As businesses progress, their legal, financial, and structural requirements progress also. One of the most common uncertainties for entrepreneurs who operate under One Person Company (OPC) structures is whether and when to convert an OPC into a Private Limited Company. Certainly, the OPC structure provides easy and independent management; however, there are limitations on growing, fundraising, and compliance on the long run when operating as an OPC. This blog post will discuss the dissimilarities between the OPC and Private Limited Company structures, provide reasoning for the conversion of the OPC to Private Company, and provide considerations for when and why to convert an OPC.
What is a One Person Company (OPC)?
The OPC was introduced in the Companies Act, 2013. OPD's are limited liability companies available for an entrepreneur or business owner that want the benefits of a corporate structure without sharing control. OPC's are perfect for solo founders and small businesses looking to operate under a formal structure.
Some features of an OPC include:
• Only one shareholder is allowed.
• Have limited liability.
• Less compliance than private limited companies.
• No annual general meetings are required.
What is a Private Limited Company?
A Private Limited Company is one of the most popular types of business entities in India. Private Limited Companies are required to have a minimum of 2 directors and shareholders, and have a maximum of 200 members.
Some Features of a Private Limited Company include:
• Separate legal entity with perpetual succession.
• Great option for startups/ growing companies.
• Also great for attracting investors and venture capitalists.
• Annual compliance and statutory audits are required.
OPC vs Private Limited Company: Key Differences
Feature
OPC
Private Limited Company
Ownership
One shareholder only
Minimum 2, Maximum 200
Fundraising
Limited
Easier to raise funds
Compliance
Less stringent
More comprehensive
Ideal For
Sole proprietors, freelancers
Startups, growing businesses
AGM Requirement
Not required
Mandatory
Tax Structure
Same as private limited
Same as OPC
Why Convert OPC Into Private Limited Company?
Converting your OPC into a Private Limited Company may prove to be a tactical decision for many reasons. Following are a few essential advantages:
1.Scalability & Growth
You may find that, as your business grows, you need partners, raise capital, or explore more varied activities. OPCs are limited in terms of shareholders (one) and scaled growth. An unlimited amount of partners/shareholders are not restricted for Private Companies and are regarded as more flexible in terms of ownership and investment.
2. Funding
Most angel investors, venture capitalists (VCs), and institutional lenders prefer to invest in private limited companies due to greater structure, accountability and shared ownership. Raising capital for your business would require converting from OPC and external investment support in Private Company.
3. Enhanced Credibility
Private Limited Companies can often have an image of being more organized and trustworthy in the eyes of your clients, suppliers, and financial institutions. This can lead to better business developments and create a longer-term trust with your stakeholders.
4. Tax Planning Opportunities
Even though the tax structure for OPC companies and Private Limited companies is the same, OPCs allow you more options for tax planning, tax deductions, and employee benefits, and eventually lead to a better overall return.
5. Compulsory Conversion After Threshold
Section 18 of the Companies Act, 2013 states that in the case that an OPC:
• Has a paid-up capital exceeding ₹50 lakhs, or
• Has an annual turnover exceeding ₹2 crore
Then it must convert into a private company or a public company. Therefore, at the time the business crosses the threshold, conversion to a private company or public company is then mandatory by law.
When Should You Convert OPC into a Private Limited Company?
Though not every business faces a change of structure, there are times when it is necessary or legally required. Below are some reasons when the conversion of OPC into Private Company is likely:
1. When Turnover is Exceeded by ₹2 Crores
According to the Companies Act, 2013, when your OPC crossing annual turnover of ₹2 crores or paid-up capital of ₹50 lakhs your OPC conversion into Private Company within 6 months.
2. When You Need External Funding
It is not possible to offer equity shares to investors or VCs through the OPC structure. If you seek to raise money, you will ultimately need to amend the OPC to Private Limited Company in order to offer legally vested shareholders.
3. When You Want to Grow
OPC is limiting if you are adding partners, adding co-founders, introducing investors or embarking on a joint venture. Private Limited Company provides more flexibility in terms of ownership and partnerships.
4. To Improve Branding and Credibility
Clients, especially corporates or international companies, prefer to work with Private Limited Companies due to the nature of the limited legal nature of such companies, their level of compliance, and the transparent approach to business operations.
5. To Accept Flexibility for FDI (Foreign Direct Investment)
Only Private Limited Companies can receive a FDI (Foreign Direct Investment) through the automatic route without government permission.
Benefits of Converting OPC to Private Limited Company
Here’s why switching to a Private Limited structure makes commercial sense:
Access to Funding
You can issue shares and attract angel investors, venture capitalists (VCs) or private equity.
