Private Limited Companies are one of the most commonly chosen business structures by entrepreneurs due to their distinct advantages like limited liability protection, separate legal entity, ease of fundraising, and perpetual existence. On the other hand, One Person Company (OPC) is a relatively newer concept introduced by the Companies Act, 2013, allowing a single individual to form a company with limited liability. OPCs provide the benefits of a private limited company, but with a lesser compliance burden and ease of operation.
Reasons for Conversion from Private Limited Company to OPC
There may be various reasons why a private limited company may choose to convert to an OPC. Some of the common reasons include:
- Reduction of Compliance Burden: OPCs have relatively lesser compliance requirements as compared to private limited companies. For instance, OPCs are not required to hold Annual General Meetings (AGMs) and can have only one director and one shareholder.
- Simplified Decision-Making: In a private limited company, decisions are made collectively by the Board of Directors. However, in an OPC, the decision-making process is simplified as there is only one director who is also the sole shareholder.
- Succession Planning: OPCs offer an easy succession planning mechanism as the nominee director can take over the operations of the company in case of the death or incapacity of the sole director/shareholder.
- Cost Savings: OPCs can be cost-effective in terms of compliance costs as compared to private limited companies, especially for small businesses with limited operations.
- Change in Business Requirements: The nature or scale of the business may change over time, and converting to an OPC may align better with the new business requirements.
Legal Requirements for Conversion
The conversion of a private limited company to an OPC is governed by the Companies Act, 2013, and the rules prescribed by the Ministry of Corporate Affairs (MCA). Some of the legal requirements for conversion are:
- The private limited company should have a paid-up share capital of Rs. 50 lakhs or less and an average annual turnover of Rs. 2 crores or less for the preceding three financial years.
- The private limited company should have only one shareholder who will also be the sole director of the OPC.
- The private limited company should not be in default of any statutory filings, and all its compliances should be up to date.
- The private limited company should obtain a No Objection Certificate (NOC) from its creditors and shareholders before proceeding with the conversion.
- The private limited company should prepare a detailed plan for the conversion, including the draft memorandum and articles of association of the OPC.
Step-by-Step Process of Conversion
The conversion process from a private limited company to an OPC involves the following steps:
- Board Meeting: The Board of Directors of the private limited company should convene a board meeting to pass a resolution for conversion and approve the conversion plan, including the draft memorandum and articles of association of the OPC.
- Shareholder Approval: The shareholders of the private limited company should approve the conversion plan by passing a special resolution in a general meeting. The private limited company should obtain a NOC from its creditors and shareholders for the conversion.
- Application to Registrar of Companies (ROC): The private limited company should file an application in Form INC-6 with the ROC along with the conversion plan, NOC, and other required documents. The ROC will review the application and may request additional documents or information.
- Issuance of Certificate of Incorporation: Upon approval of the application by the ROC, a Certificate of Incorporation will be issued, and the private limited company will be deemed converted into an OPC from the date mentioned in the Certificate.
- Compliance Requirements: After the conversion, the OPC will have to comply with the ongoing compliance requirements of an OPC, such as maintaining proper books of accounts, filing annual financial statements and annual returns with the ROC, and conducting board meetings as required.
Advantages and Disadvantages of Conversion
The conversion of a private limited company to an OPC has its pros and cons, which are important to consider before making a decision. Some of the advantages of conversion are:
- Reduced Compliance Burden: OPCs have lesser compliance requirements, which can result in cost savings and ease of operation.
- Simplified Decision-Making: OPCs have a simplified decision-making process as there is only one director/shareholder, leading to quicker decision-making.
- Easy Succession Planning: OPCs provide a smooth succession planning mechanism as the nominee director can take over in case of the sole director’s incapacity.
- Cost-Effective for Small Businesses: OPCs can be a cost-effective option for small businesses with limited operations.
However, there are also some disadvantages to consider, such as:
- Limited Liability Protection: OPCs still have limited liability protection, but the liability of the sole director/shareholder may be higher compared to a private limited company with multiple directors/shareholders.
- Restricted Operations: OPCs are not allowed to have more than one director and cannot have more than Rs. 50 lakhs of paid-up share capital or Rs. 2 crores of average annual turnover, which may limit the scale of operations for certain businesses.
- Compliance Risks: OPCs need to ensure strict compliance with the Companies Act, 2013, and other applicable laws to maintain their OPC status and avoid penalties.
Impact on Taxation and Compliance
The conversion of a private limited company to an OPC may have implications on taxation and compliance. After conversion, the OPC will be treated as a separate legal entity for taxation purposes, and it will have to obtain a new Permanent Account Number (PAN) and make necessary changes in its tax registrations, such as Goods and Services Tax (GST) registration. The OPC will also have to comply with the annual financial statement and annual return filing requirements under the Companies Act, 2013, and other applicable laws.
The Conversion of Private Company into OPC can be a strategic decision for businesses that want to simplify their operations, reduce compliance burden, and align with their changing business requirements. However, it is crucial to carefully evaluate the legal requirements, advantages, disadvantages, and implications on taxation and compliance before making a decision. Seeking professional advice from a qualified company secretary or legal expert can ensure a smooth and compliant conversion process.