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.

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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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Conversion of Private Limited Company to Public Limited Company: Step-by-Step Guide

Conversion of Private Limited Company to Public Limited Company: Step-by-Step Guide

For most growing businesses, starting out as a Private Limited Company (Pvt Ltd) feels like the natural choice- it offers the safety net of limited liability, manageable compliance requirements, and the flexibility to focus on building the business without too much red tape. But as the business scales, ambitions grow bigger. You might want to raise significant capital, bring in a larger investor base, or even dream of going public someday. That’s when converting into a Public Limited Company starts making real sense.

So, what changes when you move from private to public?

  • Access to Public Funds: Unlike a private company, a public limited company can tap into larger funding avenues through IPOs or private placements, opening doors to serious growth capital.

  • Ease of Share Transfer: In a public company, shares are freely transferable, making it easier for investors or shareholders to buy, sell, or exit, boosting liquidity and appeal.

  • No Member Cap: Private companies are capped at 200 shareholders, but public companies have no such limit, giving you the freedom to expand your ownership base.

In this guide, we’ll break down exactly what it takes to convert your private company into a public one under the Companies Act, 2013, and walk you through the compliance steps and practical things you need to be ready for once you’ve made the leap.

Table of Contents

Procedure for Conversion into a Public Limited Company

Converting a private limited company into a public limited company in India is governed by the Companies Act, 2013, and involves a formalised legal process. Here’s a step-by-step guide:

1. Convene a Board Meeting

2. Issue Notice for EGM

  • Send notices to all shareholders, directors, and auditors at least 21 days before the meeting.
  • The notice should include the agenda, draft resolutions, and explanatory statements.

3. Hold the Extraordinary General Meeting (EGM)

  • Pass a Special Resolution to approve the conversion from private to public.
  • Approve necessary alterations in the MoA (removal of “Private”) and AoA (removal of restrictive clauses on share transfer and member limits).

4. Filing with Registrar of Companies (RoC)

Submit the following forms with the Ministry of Corporate Affairs (MCA) portal:

  • MGT-14: Filing of special resolutions within 30 days of passing them.
  • INC-27: Application for conversion, along with certified copies of resolutions, amended MoA/AoA, and EGM minutes.

5. Scrutiny and Approval by RoC

The Registrar reviews the application and, upon satisfaction, issues a Fresh Certificate of Incorporation reflecting the change in company status from private to public.

Related Read: Private Company Vs Public Company: Key Differences Explained

Post-Conversion Requirements

Once the company has been converted into a public limited company, several post-conversion formalities must be completed to align with regulatory and operational standards:

1. Update Statutory Documents

  • Obtain a new PAN reflecting the updated company name.
  • Revise all statutory records, financial statements, and company stationery (letterheads, invoices, website, etc.).

2. Inform Bankers and Financial Institutions

  • Update your company’s status with existing banks and financial institutions.
  • Amend authorised signatories if required.

3. Intimate Regulatory Authorities

  • Notify relevant authorities such as tax departments, GST authorities, and regulatory bodies, if applicable.

4. Compliance with Public Company Norms

  • Increase the number of directors to a minimum of 3 (as required for a public company).
  • Appoint independent directors and comply with applicable listing regulations (if planning for a stock exchange listing).
  • Adhere to enhanced disclosure norms, audit requirements, and corporate governance standards.

5. Prepare for Capital Raising (Optional)

  • If planning an IPO, start preparing for SEBI compliance, drafting offer documents, and engaging with merchant bankers.

Frequently Asked Questions (FAQs)

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Frequently Asked Questions

What Is the Form for Conversion of a Private Company into a Public Company?

The primary form used for the conversion of a private limited company into a public limited company in India is Form INC-27. It must be submitted along with supporting documents like the altered Memorandum of Association (MoA), Articles of Association (AoA), special resolution copy, and EGM minutes.Additionally, Form MGT-14 (for filing special resolutions) must also be filed within 30 days of passing the resolution at the EGM.

Can a Private Limited Company Go Public?

Yes, a Private Limited Company can go public by converting itself into a Public Limited Company.

After conversion, the company must comply with public company regulations under the Companies Act, 2013, including increased disclosure norms, appointment of independent directors (if applicable), and adherence to corporate governance standards.

What Section of the Companies Act, 2013 Governs Conversion of a Public Company into a Private Company?

