One Person Company (OPC): Definition, Features, Formation etc.

Dec 24, 2024
Private Limited Company vs. Limited Liability Partnerships

The concept of a One-Person Company (OPC) revolutionised business formation in India with its introduction under the Companies Act of 2013.

One person company registration bridged the gap between sole proprietorships and private limited companies, offering entrepreneurs the flexibility of running their business as a single member while enjoying the benefits of limited liability.

Before this change, solo entrepreneurs often operated under sole proprietorships, exposing their personal assets to business risks.

Table of Contents

Definition of One Person Company

The full form of OPC is One Person Company. An OPC, defined under Section 2(62) of the Companies Act of 2013, is a private company with just one member. Unlike sole proprietorships, OPCs are separate legal entities, meaning the company’s liabilities do not affect the personal assets of the member.

OPCs are an excellent option for solo entrepreneurs who wish to gain the benefits of a corporate structure without the need for additional shareholders. By combining limited liability protection with simplified compliance, OPCs have become attractive for those looking to establish a secure and scalable business.

Features of a One Person Company

From having a single member and a nominee to enjoying certain privileges under the Companies Act, OPCs stand out as a distinct entity. Here are some key features and advantages of an OPC:

  • Single Member Structure: OPCs allow a single individual to own and manage the company.
  • Nominee Requirement: A nominee must be appointed during registration to take over the business in case the member dies.
  • Private Entity: OPCs are classified as private limited companies.
  • Limited Liability: The member’s liability is limited to their investment in the company.
  • Exemptions: OPCs enjoy exemptions from several compliance obligations, such as annual general meetings.
  • No Perpetual Succession: The OPC’s existence is tied to its member and nominee.

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Example of One Person Company (OPC)

To better understand how a One Person Company (OPC) functions, let’s look at a hypothetical example:

Example: Elite Decor OPC Private Limitedv

Industry: Interior Design

Scenario:
Ravi Sharma is an interior designer with a growing client base. Initially, he operated as a sole proprietor, but he wanted to expand his business, protect his personal assets, and gain more credibility with clients.

Ravi decided to register his business as an OPC, Elite Decor OPC Private Limited, under the Companies Act, 2013. By doing so:

  1. He became the sole member of the OPC, retaining full ownership and control of the business.
  2. He appointed his spouse, Priya Sharma, as the nominee, ensuring continuity of the business in case of his death or incapacitation.
  3. His liability was limited to the amount he invested in the company, protecting his personal assets like his home and savings from business risks.

Benefits Ravi Experienced:

  • Limited Liability: Any debts or losses incurred by the company would not impact Ravi’s personal wealth.
  • Separate Legal Entity: Clients and vendors saw Elite Decor as a professional entity, improving trust and credibility.
  • Ease of Compliance: Ravi benefited from exemptions like not needing to hold annual general meetings (AGMs), saving time and effort.

Through this OPC model, Ravi successfully grew his business while enjoying the benefits of limited liability and a corporate structure.

Formation of One Person Companies

Forming a One Person Company (OPC) is a straightforward and streamlined process governed by the Companies Act, 2013. Here’s a step-by-step guide to help you navigate the formation of an OPC:

Step 1: Obtain a Digital Signature Certificate (DSC)

The first step in forming an OPC is obtaining a Digital Signature Certificate (DSC) for the sole member and the nominee. You can acquire a DSC from authorised certifying agencies.

Step 2: Reserve a Unique Name through SPICe+ Part A

Use the SPICe+ (Simplified Proforma for Incorporating Company Electronically) Part A form on the Ministry of Corporate Affairs (MCA) portal to reserve a unique and compliant name for the OPC. The name should adhere to the MCA guidelines and not conflict with existing company names.

Step 3: File Incorporation Forms

Prepare and file Form SPICe+ Part B, a consolidated form for company incorporation. Along with SPICe+, you need to submit the Memorandum of Association (MOA) and Articles of Association (AOA) to define the company’s objectives and internal management rules.

Step 4: Provide Nominee Details

As an OPC requires a nominee, you must submit Form INC-3, which includes the nominee's consent and their details, such as identity and address proofs. The nominee acts as a safeguard, taking over the OPC in case of the sole member's incapacity or demise.

Step 5: Obtain the Certificate of Incorporation

Once all the forms are submitted and verified by the Registrar of Companies (ROC), the OPC will be officially registered. You will receive a Certificate of Incorporation, marking the legal formation of your company.

Membership in One Person Companies

Membership in a One Person Company (OPC) is governed by specific rules outlined in the Companies Act, 2013, ensuring that the structure remains unique to individual entrepreneurs. Here’s an overview of the eligibility and restrictions associated with OPC membership:

Who Can Be a Member?

  1. Indian Citizens Only:
    • Membership is restricted to natural persons who are Indian citizens and residents.
    • A resident is someone who stayed in India for at least 182 days in the preceding financial year.
  2. One OPC Per Individual:
    • A person can be a member or nominee in only one OPC at a time, ensuring exclusivity.
  3. Minors Are Not Allowed:
    • Minors are prohibited from becoming members or nominees of an OPC. This ensures that legally capable individuals bear the responsibilities and liabilities.

