OPC vs. Private Limited Company: Understanding the Differences

In today’s business world, the two most common forms of company registration are One Person Company (OPC) and Private Limited Company. Both OPC and Private Limited Company are incorporated under the Companies Act, 2013 and provide limited liability protection to their owners. However, there are some significant differences between these two company structures that entrepreneurs should consider before choosing one over the other.

Quick Look

The growth and popularity of company forms of business has resulted in the formation of various new types of companies to give flexibility to corporate organizations. This creation contained multiple variables to consider for various sorts of company objectives, as well as to identify a suitable structure under which the company should be founded. These are some examples:

• Members’ Liabilities
• The number of Members
• Ownership
• Parliamentary special resolution, act, or bill
• The Company’s Purpose
• Authority control
• The location of the Company
• Investment Type
• Formation and incorporation

Most people associate the term “company” with a Private Limited Company, although the term can also refer to a One Person Company, a Section 8 Company, or a Limited Company, depending on the method of incorporation under the Companies Act, 2013.

The MSME (Micro, Small, and Medium Enterprises) Act, on the other hand, classifies businesses as micro, small or medium in order to provide them with numerous MSME advantages.

There are many legal and financial considerations to keep in mind when choosing the right type of company. Two popular business structures in India are the One Person Company (OPC) and the Private Limited Company (PLC). Let us now, discuss the key differences between OPC and PLC, helping you make an informed decision for your business.

Overview of One Person Company

A One Person Company is one in which the person is the Director, member, shareholder, and promoter of the company in question. This type of business is governed by Section 2 (62) of the Companies Act, 2013.

It combines the advantages of a sole proprietorship with those of a Private Limited Company. A paid-up capital is not required with a One Person Company. An OPC is also a separate entity from its members. The following are some of the fundamental characteristics of an OPC:

• OPCs have one member, and this kind of company must appoint a nominee to continue its operations if its lone member dies.
• OPCs cannot sell their shares to the general public via Stock Exchange Platforms (SEPs) or list on the National Stock Exchange.
• An OPC is not required to convene an Annual General Meeting (AGM), and as a result of such exemptions, the cost of compliance in this type of company is prohibitively low.
• It is unable to obtain cash from the general public via prospectus or public issue.
• A One-Person Company must have at least one director and a maximum of 15 directors.
• Because the company dissolves if the candidate is not allowed to join, a perpetual succession of the company is relatively low.

Note: A One-Person Company is comparable to a private limited company, with the exception that it has just one director, who is also its sole shareholder and member.

Advantages of One Person Company

Some of the advantages of forming an OPC are:

• Limited Liability: The owner’s liability is limited to the amount invested in the company, which means that their personal assets are not at risk in case of any legal issues.
• Separate Legal Entity: An OPC is a separate legal entity, which means it can sue or be sued in its name, and its existence is not dependent on the owner’s life.
• Perpetual Succession: The ownership of the company can be transferred in case of the owner’s death, which ensures continuity of the business.
• Lower Compliance: Compared to Private Limited Company, OPC has lesser compliance requirements, making it easier to maintain and run.

Overview of Private Limited Companies

In a Private Limited Company, a small group of persons manage the organization in private without intervention from the public. By virtue of section 2 (68) of the Companies Act, 2013, as well as other pertinent laws that apply to the specific type of businesses in question, these companies are governed.

Following are some fundamental characteristics that help companies understand the components of a Private Limited Company form of business:

• For the constitution, a Minimum of Two Directors and Two Shareholders are needed.
• Stockholders may be no more than 200 members,
• The documents in which the company’s constitution is written are the Memorandum of Association (MOA) and the Articles of Association (AOA), respectively.
• Using private placements, a Private Limited Company issues its shares,
• A Private Limited Company’s incorporation is an easy process with minimal bother and expense.
• No prospectus or public offering is used by a Private Limited Company to seek capital from the general public, and
• It cannot list on the National Stock Exchange (NSE) or sell shares to the general public through stock exchange platforms, among other things.

Note: It should be noted that start-ups seeking funding and ESOPs should think about using this form of legal structure.

Advantages of Private Limited Company

Some of the advantages of forming a Private Limited Company are:

• Limited Liability: Like an OPC, the owner’s liability is limited to the amount invested in the company.
• Separate Legal Entity: A Private Limited Company is also a separate legal entity and can sue or be sued in its name.
• Perpetual Succession: The ownership of the company can be transferred in case of the shareholder’s death, ensuring continuity of the business.
• Ability to Raise Funds: Private Limited Company can issue shares, debentures, and other securities to raise funds from the public.

Differences between OPC and Private Limited Company

When starting a new business, one of the most important decisions that an entrepreneur has to make is choosing the right type of company structure. In India, there are two popular types of company structures: One Person Company (OPC) and Private Limited Company. Although both of these structures offer limited liability protection, they differ in terms of their ownership, governance, and legal requirements. The differences between OPC and Private Limited Company are:

• Legal Structure: One Person Company is a new concept introduced by the Companies Act, 2013. It is a type of Private Limited Company that can be owned and managed by a single person. In contrast, a Private Limited Company requires a minimum of two shareholders to incorporate.

• Ownership and Management: In an OPC, there can only be one owner, and the sole proprietor can be the director of the company. However, in a Private Limited Company, there must be a minimum of two directors, and the ownership is distributed among the shareholders.

• The number of Members: OPC can have only one member or shareholder, whereas a Private Limited Company can have a minimum of two members and a maximum of 200 members.

• Legal Compliance: Both OPC and Private Limited Company are required to comply with the legal formalities prescribed by the Companies Act, 2013. However, OPC has certain relaxations regarding compliance, such as no requirement for conducting Annual General Meetings (AGMs) and only one director is sufficient to sign financial statements.

• Capital Requirement: OPC does not have any minimum capital requirement, whereas a Private Limited Company has a minimum paid-up capital of Rs. 1 lakh.

• Taxation: OPC and Private Limited Company are taxed at the same rate of 25% of profits. However, the distribution of dividends to shareholders is taxed differently. In OPC, there is no Dividend Distribution Tax (DDT), whereas in a Private Limited Company, DDT is applicable.

Which Company is Suitable for you between OPC and Private Limited Company?

Choosing the right legal structure for your business is a crucial decision that can affect the future of your company. Two popular options for business entities in India are the One Person Company (OPC) and the Private Limited Company. Both have their advantages and disadvantages, and it’s essential to understand which one is suitable for you.

When deciding which legal structure to choose for your business, you should consider the following factors:

• The Number of Owners: If you are the sole owner of the business, then an OPC might be suitable for you. If you have multiple shareholders, then a Private Limited Company might be the better option.
• Fundraising: If you plan to raise funds from the public, then a Private Limited Company is more suitable since it can issue shares and other securities.
• Compliance: If you want to keep compliance requirements to a minimum, then an OPC is the better option since it has lesser compliance requirements.
• Future Expansion: If you plan to expand your business in the future, then a Private Limited Company might be more suitable since it can have up to 200 shareholders.

Takeaway

Choosing between an OPC and a Private Limited Company depends on your business needs and goals. Both have their advantages and disadvantages, and it’s essential to understand them before making a decision. If you are a sole owner and want to keep compliance requirements to a minimum, then an OPC might be suitable for you. However, if you have multiple shareholders and plan to raise funds from the public, then a Private Limited Company might be a better option. It’s important to consult a legal expert before making a decision to ensure that you choose the right legal structure for your business.

Connect to the Legal Window Team and get your choice of company registered today. Our experts are here to assist you with all the technicalities and procedures.