Companies Act, 2013 introduced the concept of One Person Company in India in order to promote self-employment and to motivate individuals who are capable of starting a business of their own. The need for two directors in a private limited company is eliminated which aids the entrepreneurs to have total control over their entity, and also enjoying limited liability. A nominee is required to be mentioned in the Memorandum & Articles of Association, who will take over the responsibility of the company in case the original member is dead or incapable by any cause.
Mentioned below are some of the disadvantages of a One Person Company (OPC):
Number of Member is the first in the Disadvantages of one person company, the One Person Company Registration can have a Minimum or Maximum no. of 1 Member. It only allows one person to own and run the entire business. A minor is neither eligible to become a member or a nominee of the OPC nor it cannot hold a share with beneficial interest.
Thus only a natural person who is an Indian citizen and a resident in India will be eligible to incorporate an OPC and also be a nominee to the sole member in the company.
Suitability for small business
The suitability for a small business plays important role in disadvantages of one person company as the OPC is suitable only for small businesses only. OPC can thus have maximum paid up share capital of Rs. 50 Lakh or an annual turnover of Rs. 2 Crores. Otherwise, an OPC needs to be converted itself into a Private Limited Company.
An OPC is not allowed to carry out a Non – Banking Financial Investment activities including the investment in securities of any corporate. OPC is not permitted to convert itself into a Section 8 company.
Related: Advantages of OPC Registration
The concept of One Person Company Registration is also not a recognized approach under the Income Tax Act and hence such kind of companies will thus be put in the same tax slab as other private companies for the taxation purposes. As per the Income Tax Act, 1961, private companies have been placed under the tax bracket of 30% of tax on total income. On the other hand, the sole proprietors are thus taxed at the rates which are applicable to the individuals, which mean that there are different tax rates which are applicable for the different income slabs. Thus, from the taxation point of view, this concept thus seems to be a less lucrative as it imposes a heavy financial burden compared to a sole proprietorship.
This is a concept of a legal entity which is being created for a perpetual succession that is the continuation of the company even after the death or the retirement of a member is also challenged. Because the nominee whose name has thus been mentioned in the memorandum of association will, however, become the member of the company in the case of the death of the existing member. But it is doubtful that it would do any good for the company because the person is not involved in the day to day operation of the company, and hence he would not be able to succeed the business after the death of the member.
Higher incorporation costs
As compared to proprietorship, OPC is required to be registered with the registrar of companies under the Companies Act, 2013. This would thus entail upfront expenditure on the government charges and the professional fees which will be paid to the Chartered Accountant/Company Secretary. Proprietorship Firms don’t need to register with the government and hence do not pay the incorporation charges.
Higher compliance costs
As compared to the proprietorship, an OPC incurs compliance costs yearly, as it is required to get its accounts audited and file the returns every financial year with the Registrar of Companies (ROC) like any other corporate entity.
Separation of Owner and Control:
This is one of the characteristics of OPC that it is seriously challenged by the new Companies Act, 2013, where the line between the ownership and control is thus blurred which result in unethical business practices.