Role of a Nominee

Every OPC requires a nominee to take over the company in the event of the member's incapacity or demise. The nominee:

  • Must also be an Indian resident and citizen.
  • Can withdraw or cancel their nomination by notifying the member and the company through the prescribed forms.

Natural Persons vs. Corporate Entities

Only natural persons are eligible to become members or nominees of an OPC. Corporate bodies, LLPs, or partnerships cannot hold membership, emphasizing the personal ownership aspect of the OPC model.

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Difference Between OPCs and Sole Proprietorships

While both structures allow solo ownership, they differ significantly in terms of liability, legal status and compliance requirements.

An OPC provides the benefits of limited liability and a separate legal identity, ensuring personal assets are protected from business risks.

On the other hand, a sole proprietorship is simpler to set up but ties the owner's personal finances directly to the business, increasing financial vulnerability.

Here are some key differences between OPC and Sole Proprietorship:

Parameters One Person Company (OPC) Sole Proprietorship
Legal Entity Separate legal entity Not a separate entity; the owner and business are the same
Liability Limited to the member's contribution Unlimited liability; owner's personal assets are at risk
Regulation Governed by the Companies Act of 2013 Minimal regulations; governed by local laws
Registration Formal registration with RoC is required No formal registration is required
Compliance Moderate compliance (e.g., filing annual returns) Minimal compliance requirements
Business Continuity Exists independently of the owner Dissolves upon the owner's death or withdrawal

Conversion of OPCs into Other Companies

The conversion of a One Person Company (OPC) into other company types is governed by specific regulations under the Companies Act, 2013. This flexibility allows businesses to evolve their structure as they grow or to meet operational and strategic needs. Here’s an overview of the conversion process and rules:

Mandatory Conditions for Conversion

  1. Turnover Threshold:
    • An OPC must convert into a private or public limited company if its paid-up share capital exceeds ₹50 lakh or its average annual turnover exceeds ₹2 crore in the previous three financial years.
    • The conversion must be completed within six months from the date these thresholds are crossed.
  2. Prohibited Conversions:
    • Due to legal restrictions, an OPC cannot be converted into a Section 8 company (non-profit organisation).

Voluntary Conversion

  • Eligibility for Voluntary Conversion:
  • After two years from the date of incorporation, an OPC can voluntarily convert into a private or public limited company.

Steps for Conversion of OPC into a Private Limited Company

  1. Conduct a General Meeting:
  2. Pass a special resolution. Convene a meeting of the sole member (or board if applicable) to approve the conversion resolution.
  3. Amend MOA and AOA:
  4. Update the Memorandum of Association (MOA) and Articles of Association (AOA) to reflect the new structure.
  5. File Required Forms:
  6. Submit Form INC-6 to the ROC and supporting documents, such as the updated MOA, AOA, and resolution copy.
  7. Obtain Certificate of Conversion:
  8. Upon successful verification, the ROC will issue a certificate confirming the company’s new status.

Privileges of One Person Companies

Mandatory Conditions for Conversion

  1. No Annual General Meetings (AGMs): OPCs are exempt from holding AGMs.
  2. Simplified Reporting: Financial statements require less detailed disclosures.
  3. Director Remuneration: Increased flexibility in director remuneration.
  4. Minimal Board Meetings: A single meeting is sufficient for many decisions.
  5. Relaxed Governance: Compliance obligations are simplified, enabling easier operations.

These privileges of an OPC empower solo entrepreneurs with the freedom to focus on growing their businesses without being overburdened by compliance requirements.

Frequently Asked Questions

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Frequently Asked Questions

What is OPC and its Features?

An OPC (One Person Company) is a corporate entity introduced under Section 2(62) of the Companies Act, 2013. OPC registration allows a single individual to start a company while enjoying the benefits of limited liability and a separate legal entity, distinct from its owner.

Key Features of OPC:

  • Single Member Structure
  • Limited Liability
  • Nominee Requirement
  • Separate Legal Entity

What is the Formation of a One Person Company?

OPC registration online involves the following steps under the Companies Act of 2013:

  1. Obtain Digital Signature Certificate (DSC): Required for the sole member and nominee.
  2. Reserve Company Name: Use the SPICe+ Part A to secure the OPC’s name.
  3. File Incorporation Forms: Submit Form SPICe+ Part B with the MOA (Memorandum of Association) and AOA (Articles of Association).
  4. Nominee Details: Provide the nominee’s consent using Form INC-3.
  5. Certificate of Incorporation: The ROC issues this after verification to confirm the formation of the OPC.

What are the Types of OPC?

In India, One Person Companies (OPCs) are categorised based on their purpose and nature of business activities. While the Companies Act of 2013 does not explicitly define subcategories, OPCs are generally distinguished as follows:

  • OPC Limited by Shares
  • OPC Limited by Guarantee with Share Capital
  • OPC Limited by Guarantee without Share Capital
  • Unlimited OPC with Share Capital
  • Unlimited OPC without Share Capital

What is the Limit of OPC?