The conversion of a Public Company into a Private Company is governed by Section 14 of the Companies Act, 2013.

  • Section 14(1) deals with altering the Articles of Association (AoA) to include provisions applicable to a private company.
  • Such a conversion requires passing a special resolution and obtaining approval from the Tribunal (NCLT) as mandated under Section 14(2).

Asset Reconstruction Companies (ARCs): Business Model

Asset Reconstruction Companies (ARCs): Business Model

India’s banking sector often grapples with the challenge of rising non-performing assets (NPAs). These stressed loans lock up capital, reduce profitability, and weaken the overall financial system. To address this, Asset Reconstruction Companies (ARCs) were introduced as a mechanism to manage and recover bad loans.

ARCs essentially act as financial intermediaries. They acquire NPAs from banks and financial institutions, clean up their balance sheets, and work towards reviving the distressed assets. In doing so, ARCs reduce the burden on banks and create room for fresh credit flow into the economy.

But how do ARCs actually function? What’s their business model? And what challenges do they face in India’s evolving financial landscape? Let’s break it down.

Table of Contents

What is an Asset Reconstruction Company?

An Asset Reconstruction Company (ARC) is a specialised financial institution that buys NPAs or stressed assets from banks and other lenders. By transferring these assets to ARCs, banks can focus on fresh lending and growth, while ARCs work to recover value from distressed accounts.

The importance of ARCs lies in their ability to:

  • Clean up bank balance sheets.
  • Strengthen financial stability.
  • Contribute to economic growth by reviving stressed businesses.

In simple terms, ARCs buy bad loans from banks and try to recover as much as possible, either by reviving the business or liquidating its assets.

Background of Asset Reconstruction Companies in India

The Narasimham Committee first recommended ARCs in India in 1998, recognising the growing problem of NPAs in the banking system. This led to the enactment of the SARFAESI Act, 2002 (Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act), which provided the legal foundation for ARCs.

Key points about ARCs in India:

  • ARCs must register with the Reserve Bank of India (RBI) under Section 3 of the SARFAESI Act.
  • They primarily acquire secured NPAs from banks and financial institutions.
  • Their role includes asset reconstruction and securitisation, simplifying lender balance sheets.

The Evolution of ARCs

Over the years, ARCs have evolved as a vital solution to the rising NPAs that hamper the profitability and liquidity of banks. By purchasing and managing these stressed assets, ARCs not only reduce risk exposure for banks but also:

  • Create investment opportunities in the distressed debt market.
  • Provide a structured framework for debt recovery.
  • Support economic stability by reviving potentially viable businesses.

How Does ARC Work?

The ARC business model typically involves the following steps:

  1. Acquisition of Assets: ARCs purchase NPAs from banks, usually at a discount, either in cash or through the issuance of Security Receipts (SRs) to the banks.

  2. Management of Assets: Once acquired, ARCs restructure, reschedule, or attempt to revive the borrower’s operations.

  3. Recovery Mechanisms: Recovery can happen via settlement with borrowers, enforcing collateral, selling assets, or bringing in new investors.

  4. Return on Investment: ARCs earn returns by successfully recovering dues and distributing proceeds to banks or SR holders.

Note: ARCs must maintain a minimum Net Owned Fund (NOF) of ₹100 crore to operate legally.

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The Core of the ARC Business Model

The ARC business model is built on three core pillars:

  1. Acquisition: Buying NPAs at a discounted value from banks and financial institutions.
  2. Restructuring: Developing strategies to revive stressed businesses, including debt restructuring or converting debt into equity.
  3. Recovery: Enforcing security interests, liquidating assets, or monetising businesses to recover maximum value.

These pillars determine the sustainability and profitability of ARCs.

Process of Asset Reconstruction by ARCs

The process of asset reconstruction typically involves:

  • Management takeover of the borrower’s business.
  • Sale or lease of part or entire business.
  • Debt rescheduling to provide repayment flexibility.
  • Enforcing security by selling collateral.
  • Possession of secured assets for liquidation.
  • Conversion of debt into equity, enabling ARCs to hold a stake in the borrower company.

This multi-step process maximises recovery and ensures balance sheet clean-up for lenders.

What are the Services Provided by Asset Reconstruction Companies?

