has to comply with the requirements applicable to private or public corporations, which includes the appointment of two directors in the case of a private limited company.
- Mandatory Conversion (Prior to the 2021 Amendment)
The One Person Companies that had crossed ₹50 lakhs in paid-up capital and ₹2 crores in turnover for three consecutive financial years were required to be converted into a private company or public company within six months from April 1, 2021. For this purpose, the OPC was expected to furnish the ROC with Form INC-5. Following approval, the company would appoint additional directors and members to align with the criteria for private or public companies.
However, following the 2021 amendment, the requirement for mandatory conversion based on financial thresholds was abolished, permitting OPCs to maintain their status indefinitely.
Impact of the 2021 Amendment on One Person Companies (OPCs)
The removal of turnover and paid-up capital requirements has greatly relieved entrepreneurs, especially those in startups, freelancing, and small businesses. The key benefits include:
- Increased Flexibility for Business Expansion: Entrepreneurs can now expand their operations without the necessity of transforming their ventures into private or public companies.
- Reduces Compliance Liabilities: In addition to surpassing turnover, there is no additional regulatory liability for turning.
- Improved Ease of Doing Business: The government attempts to aid in small business incorporation and incentivise OPC registration.
For example, Before the amendment of 2021, an OPC having an annual revenue of ₹3 crore had to mandatorily convert into a private company, which increased the compliance cost. Now, it can continue to be an OPC, irrespective of the revenue generated.
Present Compliance Requirements for OPCs
Despite the removal of turnover and paid-up capital restrictions, OPCs are still subject to the following regulations:
- Maintain statutory records, such as member registers and minutes of board meetings.
- File annual financial statements and tax returns with the Registrar of Companies (ROC).
- Appoint a nominee director as mandated by the Companies Act of 2013.
- Comply with GST registration and any other applicable tax requirements.
In introducing the Companies (Incorporation) Second Amendment Rules, 2021, the provisions of OPC are significantly changed; the turnover requirement and paid-up capital requirement associated with OPC’s incorporation are repealed. This amended provision will open up more ease for small companies to expand the scope of operation without the increasing burden of having to comply while still availing the benefits of limited liability along with a corporate framework. The new framework is in tune with the goal of India to promote startups and micro, small and medium enterprises (MSMEs) and thus OPCs become an attractive option for individual entrepreneurs.
Why is the Turnover Limit Important for One Person Companies and Small Business?
Turnover is also an important fiscal indicator, considering the capability to generate revenues that a company generates. In respect of one-person companies and smaller businesses, crossing the turnover thresholds is critical because it decides structure, compliance burdens and ultimately, the possibility for long-term business growth. To date, such OPCs could be compelled to convert into private or public companies if the firm’s revenue increased beyond ₹2 crore, restraining its expansion and growth. The removal of this limitation has brought in financial flexibility, streamlined regulatory compliance, and improved long-term sustainability for enterprises. This has made OPCs very appealing to small Indian businesses.
1. Regulatory Compliance and Business Structure
Before the amendment in 2021, OPCs were restricted in India up to a turnover of ₹2 crore. Should the annual turnover of an OPC exceed this threshold, it needs to be converted into a private or public company within six months. This posed a challenge to expanding businesses because it was surrounded by increased regulation compliance, among them the obligation to have additional directors (two for private companies and three for public companies). Furthermore, new filing obligations under the Companies Act of 2013 and increased operational expenses due to statutory audits, corporate governance adherence, and tax implications were significant concerns.
The removal of the turnover limit in 2021 enables OPCs to expand their revenue without the compulsion to transition into a larger corporate structure, thereby alleviating the compliance burden on small businesses.
2. Encouraging Entrepreneurship and Business Development
Small enterprises, startups, and independent contractors often opt for One Person Companies (OPCs) due to their limited liability and streamlined regulatory environment. The presence of turnover limitations would pose significant obstacles for entrepreneurs aiming to expand their businesses.
By eliminating turnover limitations, the government has promoted corporate growth and enabled OPCs to expand without facing excessive regulatory barriers. This has resulted in enhanced ease of conducting business, reducing the apprehension of mandatory conversion. Additionally, it has provided incentives for sole proprietorships through corporate recognition and diminished compliance requirements.
3. Financial Agility and Competitive Market Positioning
This has enabled OPCs to compete better with larger corporations without losing the single-owner structure. This helps businesses focus more on growth, investment, and market expansion instead of legal restructuring.
Conclusion
The removal of the turnover limit for OPCs has significantly improved the flexibility and growth opportunities open to individual entrepreneurs and small enterprises. Earlier, crossing the ₹2 crore turnover threshold necessitated that OPCs convert into private or public companies, which would increase compliance and operational costs. The government has, therefore, abolished this limitation to empower OPCs to grow without excessive legal barriers, fostering entrepreneurship and improving the business environment. This change allows business owners to concentrate on expansion, investment, and maintaining competitiveness in the market while still enjoying the advantages of a limited liability corporate framework. In addition, it supports the objective of India in terms of supporting startups, MSMEs, and individual entrepreneurs, making OPCs a more attractive and feasible business model. Reduced regulatory challenges have allowed OPCs to function with greater stability, financial agility, and long-term growth prospects that will contribute to the development of India’s evolving business landscape.
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