  • Turnover Limit: An OPC must convert into a private or public limited company if its average annual turnover exceeds ₹2 crore.
  • Paid-up Capital Limit: Conversion is also mandatory if paid-up share capital exceeds ₹50 lakh.

What are the Benefits of OPC?

  • Limited Liability: Protects the owner’s personal assets from business liabilities.
  • Separate Legal Entity: Provides credibility and allows the company to operate independently.
  • Ease of Formation: Requires fewer formalities compared to other companies.
  • Nominee Provision: Ensures continuity in the owner’s absence, even though it’s a single-person company.
  • Exemptions: OPCs are exempt from holding annual general meetings (AGMs) and other complex compliance requirements.
  • Tax Benefits: Treated as a private limited company for tax purposes, which is advantageous compared to sole proprietorships.

Can OPC Have Two Directors?

Yes, an OPC can have up to 15 directors, as per the Companies Act of 2013. However, it can only have one member or shareholder who owns the company. Directors can be appointed to assist in the company’s management but do not hold ownership.

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Related Posts

 Difference Between Sole Proprietorship and One Person Company

Difference Between Sole Proprietorship and One Person Company

When deciding between a One Person Company (OPC) and a Sole Proprietorship (SP), understanding their core differences is crucial. An OPC is a legal entity with limited liability, separate from its owner, which can be beneficial for protecting personal assets. In contrast, a Sole Proprietorship is not a separate legal entity; here, the owner bears full responsibility for business liabilities, making it simpler but riskier.

Factors such as liability, compliance requirements and tax benefits may impact your choice between OPC and SP. While OPC offers better legal protection, SP provides simplicity and minimal regulatory obligations.

This guide will evaluate opc vs sole proprietorship in detail. 

Table of Contents

What is One Person Company (OPC)?

A One Person Company (OPC) is a company structure in India that allows a single individual to establish a business with limited liability. It provides the benefits of a corporate entity while retaining the simplicity of sole ownership.

Unlike a sole proprietorship, an OPC is a separate legal entity. This means it can own assets, enter into contracts, and protect the owner's personal assets from business liabilities.

OPCs operate under regulatory requirements similar to private limited companies but are tailored for single ownership. Additionally, the member must appoint a nominee to take over the business in case of the owner's incapacity or death.

What is Sole Proprietorship?

A sole proprietorship is a simple business structure, where the business is owned and managed by one individual. This makes it ideal for small businesses or individual entrepreneurs. The meaning of a sole proprietor is essentially someone who is the sole beneficiary of all business profits and is personally liable for any debts incurred by the business. There is no particular Sole Proprietorship Act in India. 

Unlike a One Person Company, a sole proprietorship does not separate the business entity from the owner. This means that all legal, financial and operational responsibilities rest with the proprietor, who has full control over decision-making and retains all profits.

Operating as a sole proprietor allows for flexibility and ease in starting or closing a business. There are minimal regulatory formalities, although certain licences may be required for specific sectors, like medical or food services. 

One Person Company vs Sole Proprietorship

Here is a detailed analysis of the difference between sole proprietorship and one person company:

Criteria Sole Proprietorship One Person Company (OPC)
Definition An unincorporated business owned and operated by a single individual, making it the simplest business form. A business structure introduced under the Companies Act 2013, allowing a single person to own a company with limited liability.
Liability The owner has unlimited personal liability, meaning their personal assets are at risk for business debts. Offers limited liability protection to the owner, so personal assets are generally safeguarded from business liabilities.
Formation and Compliance Minimal formalities required for setup, as it is not registered under any specific act. Requires registration with the Registrar of Companies (RoC) and submission of documents like MoA and AoA.
Continuity Business depends entirely on the owner’s existence; it ends if the owner dies or is incapacitated. Separate legal entity status allows the OPC to continue even if the owner passes away, with a nominee assuming control.
Fundraising Limited to personal savings, bank loans or funds from informal sources, which can hinder growth. Better positioned for fundraising through equity shares, allowing more potential for expansion.
Taxation Income is taxed as per individual income tax slabs, making tax management straightforward. Taxed as a company with applicable corporate tax rates, requiring additional annual filings with RoC.
Business Name Generally uses the owner’s name or a trade name, with no specific suffix required. Must include “OPC” in the company name, as mandated by law.

Sole Proprietorship Advantages and Disadvantages

Advantages of Sole Proprietorship

Quick Decision-Making

With full control, the sole proprietor can make prompt decisions, aiding responsiveness and agility in business operations.

Confidentiality

All business information remains private to the owner, enhancing operational discretion.

Ease of Formation and Low Costs

Starting a sole proprietorship involves fewer legal requirements, keeping setup costs low.

Direct Incentives

The owner retains all profits, providing direct motivation for business success.