ARCs provide a wide range of services, including:

  • Acquisition and management of distressed assets.
  • Debt restructuring and settlement.
  • Recovery and asset monetisation.
  • Investor management through security receipts.
  • Advisory services for stressed asset management.

While they operate under the SARFAESI Act, 2002 and RBI guidelines, ARCs must adapt to challenges like economic downturns, legal delays, and shifting regulations. Technology adoption is also becoming critical in driving recovery efficiency and risk management.

Recent Changes in ARC Regulations by RBI

The RBI has introduced significant regulatory reforms to strengthen governance in the ARC sector. Recent updates include:

  • Stronger corporate governance with mandatory independent directors.
  • Enhanced transparency through periodic performance disclosures.
  • Revised investment norms for security receipts (SRs), encouraging higher skin-in-the-game from ARCs.

Challenges Faced by ARCs

While ARCs play a vital role, they face multiple hurdles:

  • Legal and Judicial Delays: Court proceedings and enforcement under SARFAESI or IBC can be time-consuming.
  • Regulatory Changes: Frequent shifts in RBI and government policies impact operations.
  • Capital Requirements: ARCs often struggle with limited capital for large NPA acquisitions.
  • Economic Uncertainty: Market downturns can reduce asset valuation and recovery potential.

Best Practices for Aspiring ARCs

For ARCs to thrive, the following best practices are essential:

  • Build a robust risk management framework.
  • Continuously innovate restructuring strategies.
  • Leverage technology and analytics for recovery.
  • Develop strong relationships with regulators and stakeholders.
  • Invest in training and upskilling teams.

Frequently Asked Questions (FAQs)

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Frequently Asked Questions

What is the minimum fund for ARC?

To set up an Asset Reconstruction Company in India, the minimum Net Owned Fund (NOF) requirement is ₹300 crore (as per RBI guidelines, updated in 2022).

What is the difference between a bad bank and an asset reconstruction company?

While both focus on resolving stressed assets, they are not the same:

  • Bad Bank: A government-backed entity that consolidates bad loans from various banks. It doesn’t necessarily focus on recovery, but rather on holding and restructuring them to reduce immediate pressure on banks.
  • ARC: A specialised financial institution that buys bad loans from banks at a discount and actively works on recovering the dues through restructuring, settlements, or asset sales.

In short, bad banks act as repositories, while ARCs focus on active resolution and recovery.

Who can fund an ARC?

Funding for ARCs typically comes from:

  • Banks and financial institutions (may also hold stakes in ARCs)
  • Private equity firms and investors looking to enter the distressed assets market
  • Foreign investors, subject to RBI and FDI guidelines

Sponsors, who must hold at least 51% ownership as per regulations

What strategies do ARCs use to recover debts?

ARCs deploy multiple recovery strategies, such as:

  • Restructuring loans to make repayment more manageable for borrowers
  • Taking over the management of stressed companies to revive operations
  • One-time settlements (OTS) with borrowers at negotiated terms
  • Asset sales (selling collateral like property, land, or machinery)
  • Legal proceedings under the SARFAESI Act to enforce security interests

How does the SARFAESI Act support asset reconstruction?

The SARFAESI Act, 2002, is the backbone of ARC operations. It gives ARCs the power to:

  • Enforce security interests without going through lengthy court processes
  • Take possession of secured assets of defaulting borrowers
  • Sell, lease, or manage those assets to recover dues
  • Empower banks and ARCs to speed up the resolution of bad loans

Mukesh Goyal

Mukesh Goyal is a startup enthusiast and problem-solver, currently leading the Rize Company Registration Charter at Razorpay, where he’s helping simplify the way early-stage founders start and scale their businesses. With a deep understanding of the regulatory and operational hurdles that startups face, Mukesh is at the forefront of building founder-first experiences within India’s growing startup ecosystem.

An alumnus of FMS Delhi, Mukesh cracked CAT 2016 with a perfect 100 percentile- a milestone that opened new doors and laid the foundation for a career rooted in impact, scale, and community.

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 Difference Between Company and Partnership

Difference Between Company and Partnership

Partnership vs company structures have distinct characteristics that entrepreneurs must consider when choosing a business model. While both enable individuals to collaborate and share resources, the difference between partnership and company lies in their legal structure, liability, management, and compliance requirements. This article delves into the key distinctions between these two business entities, helping you make an informed decision based on your venture's needs and goals.

