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Disadvantages of One Person Company


Disadvantages of One Person Company

A. Members:

One person Company can have Minimum or Maximum no. of 1 Member.

A minor shall not be eligible to become a member or nominee of the One Person Company or can hold share with beneficial interest.

Only a natural person who is an Indian citizen and resident in India shall be eligible to incorporate a One Person Company and shall be a nominee for the sole member of a One Person Company.

B. Suitable only for small business:

OPC is suitable only for small business. OPC can have maximum Paid up share capital of Rs.50Lakhs or Turnover of Rs.2 Crores. Otherwise OPC need to be converted into Private Ltd Company.

C. Business Activities:

One Person Company cannot carry out Non – Banking Financial Investment activities including investment in securities of anybody corporates.

One Person Company cannot be incorporated or converted into a company under Section 8 of the Act.

D. Tax Liability:

The concept of One Person Company is not a recognized concept under IT Act and hence such companies will be put in the same tax slab as other private companies for taxation purposes. As per the Income Tax Act, 1961, private companies have been placed under the tax bracket of 30% on total income. On the other hand, sole proprietors are taxed at the rates applicable to individuals, which mean that different tax rates are applicable for different income slabs. Thus, from taxation point of view this concept seems to be a less lucrative concept as it imposes heavy financial burden as compared to a sole proprietorship.

The basic income tax rate for a one person company is 30% which may result in a higher tax as compared to the income tax slab rates of an individual (i.e. 10% to 30%).

(Proprietorships have a clear advantage here in that a proprietor is subject to individual income tax slab rates from 10% to 30% and get benefits of basic exemptions. Hence, if you select a one person company over a proprietorship you will have to give up these advantages.)

E. Perpetual Succession:

This is Very concept of a separate legal entity being created for a perpetual succession that is continuation of the company even after the death or retirement of a member is also challenged. Because the nominee whose name has been mentioned in the memorandum of association will become the member of the company in the event of death of the existing member. However it is doubtful that it would do any good for the company because the person is not being a member of the company and also not involved in the day to day operation of the company, would not be able to succeed the business after the death of the member.

F. Higher incorporation costs:

As compared to proprietorships: One person companies need to be registered with the registrar of companies under the Companies Act, 2013. This would entail upfront expenditure on government charges and professional fees which you will have to pay your CA or CS. Proprietorships don’t need to register with the government and hence don’t incur these incorporation charges.

Though the Act extends slew of exemptions to a One Person company in terms of conducting AGM, EGM, Quorum of meetings, restriction on voting rights or filing its financial statements, yet the incorporation of such a company requires lots of paper work as compared to a sole proprietorship. These procedural complexities with respect to incorporation of One Person Company might make this concept less attractive for sole entrepreneurs

G. Higher compliance costs:

Compared to proprietorships: A one person company would have recurring compliance costs yearly, as it will need to get its accounts audited and will need to file returns every year with the registrar of companies like any other company.

H. Separation of Owner and Control:

This is one of the characteristics of the company ,which is seriously challenged by the new Companies Act ,2013, where the line between the ownership and control is blurred.

Which might result in unethical business practices.

I. Other Disadvantages:

A person shall not be eligible to incorporate more than a One Person Company or become nominee in more than one such company.

NRIs not allowed incorporating One Person Company.

Requirement to appoint a nominee for incorporating a One Person Company:

 


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