A One Person Company offers sole owners many benefits that are not readily available to sole proprietors. These include the concept of limited liability, the ability to raise larger debts at competitive rates from banks and so on. But at the same time, there are certain drawbacks to OPCs that may make it unsuitable for certain people. Five such drawbacks are discussed below.
A curious downside of starting a One Person Company is that once you register an OPC, then you are restricted from incorporating any more OPCs. In contrast, you are free to start any number of private limited companies and LLPs. The exact reason as to why such a restriction has been imposed is not clear, but it does not change the fact that such a limitation affects a person’s ability to start multiple ventures with 100% ownership. This means that your personal house, your foundation for your livelihood is under a certain amount of pressure, as you could potentially be liable for damages and have to sell your home in order to pay for your company’s failure.
Only a natural born Indian citizen, who is currently living in the country can incorporate a One Person Company. As such, foreign nationals cannot start OPCs in India. Plus, a company cannot incorporate an OPC since a company is not considered a ‘person’ when it comes to OPCs. As such, if you own a private limited company and wish to start an OPC in the name of the company to use it as a subsidiary or some other purpose, you will be unable to do so under current laws.
External Commercial Borrowing (ECB) Restrictions
One big drawback of an OPC is that they are not recognized by the External Commercial Borrowing and Trade Credits. What this means is that OPCs cannot seek funds from foreign lenders. So, if you are planning to obtain some funds for your venture from outside India, an OPC is not the ideal business structure for you. But if you are not concerned with foreign funds, then you can go ahead and do a One Person Company registration.
An OPC is taxed at the same rate as other private companies, which means a flat 30% charge on total income. However, sole proprietors are only charged at the tax rate applicable to individuals. As such, if you are going to be the only owner of the business, then operating the business as a sole proprietorship is the most advantageous option for you from the perspective of taxation.
A One Person Company only has one shareholder, owning 100% of the business. As such, the concept of an ESOP does not exist within the context of an OPC. So, in case you plan on giving your employees a share of your business in the future, then an OPC is not suitable for you.
If you are concerned about any of the above limitations of OPCs, then you should look at registering other business structures like an LLP or a private limited company. Plus, remember to trademark your business identity to protect it from infringement. You can easily register trademark online in India by consulting any good trademark registration service.