Disadvantages of Sole Proprietorship

Unlimited Liability

The proprietor’s personal assets can be used to cover business debts, increasing financial risk.

Limited Access to Capital

Raising funds can be challenging, as sole proprietors often rely on personal savings or small loans.

Lack of Business Continuity

The business may end with the owner's incapacity, death or insolvency, impacting long-term stability.

Limited Specialisation

Managing all aspects of the business alone can hinder growth and focus on key areas.

One Person Company (OPC) Advantages and Disadvantages

Advantages of One Person Company

Limited Liability

The owner's liability is limited to the capital invested, safeguarding personal assets from business debts.

Separate Legal Entity

Being legally distinct enhances the company's credibility and professionalism.

Tax Benefits

OPCs enjoy certain tax benefits, such as lower rates and deductions on business expenses.

Single Ownership with Control

The owner retains full control over operations, simplifying decision-making.

Disadvantages of One Person Company

Limited Funding Options

OPCs cannot raise funds from the public, which may restrict growth opportunities.

Compliance Requirements

Annual filings, account maintenance and meetings are required, adding to operational tasks.

Nominee Requirement

The need for a nominee can be limiting for owners wanting complete control.

Naming Restrictions

"One Person Company" must be part of the company’s name, reducing flexibility in branding.

Frequently Asked Questions:

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Limited Liability Partnership
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  • Professional services 
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Private Limited Company
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  • Service-based businesses
  • Businesses looking to issue shares
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Private Limited Company
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  • Service-based businesses
  • Businesses looking to issue shares
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Limited Liability Partnership
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1,499 + Govt. Fee
BEST SUITED FOR
  • Professional services 
  • Firms seeking any capital contribution from Partners
  • Firms sharing resources with limited liability 

Frequently Asked Questions

Which is better, OPC or sole proprietorship?

When evaluating one person company vs sole proprietorship, the decision depends on your business goals. An OPC offers limited liability, protecting personal assets and provides credibility as a separate legal entity, which may attract investors. In contrast, a sole proprietorship is simpler to set up with fewer compliance requirements, but the owner is personally liable for business debts. 

Can a sole proprietorship be converted to OPC?

Yes, a sole proprietorship can be converted to an OPC. The process involves registering a new OPC and transferring the business’s assets and liabilities, following the regulations laid out by the Ministry of Corporate Affairs (MCA).

What are the tax benefits of OPC?

An OPC enjoys various tax benefits compared to a sole proprietorship. For example, OPCs can claim deductions on business expenses, such as salaries, office rent and travel costs. Additionally, OPCs benefit from lower corporate tax rates compared to individual tax rates applicable to sole proprietorships. 

How is OPC taxed?

An OPC is taxed as a private limited company, subject to corporate tax rates rather than individual tax rates. The current corporate tax rate in India for domestic companies is typically lower than the personal income tax rate applicable to sole proprietorships. 

Why is OPC a private company?

An OPC is classified as a private company because it operates with a single owner and has similar structural features to a private limited company, such as limited liability, a separate legal entity and compliance requirements. 

Can a sole proprietorship have employees?

Yes, a sole proprietorship can hire employees. The business owner, however, remains personally liable for any obligations or liabilities arising from employment, as the structure lacks limited liability protection.

Is a one person company the same as sole proprietorship?

No, a one person company is not the same as a sole proprietorship. While a one person company has a separate legal entity, a sole proprietorship does not have it. Moreover, the liability of the owner is limited in a one person company, as opposed to a sole proprietorship, where the owner’s liability is unlimited. 

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What is Letter of Credit (LC)? Meaning, Types, Examples, and Uses

What is Letter of Credit (LC)? Meaning, Types, Examples, and Uses

A Letter of Credit (LC) is a financial tool used in trade transactions to ensure secure payments for sellers. It acts as a guarantee from a bank that the buyer's payment will be received on time and for the correct amount. This mechanism minimises risks in international trade. There are various types of LCs like sight credit, acceptance credit and revocable credit, etc.

Table of Contents

What is an LC (Letter of Credit)?

A Letter of Credit (LC) is a document issued by a bank that guarantees payment to a seller on behalf of a buyer, provided that certain conditions are met. This financial instrument ensures payment security and mitigates risks associated with cross-border transactions. The issuance of an LC involves specific conditions, like the submission of required documents, which the bank reviews before releasing funds. It provides bank guarantees and incurs fees that are essential for its operation.

Examples of Letters of Credit

International Trade Example: A U.S. company wants to buy machinery from an Indian exporter. The U.S. company requests its bank to issue an LC to the Indian exporter. Once the exporter ships the machinery and presents the required documents to their bank, they receive payment from the issuing bank, ensuring trust and mitigating payment risk.

Domestic Transaction Example: A large retail chain uses an LC to purchase inventory from a local supplier. The LC guarantees that the supplier will receive payment as soon as they fulfill the delivery conditions outlined in the agreement.

Basics of a Letter of Credit Transaction

Applicant

The buyer who requests the LC from their bank. They initiate the process by applying for the LC and specifying the terms and conditions of the trade.