Scalability
There are restrictions on turnover and paid-up capital. Provides the opportunities to grow within India and expand abroad.
More Credible
Pvt Ltd Companies are considered more credible by Consumers, Stakeholders, and Governing Agencies.
Ownership is Flexible
You can have many shareholders and can transfer shares to new partners or issue new shares.
Legal Recognition & Perpetual Succession
The company exists as a separate entity from its owners and continues to exist even if an ownership change happens ensuring sustainability long term.
The company continues to exist even if ownership changes, ensuring long-term sustainability.
How to Convert OPC to Private Limited Company?
There are two types of conversion:
1.Voluntary Conversion:
Can only be after 2 years from the Date of Incorporation (unless you cross the turnover or capital thresholds earlier).
2. Mandatory Conversion:
When the OPC crosses either a turnover of ₹2 crores or paid-up capital of ₹50 lakhs (can happen at any time) - and it doesn't matter how old the company is!
Step by Step Process of converting an OPC into a Private Limited Company:
1.Call for a Board Meeting
Pass a resolution for conversion.
Pass an alteration of the MOA (Memorandum of Association) and AOA (Articles of Association).
2. Consent of Members
You only need the consent of the single shareholder, since that’s the only shareholder.
3. File form INC-6
Apply for conversion of OPC into Private Company by filing form INC-6 to the MCA along with the following documents:
Altered MOA and AOA.
Board Resolution.
Consent of shareholder.
Certificate of Incorporation.
4. Certificate of Incorporation
Upon approval by the Registrar of Companies (ROC), the ROC will issue a new certificate of incorporation, which confirms that the conversion took place.
Things to Keep in Mind Before Conversion
• You need to select at least two directors and owners.
• You need to update your PAN, TAN, and bank account following the conversion.
• You need to communicate a change to clients, suppliers, and the government.
• You should make sure any and all annual filings are up to date to avoid any hiccups with the conversion's approval.
• There should be no complaints against the company.
Legal Compliance Post Conversion
Once your OPC has successfully converted into a Private Company, the company will need to:
• Conduct annual general meetings'
• Keep statutory registers and books
• File annual returns and financial statements with the ROC
• Appoint a statutory auditor
• Follow the Companies Act, 2013 and any other law that applies to the Company
Common Mistakes to Avoid During OPC to Pvt Ltd Conversion
Failure to appoint a second shareholder or a director prior to filing.
Not amending the MoA and the AoA as per Pvt Ltd format.
Delays in filing ROC forms leading to penalties.
Forgetting PAN/TAN, GST, and bank changes after converting.
To prevent these mistakes, it is best to work with a registered OPC to Private Limited Company conversion professional service provider.
Is Switching to Pvt Ltd the Right Decision?
In case your business is expanding and attracting investors, or is developing larger contracts, you have a good legal and strategic base by moving to Private Limited Company status. If your business is small and you would like to keep full control, you may want to stay as an OPC. If you have decided to convert OPC into Private Limited Company, it should reflect your:
• Business growth objectives,
• Finance options,
• Compliance and readiness,
• Vision for business.
Conclusion
Choosing your business structure and timing is pivotal in securing the long-term success of your business. Although an OPC is an excellent option for individual entrepreneurs, when you start to scale, you're unlikely to find the services you need to support your ambitions. That is why you need the OPC to Private Limited Company conversion process - not just to remain compliant, but most importantly to provide the funding, credibility, and growth opportunities needed for your business. Whether you are looking to bring in investors, build a core team to support your growth, or scale internationally, converting your OPC to Private Company means that you will be set up to continue your journey to success. If you are planning to convert OPC to Private Limited Company, then make sure you engage a trusted legal and compliance provider to help you navigate this process as smoothly as possible.
(FAQs)
Q1. Is it mandatory to convert my OPC into a Private Limited Company?
Yes, if your OPC’s paid-up share capital exceeds ₹50 lakhs or its turnover crosses ₹2 crores, it is mandatory to convert into a private or public company.
Q2. Can I voluntarily convert my OPC into a private limited company?
Yes, you can voluntarily convert OPC to private limited company after two years from its incorporation, even if the threshold limits are not crossed.
Q3. How many directors are required after conversion?
You need a minimum of two directors and two shareholders to operate a private limited company.
Q4. What is the government fee for conversion?
The government fee for filing Form INC-6 depends on the company’s paid-up capital. Additional professional and document preparation charges may also apply.
Q5. Will I get a new certificate after conversion?
Yes, the ROC issues a new certificate of incorporation reflecting the change in the company type.
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