Table of Contents

Difference Between Company and Partnership Firm

A company and partnership difference is rooted in their legal definitions and formation processes. A company is an incorporated entity under the Companies Act, 2013, with shareholders owning the business. Conversely, a partnership firm is an unincorporated association of individuals governed by the Indian Partnership Act, 1932, where partners collectively own and manage the business.

Here's a table highlighting the main differences:

Aspect Company Partnership Firm
Legal Entity Separate legal entity with authority to enter into contracts, own assets and is liable for its actions No separate legal entity with partners being personally liable for any debts and obligations
Governing Law Companies Act, 2013 Indian Partnership Act, 1932
Liability Limited for shareholders to the amount invested Partners have complete responsibility for all of the firm's debts and liabilities
Ownership Shareholders Partners
Management Board of Directors Partners
Taxation Corporate tax rates are applicable Partners taxed individually based on their income share
Compliance Complex legal compliance due to various legal formalities Much simpler legal requirements due to fewer legal formalities
Continuity Perpetual existence continues even after changes in ownership and management May be dissolved if a partner retires, withdraws, or dies in the absence of an continuity agreement

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Understanding a Company

Definition of Company

A company is a distinct legal entity formed by an association of people to carry on a business. The Indian Companies Act of 2013, Section 2(20), defines "company" as "a company incorporated under the Companies Act 2013 or any previous company law." Companies can be public or private, with private limited companies having 2-200 members and public companies having at least 7 members with no upper limit.

Types of Company

Here are the types of companies:

  1. Private limited company: A privately held company with 2-200 members, where the transfer of shares is restricted.
  2. Public limited company: A company that can invite the public to subscribe to its shares, with a minimum of 7 members and no upper limit.
  3. One Person Company: A company with only one member.

Characteristics of a Company

  • Separate legal entity
  • Limited liability for members
  • Perpetual succession
  • Transferable shares
  • Managed by Board of Directors
  • Stringent compliance requirements

Company registration involves a formal process, including filing Memorandum and Articles of Association, obtaining DIN for directors, and submitting requisite documents to the Registrar of Companies.

Understanding a Partnership Firm

A partnership firm is a business structure where two or more partners come together to run a business collectively. The partners share the profits and bear the losses of the business in the agreed proportion.

Definition of Partnership Firm

A partnership firm is a business structure formed by an association of two or more people who agree to share business profits. The Indian Partnership Act of 1932, Section 4, defines Partnership as "The relation between persons who have agreed to share profits of business carried on by all or any of them acting for all."

Partnerships can be general partnerships where all partners have unlimited liability, or limited liability partnerships (LLPs) with both general and limited partners. The key differences between a company and partnership relate to legal structure, liability, management, ownership transfer, regulatory compliance, and taxation.

Characteristics of a Partnership Firm

  • Formed by an agreement between partners
  • No separate legal entity from partners
  • Unlimited liability for partners
  • Profit sharing as per partnership deed
  • Jointly managed by partners
  • Fewer compliance requirements compared to companies
  • Ideal for small and medium-sized businesses

Similarities Between Company and Partnership Firm

Despite their difference between company and partnership firm, they share some common characteristics:

  • Formed for carrying on a business
  • Require registration with relevant authorities
  • Aim to earn profits
  • Governed by specific laws and regulations
  • Require maintenance of books of accounts
  • Can sue and be sued in their own name

Which One Should You Choose?

Choosing between a company and a partnership depends on business goals, liability, taxation, and compliance requirements. Below are hypothetical examples to help you decide.

1. Business Size & Growth Potential

  • Choose a Company: If you plan to scale your business, attract investors, or raise capital, a company structure is ideal.
    • Example: Raj and Meera start an AI-based edtech startup. They plan to raise funds from investors and expand globally. To do this, they register as a private limited company and issue shares to investors.
  • Choose a Partnership: If you prefer a small-scale business with direct decision-making, a partnership is a better choice.
    • Example: Aarav and Kunal start a custom furniture workshop in their city. Since they don’t need external funding and want to split profits equally, they form a partnership firm.