Beneficiary

The seller who receives payment through the LC. They must present all required documents correctly to receive payment.

Issuing Bank

The bank that issues the LC on behalf of the applicant. They verify the buyer's creditworthiness and commit to making the payment when conditions are met.

Negotiating Bank

The negotiating bank in LC that examines documents presented by the beneficiary and facilitates payment. They ensure all paperwork matches LC requirements perfectly.

The process begins when the applicant approaches their issuing bank for an LC. The issuing bank then coordinates with the negotiating bank to establish terms and verify documents before releasing any funds.

Importance of Letters of Credit

Secure Payments

They ensure that sellers receive payments without requiring advance payments, reducing risk for both parties involved in the letter of credit.

Facilitate Cross-Border Transactions

LCs simplify complex international transactions by providing a standardised payment mechanism across different countries.

Secure Business Funding

They provide businesses with necessary funding while verifying creditworthiness, helping companies maintain healthy cash flow.

Financial Assurance

LCs offer security when buyers cannot pay, acting as a guarantee backed by reliable banking institutions.

Advantages of Letters of Credit

Ease International Trade: Simplifies complex transactions across borders by providing a structured framework for payment and documentation.

Foster Global Business Connections: Builds trust between trading partners by removing payment uncertainty and providing bank-backed guarantees.

Provide Flexibility: Customisable terms to suit various transaction needs, including payment timing, shipping requirements, and document presentation.

Parties to Documentary Credit

Commercial/Trade Parties: The buyer and seller form the core of the transaction, initiating and completing the trade deal.

Banks: Issuing and advising banks serve as intermediaries ensuring secure payment and proper documentation.

Related Entities: Shipping lines and insurers support the transaction by handling logistics and risk management aspects.

Types of a Letter of Credit

Sight Credit

A Sight Credit allows instant payment upon presenting the correct documents, providing immediate access to funds for sellers. For example, if a businessman needs quick access to cash after shipping goods, they can use this type of credit.

Acceptance Credit/Time Credit

Acceptance or Time Credit involves bills that are accepted upon presentation and paid on specified due dates. This type allows sellers to receive payments after a set period.

Revocable Letter of Credit

A Revocable Letter of Credit can be canceled or modified by the issuing bank without beneficiary consent, which limits its reliability in ensuring secure transactions.

Irrevocable Letter of Credit

An Irrevocable Letter of Credit guarantees payment once certified by the exporter’s bank. This type provides security for international transactions and is often preferred by exporters due to its reliability.

Confirmed Letter of Credit

A Confirmed Letter of Credit involves both issuing and confirming banks. The confirming bank guarantees payment to the beneficiary, holding equal liability as the issuing bank, ensuring that payments will be honored upon proper presentation.

Back-to-Back Letter of Credit

This type involves issuing a second LC based on the security provided by the first LC. It is commonly used to secure payments for suppliers in international trade transactions.

Transferable Letter of Credit

A Transferable Letter of Credit allows the primary beneficiary to transfer credit partially or fully to another beneficiary, typically a supplier. However, once transferred, the second beneficiary cannot transfer it further.

Restricted Letter of Credit

A Restricted Letter of Credit specifies a particular bank responsible for payment, limiting its scope compared to unrestricted LCs. This type is often used when specific banks are preferred due to their reliability.

Revolving Letter of Credit

A Revolving Letter of Credit allows reuse after payments or drawings are made. This flexibility is beneficial for businesses requiring multiple shipments or ongoing transactions under one credit arrangement.

Precautions to be Taken

Verify Bank Reliability: The issuing bank must be reliable and well-known to both parties of the letter of credit. This helps minimise risks and ensures the LC will be honored when presented.

Local Bank Verification: It's essential to advise through an Indian bank and confirm the authenticity of the LC. The local bank can verify the legitimacy of the foreign bank and ensure all documents meet local regulations.

Clarify Financial Terms: Make sure to clearly establish who covers all bank charges and confirm freight payment terms as specified in contract agreements. This prevents disputes and unexpected costs during the transaction process.

Import Export Code

The Import Export Code (IEC) is a mandatory document required for all businesses involved in international trade. This code streamlines customs clearance, enables duty benefits, and ensures regulatory compliance. Through platforms like Razorpay Rize, businesses can obtain their IEC within 6-7 days which makes the process efficient and straightforward.

Frequently Asked Questions

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Private Limited Company
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1,499 + Govt. Fee
BEST SUITED FOR
  • Service-based businesses
  • Businesses looking to issue shares
  • Businesses seeking investment through equity-based funding


Limited Liability Partnership
(LLP)

1,499 + Govt. Fee
BEST SUITED FOR
  • Professional services 
  • Firms seeking any capital contribution from Partners
  • Firms sharing resources with limited liability 

One Person Company
(OPC)

1,499 + Govt. Fee
BEST SUITED FOR
  • Freelancers, Small-scale businesses
  • Businesses looking for minimal compliance
  • Businesses looking for single-ownership

Private Limited Company
(Pvt. Ltd.)

