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How do you convert from a One Person Company to a Private Limited Company?

The introduction of the Private limited company into the legal system came into existence to encourage all budding entrepreneurs with the sole motive of entering the corporate world. This will not only contribute to the economic growth of the nation but also at the same time will generate vast employment opportunities in various sectors.

Let us have a brief intro what a One Person Company (OPC) is all about.

OPC is basically a hybrid structure which combines the advantages of a sole proprietorship and a company form of business. In case of an OPC, a single person can be a director as well as the shareholder.

Section 2(62) of the Companies Act, 2013 defines that the OPC is a company which should have at least one person as its member. A One Person Company registration is as similar to a Pvt Ltd company thereby both the business entities follow the same provisions.

Merits of incorporating an OPC

It is a new structure of the business model that has been emerging in recent times. Here are some of the benefits regarding an OPC:

  • Unlike a sole proprietorship, the liability of the director is limited in case of an OPC.
  • The owner will have the entire control of the company or the business.
  • OPC helps startup entrepreneurs to experiment with their business skills for a short period of time. However in later stages, one can carry forward their business by converting to a Pvt Ltd Company with additional funding from venture capitalists.
  • One can also avail certain tax flexibilities and concessions in an OPC.

Why does an OPC need to convert into a private limited company?

In order to obtain several features of a company, many OPC’s after getting established opt to convert itself into a private limited company.

The motive behind introducing the concept of an OPC is to encourage petty businesses. According to the Company Act, 2013 there is a requirement of conversion of an OPC to a private ltd company when it triggers certain criteria like;

  • If the paid-up share capital of an OPC is more than Rs. 50 lakhs
  • If the annual turnover exceeds Rs. 2 crore consecutively for the last 3 years.

The maximum time limit provided for the conversion after an OPC meets the above mentioned criteria is 6 months.

Steps taken during the conversion of an OPC to a Private limited company

On reaching a decision to convert to a private limited company the following points should be noted.

  • The OPC should end with the tag mentioned as ‘Private limited’ at the end of its name.
  • The objective clause should be amended if there is a requirement of additional objectives in the clause or there is a difference with the existing clause.
  • The clause with regard to the subscribers needs to be altered as there is a requirement of inclusion of additional members in the memorandum.
  • The Registrar has to be intimated through the Form INC 6 within a time frame of 30 days stating that the existing OPC is getting converted into a private limited company.

2 modes of conversion:

  • Voluntary conversion
  • Mandatory conversion

In the case of the former, an OPC can convert to a private limited company 2 years from the date of incorporation. Moreover, if the paid-up share capital exceeds more than Rs. 50 lakhs or its annual turnover crosses Rs. 2 crores in the last 3 years then an OPC can voluntarily convert into a private limited company within a period of 2 months. For this, an OPC has to communicate with the Registrar of Companies in Form INC-5 within 60 days. Here the choice is voluntary i.e., it can convert to a private limited company or not.

In the case of latter, it is a condition where an OPC has to be converted to a private limited company mandatorily. The reason being when an OPC has a paid-up share capital in excess of Rs. 50 lakhs and the annual turnover exceeds Rs. 2 crores in the last 3 years, then it is obligatory to convert an OPC to a private limited company.

The shareholders of an OPC should hold a general meeting for passing the resolution for raising the paid-up capital if required, number of shareholders, the appointment of directors etc for converting an OPC to a private limited company. Moreover, a board resolution should be passed by the shareholders for approving the alteration in the Memorandum and the Articles of Association of the OPC.

If the Registrar of Companies comes to know if any of the members have breached the provision of the rules as stated are liable for a severe penalty. He/she shall be punishable with a fine which may extend to Rs. 10,000 with an additional penalty of Rs. 1000 for every day after which such contravention continues.

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