2. Liability Protection

  • Company: Offers limited liability, meaning the owners’ personal assets are protected in case of losses.
    • Example: Neha runs an organic skincare brand. A customer files a lawsuit over an allergic reaction. Since Neha's business is a registered company, her personal assets remain safe, and only the company’s assets are at risk.
  • Partnership: In a general partnership, partners have unlimited liability, meaning personal assets can be used to settle business debts.
    • Example: Vikram and Ramesh own a small event management business. They take a loan for an event but incur heavy losses. As a partnership, both partners are personally responsible for repaying the loan, even if it means selling personal assets.

Note: In a Limited Liability Partnership (LLP), personal liability is restricted.

3. Taxation Structure

  • Company: Pays corporate tax, and profits distributed as dividends may be taxed separately.
    • Example: An IT consulting firm is structured as a private limited company. While it pays corporate tax, its owners benefit from lower tax rates on dividends compared to individual income tax.
  • Partnership: Profits are taxed at the individual level, often leading to lower overall tax liability.
    • Example: A local bakery run by two partners is taxed based on individual earnings, avoiding corporate tax obligations and reducing overall tax liability.

4. Compliance & Legal Requirements

  • Company: Requires mandatory registration, regular filings, audits, and compliance with corporate laws.
    • Example: A group of engineers launches a renewable energy startup. Since they have multiple stakeholders and need regulatory approvals, they register as a company, ensuring compliance with industry standards.
  • Partnership: Has minimal legal requirements, making it easier and cost-effective to manage.
    • Example: A duo running a content writing agency operates as a partnership to avoid the hassle of extensive compliance, annual filings, and statutory audits.

5. Business Continuity & Stability

  • Company: Has a separate legal identity, meaning the business continues even if owners change.
    • Example: A software firm registered as a company continues operations after one founder exits by transferring shares to a new investor.
  • Partnership: Typically dissolves if a partner exits unless an agreement states otherwise.
    • Example: A law firm operating as a partnership dissolves after one partner retires, requiring a new agreement to continue operations.

In conclusion, understanding the difference between partnership and company is crucial for entrepreneurs when deciding on the most suitable business structure. While a Sole Proprietorship offers simplicity and control, a partnership firm enables collaboration and shared responsibility. On the other hand, a company, particularly a private limited company, provides limited liability and greater scalability. Consider factors such as liability, management, compliance, and growth prospects when choosing between a partnership vs company. Seek professional advice to make an informed decision aligned with your business objectives and risk appetite.

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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 

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

Is a partnership different from a company?

Yes, a partnership firm and a company are different. A partnership firm is an unincorporated association of individuals, while a company is an incorporated entity with a separate legal identity from its members.

What is the difference between partnership and share company?

A partnership firm is owned and managed by partners who have unlimited liability, while a share company, also known as a joint-stock company, is owned by shareholders who have limited liability. The management of a share company is vested in a Board of Directors.

What is the difference between limited company and partnership?

The primary difference between a limited company and a partnership firm lies in the liability of its members. In a limited company, the liability of shareholders is limited to their share capital, whereas, in a partnership firm, the liability of partners is unlimited.

H3 What are the three major differences between a partnership and a corporation?

  1. Liability: Partners have unlimited liability, while shareholders in a corporation have limited liability.
  2. Management: Partners manage a partnership firm, while a Board of Directors manages a corporation.
  3. Transferability of ownership: Ownership in a partnership firm is not easily transferable, while shares in a corporation are freely transferable.

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Dhaval Trivedi
Basanth Verma
shopeg.in
Exciting news! Incorporation of our company, FoxSell, with Razorpay Rize was extremely smooth and straightforward. We highly recommend them. Thank you Razorpay Rize for making it easy to set up our business in India.
@foxsellapp
#razorpayrize #rizeincorporation
Dhaval Trivedi
Prakhar Shrivastava
foxsell.app
We would recommend Razorpay Rize incorporation services to any founder without a second doubt. The process was beyond efficient and show's razorpay founder's commitment and vision to truly help entrepreneur's and early stage startups to get them incorporated with ease. If you wanna get incorporated, pick them. Thanks for the help Razorpay.

#entrepreneur #tbsmagazine #rize #razorpay #feedback
Dhaval Trivedi
TBS Magazine
Hey, Guys!
We just got incorporated yesterday.
Thanks to Rize team for all the Support.
It was a wonderful experience.
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#entrepreneur #tbsmagazine #rize #razorpay #feedback
Dhaval Trivedi
Nayan Mishra
https://zillout.com/