1,499 + Govt. Fee
BEST SUITED FOR
  • Service-based businesses
  • Businesses looking to issue shares
  • Businesses seeking investment through equity-based funding


One Person Company
(OPC)

1,499 + Govt. Fee
BEST SUITED FOR
  • Freelancers, Small-scale businesses
  • Businesses looking for minimal compliance
  • Businesses looking for single-ownership

Private Limited Company
(Pvt. Ltd.)

1,499 + Govt. Fee
BEST SUITED FOR
  • Service-based businesses
  • Businesses looking to issue shares
  • Businesses seeking investment through equity-based funding


Limited Liability Partnership
(LLP)

1,499 + Govt. Fee
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  • Professional services 
  • Firms seeking any capital contribution from Partners
  • Firms sharing resources with limited liability 

Frequently Asked Questions

What is meant by a letter of credit?

A letter of credit is a financial instrument issued by a bank that serves as a guarantee of payment in a transaction. The bank commits to pay the seller on behalf of the buyer when specific conditions and documentation requirements are met.

What is the difference between LC and BG?

While both are banking instruments, they serve different purposes. A letter of credit (LC) primarily ensures payment for a specific transaction upon meeting predetermined conditions. In contrast, a bank guarantee (BG) acts as a financial backup that compensates for potential losses if one party fails to meet their obligations.

Is a letter of credit a bank guarantee?

Though they may seem similar, these are distinct financial instruments. Letters of credit facilitate trade transactions by ensuring payment, while bank guarantees provide security against non-performance or default. They have different structures, purposes, and usage scenarios in business transactions.

Which type of LC is safest?

Among all types of letters of credit, a confirmed LC offers the highest level of security for sellers. This is because it involves two banks - the issuing bank and a confirming bank - both guaranteeing payment. The second bank's confirmation adds an extra layer of payment security, particularly valuable when dealing with international trade.

What is the bank limit for LC?

There's no standard limit for letters of credit, as banks set their own limits. These limits are determined by various factors like:

  • The bank's assessment of the client's creditworthiness
  • The nature and value of the transaction
  • The type of goods or services involved
  • The client's relationship with the bank
  • The bank's own risk policies and regulatory requirements

Nipun Jain

Nipun Jain is a seasoned startup leader with 13+ years of experience across zero-to-one journeys, leading enterprise sales, partnerships, and strategy at high-growth startups. He currently heads Razorpay Rize, where he's building India's most loved startup enablement program and launched Rize Incorporation to simplify company registration for founders.

Previously, he founded Natty Niños and scaled it before exiting in 2021, then led enterprise growth at Pickrr Technologies, contributing to its $200M acquisition by Shiprocket. A builder at heart, Nipun loves numbers, stories and simplifying complex processes.

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A Comprehensive Guide on Micro Finance Company Registration

A Comprehensive Guide on Micro Finance Company Registration

Micro Finance Companies (MFCs) are changing lives by making financial services accessible to people who are often overlooked by traditional banks. These companies focus on helping low-income individuals, small business owners, and self-employed people by offering small loans and basic financial support.

By doing so, they promote financial inclusion and play a key role in empowering communities and boosting local economies. However, like any financial institution, Micro Finance companies need to be registered and follow specific rules and regulations to operate legally and build credibility.

In this blog, we’ll walk you through everything you need to know about registering a Micro Finance Company in India- from understanding what they do, to the steps, documents, and costs involved in the registration process.

Table of Contents

What is a Micro Finance Company?

A Micro Finance Company is a financial institution that provides small loans and financial services to low-income individuals, self-employed persons, and small enterprises who lack access to conventional banking services.

These companies play a vital role in empowering economically weaker sections, supporting entrepreneurial initiatives, and fostering local economic development by promoting financial inclusion.

Features of Micro Finance Company

Micro Finance Companies are characterised by:

  • Providing small-ticket loans, typically without the need for collateral
  • Targeting low-income, rural, and unbanked populations
  • Offering simplified and accessible loan approval processes
  • Promoting financial literacy and inclusive banking

Objectives of Micro Finance Company

The main objectives of an MFC include:

  • Promoting financial inclusion for low-income individuals
  • Empowering women and self-employed entrepreneurs
  • Supporting small businesses and farming communities
  • Encouraging savings and responsible financial behaviour
  • Driving sustainable economic growth in underserved areas

Need for Micro Finance Company

There is a growing need for MFCs due to the lack of access to formal credit channels among the financially marginalised. Traditional banks often require credit history and collateral, which many low-income individuals cannot provide.

MFCs bridge this gap by offering unsecured loans and financial products tailored to the needs of small businesses, farmers, and micro-entrepreneurs.

Roles of a Micro Finance Company

Micro Finance Companies perform various functions that support economic empowerment:

  • Disbursing microloans to low-income individuals and small enterprises
  • Offering savings schemes and recurring deposit products
  • Providing insurance and risk mitigation solutions
  • Conducting financial literacy and awareness programs

Prerequisites for Microfinance Company Registration

A Micro Finance Company (MFC) can be registered either as an NBFC or as a Section 8 Company. The prerequisites vary depending on the type of entity you choose.

