One-person companies to boost start-up ecosystem in small towns

The Budget has proposed to incentivise the incorporation of One Person Companies (OPCs) which is expected to boost the start-up and innovation ecosystem. The move aims to provide total control, lesser compliance burden coupled with limited liability to the company founder. It is also expected to nurture entrepreneurship in Tier 2,3,4 and 5 cities.

“I propose to revise the definition under Companies Act, 2013 for Small Companies by increasing their thresholds for paid up capital from ‘not exceeding ₹50 lakh’ to ‘not exceeding ₹2 crore’ and turnover from ‘not exceeding ₹2 crore’ to ‘not exceeding ₹20 crore. This will benefit more than 2 lakh companies in easing their compliance burden,” said Sitharaman.

Additionally, the residency limit for an Indian citizen to set up an OPC was reduced from 182 days to 120 days and Non-Resident Indians (NRIs) are now allowed to incorporate 1-person companies in India. The FM has also incentivised start-ups by extending eligibility to claim tax holiday by one year - 31st March, 2022.

Potential for growth

Pointing out that OPCs require one person as a subscriber to form a company and such a company is treated as a private company under the Companies Act, Moin Ladha, Partner Khaitan & Co, said: “The primary advantages of OPC include complete control, lesser compliance burden coupled with limited liability for the founder. It allows OPCs to grow without any restrictions on paid-up capital and turnover, allowing their conversion into any other type of company such as a private limited company which requires a minimum of two people and a two-person board of directors.”

He said, “Allowing NRIs to invest through this route can encourage start-ups and smaller businesses to set up without the concerns of a larger compliance framework or minimum capital commitment,” he said.

Boost to start-ups

OPCs will give a boost to new start-ups getting launched which will emerge from Tier 2,3,4 and 5 towns, said Bhaskar Majumdar, Managing Partner, Unicorn India Ventures. He said, “The focus of the Companies Act was on preventing fraud and not about inculcating entrepreneurship. OPC is definitely a step in the right direction for entrepreneurship and will not only de-risk an individual from his business but also give him/her credibility in raising seed/angel money in the future.”

A simplified regime for OPC will encourage start-ups and entrepreneurs to do business under a corporate structure in an organised manner that can help them to scale and grow, said Suraj Malik, Partner-Transaction Tax, BDO India. Serial entrepreneur and partner of GrowthStory, K Ganesh, said that OPCs ensure ease of doing business, allowing founders to focus their efforts on the business rather than on government red tape.