Prerequisites NBFC Section 8
Approval by the RBI It is mandatory It is not required
Net Owned Fund (NOF) Requires a minimum NOF of ₹5 crores There is no minimum requirement
Loan Limit It should be a maximum of 10% of the total assets There is a provision for an unsecured loan of around Rs. 50,000 to small businesses
Director Experience At least one director with 10 years of experience in financial services No prior experience required
No. of members Minimum members:
Private Limited Company- 2
Public Limited Company - 7
Minimum of 2 members
Status of Organisation Profitable Organisation Non-profit Organisation

Documents Required for Micro Finance Company Registration

Key documents include:

  • Identity and address proof of directors
  • Memorandum and Articles of Association
  • Business plan and financial projections
  • RBI approval (for NBFCs)
  • Certificate of Incorporation (for Section 8 companies)
  • Net Owned Fund certificate (for NBFCs)
  • Copy of Auditor’s report
  • Banker’s report copy
  • Recent credit report of the directors
  • Net worth certificate of the directors
  • Proof of work experience in the financial sector
  • Tax and statutory compliance documents

Micro Finance Company Registration as an NBFC

Given the two different approaches to forming a microfinance company, the registration process for an NBFC-MFI follows a specific set of steps:

  1. Company Incorporation:
    The first step is to register your business as either a Public Limited or a Private Limited Company. A private company requires a minimum of 2 members and a capital of ₹1 lakh, while a public company requires at least 7 members.
  2. Capital Requirement:Next, you must raise the minimum required Net Owned Funds (NOF)- ₹5 crore for most regions.
  3. Capital Deposit:
    Once the capital is raised, it must be deposited in a bank as a fixed deposit, and a ‘No Lien’ certificate must be obtained from the bank to confirm the funds are unencumbered.
  4. RBI License Application:
    The company must then apply for an NBFC license by submitting an online application through the RBI’s portal, along with all necessary certified documents. Additionally, a physical copy of the application and documents must be submitted to the RBI’s regional office.
  5. All documents should be readily available with the company at the time of filing.

Micro Finance Company Registration as a Section 8 Company

Alternatively, a Micro Finance company can be registered as a Section 8 Company, which is a not-for-profit entity. The steps involved in this process are:

  1. Obtain DSC:
  2. Begin by applying for the Digital Signature Certificate (DSC) for all proposed directors. The DSC is essential for digitally signing e-forms during the registration process.
  3. Name Approval:
  4. Next, apply for name approval using the SPICe+ form. The chosen name should reflect the company's non-profit nature- suggested words include Foundation, Sanstha, or Micro Credit.
  5. Draft and File MOA & AOA:
  6. Once the name is approved, prepare the Memorandum of Association (MOA) and Articles of Association (AOA). These must be filed along with the necessary supporting documents.
  7. Submit Incorporation Documents:
  8. Finally, all relevant incorporation documents, including Form INC-12, must be filed to obtain the license to operate as a Section 8 company.

Micro Finance Company Registration Fees

Registration fees vary based on the chosen structure:

  • NBFCs: Government registration charges, RBI license fee, legal and consultancy fees, and compliance setup costs.
  • Section 8 Companies: Lower fees due to no capital requirement; includes MCA license charges, incorporation costs, and legal consultations.

Registration Process of the Company with the RBI

Step 1: Register the Brand Name as a Trademark

Before proceeding with the RBI registration, it’s important to secure your brand identity. Registering your brand name or logo as a trademark under the Trademarks Act, 1999, ensures legal protection and exclusive rights to use the name across India.

Step 2: Incorporate the Company and Obtain a Certificate of Incorporation

Begin by registering your business as a Private Limited or Public Limited Company under the Companies Act, 2013 via the Ministry of Corporate Affairs (MCA) portal.
You will receive a Certificate of Incorporation (CoI) upon approval, which acts as the legal foundation for your microfinance company.

Step 3: Deposit Capital and Obtain No Lien Certificate

Raise the required Net Owned Funds (NOF)—₹5 crore (₹2 crore for northeastern states)—and deposit it as a Fixed Deposit in a scheduled commercial bank. Obtain a No Lien Certificate from the bank, confirming the funds are unencumbered and reserved as per RBI norms.

Step 4: Prepare and Submit the Detailed Project Report (DPR)

Create a robust Detailed Project Report covering your business plan, financial projections, risk management policies, organisational structure, and promoter background.

Step 5: Complete RBI Formalities and Gather Certified Documents

Collect all required documents, including:

  • Certificate of Incorporation
  • MOA & AOA
  • PAN & TAN
  • No Lien Certificate
  • Board resolutions
  • Audited financials (if available)

Step 6: Submit Online Application via RBI's Portal

Access the portal and complete the online NBFC-MFI application. Upload all necessary documents and ensure there are no errors or omissions in the form.

Step 7: Submit a Physical Application to the RBI Regional Office

After the online submission, send a hard copy of your application, including all enclosures and supporting documents, to the Regional Office of the RBI under whose jurisdiction your company falls.

Conclusion

Registering a Micro Finance Company enables you to reach underserved communities while operating within a legal and trusted framework.

Each model has its own advantages. NBFCs are ideal for those looking to operate commercially, access capital markets, and build a for-profit lending institution with high compliance standards. On the other hand, Section 8 Companies are best suited for nonprofit or social enterprise models focused on financial literacy, community development, or charitable micro-lending.

Frequently Asked Questions

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Private Limited Company
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1,499 + Govt. Fee
BEST SUITED FOR
  • Service-based businesses
  • Businesses looking to issue shares
  • Businesses seeking investment through equity-based funding


Limited Liability Partnership
(LLP)

1,499 + Govt. Fee
BEST SUITED FOR
  • Professional services 
  • Firms seeking any capital contribution from Partners
  • Firms sharing resources with limited liability 

One Person Company
(OPC)

1,499 + Govt. Fee
BEST SUITED FOR
  • Freelancers, Small-scale businesses
  • Businesses looking for minimal compliance
  • Businesses looking for single-ownership

Private Limited Company
(Pvt. Ltd.)

1,499 + Govt. Fee
BEST SUITED FOR
  • Service-based businesses
  • Businesses looking to issue shares
  • Businesses seeking investment through equity-based funding


One Person Company
(OPC)

1,499 + Govt. Fee
BEST SUITED FOR
  • Freelancers, Small-scale businesses
  • Businesses looking for minimal compliance
  • Businesses looking for single-ownership

Private Limited Company
(Pvt. Ltd.)

1,499 + Govt. Fee
BEST SUITED FOR
  • Service-based businesses
  • Businesses looking to issue shares
  • Businesses seeking investment through equity-based funding


Limited Liability Partnership
(LLP)

1,499 + Govt. Fee
BEST SUITED FOR
  • Professional services 
  • Firms seeking any capital contribution from Partners
  • Firms sharing resources with limited liability 

Frequently Asked Questions

How Do I Start a Microfinance Company?

Each model has its own advantages. NBFCs are ideal for those looking to operate commercially, access capital markets, and build a for-profit lending institution with high compliance standards. On the other hand, Section 8 Companies are best suited for nonprofit or social enterprise models focused on financial literacy, community development, or charitable micro-lending.

  • As an NBFC-MFI (Non-Banking Financial Company - Micro Finance Institution)This is a for-profit model regulated by the RBI, which is ideal if you plan to scale lending operations commercially.
  • As a Section 8 Company (Non-Profit Model)This structure is more suitable for social enterprises or charitable organisations offering microcredit without profit motives.

Key steps:

  1. Incorporate a company (Private/Public Ltd. or Section 8).
  2. Raise the required capital (₹5 crore for NBFC-MFI or as applicable).
  3. Deposit capital and get a No Lien certificate from a bank.
  4. Submit a Detailed Project Report (DPR).
  5. Apply to the RBI for a license (NBFC route) or to the MCA for Section 8.
  6. Await approval and begin operations.

How Do I Get a Microfinance License?

If you're forming an NBFC-MFI, the license must be obtained from the Reserve Bank of India (RBI).

Steps to get the license:

  1. Incorporate a company under the Companies Act
  2. Raise and deposit ₹5 crore as Net Owned Funds
  3. Obtain a No Lien certificate for the FD from the bank
  4. Prepare a Detailed Project Report (DPR) and supporting documents
  5. Apply online via the RBI's portal
  6. Submit physical documents to the RBI Regional Office

For Section 8 Companies, you need to apply to the Ministry of Corporate Affairs (MCA) for a license using Form INC-12.

How Much Capital is Required to Start a Micro Finance Company?

  • If you are starting as an NBFC-MFI, the minimum capital (Net Owned Funds) required is ₹5 crore for most parts of India.
  • For a Section 8 Company, there is no minimum capital requirement. However, the capital should be sufficient to support your operations and fulfil the objectives laid out in your application.

How Do I Register a Micro Company?

If by “micro company” you mean a Microfinance Company, you can register in two ways:

  1. As a Private or Public Limited Company (for NBFC route)
  2. As a Section 8 Company (for nonprofit)

Once your company is incorporated, follow the appropriate process (RBI or MCA) to apply for microfinance permissions.

Nipun Jain

Nipun Jain is a seasoned startup leader with 13+ years of experience across zero-to-one journeys, leading enterprise sales, partnerships, and strategy at high-growth startups. He currently heads Razorpay Rize, where he's building India's most loved startup enablement program and launched Rize Incorporation to simplify company registration for founders.

Previously, he founded Natty Niños and scaled it before exiting in 2021, then led enterprise growth at Pickrr Technologies, contributing to its $200M acquisition by Shiprocket. A builder at heart, Nipun loves numbers, stories and simplifying complex processes.

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