In India, many entrepreneurs begin their business journey as a Sole Proprietorship due to its simplicity and minimal compliance requirements. However, as the business grows, converting it into a One Person Company (OPC) under the Companies Act, 2013 becomes a strategic move to enjoy limited liability, separate legal identity, and ease of raising funds.

This article outlines the detailed process, legal provisions, documentation, and compliance requirements for converting a sole proprietorship into an OPC in India.

Knowing the Sole Proprietorship and OPC

A Sole Proprietorship is an unregistered business owned and operated by a single individual. It is easy to set up but does not offer limited liability or separate legal status.

In contrast, an OPC is a company registered under Section 2(62) of the Companies Act, 2013, with only one shareholder. It offers limited liability protection, corporate identity, and better credibility in the business world.

Benefits of Converting into an OPC

• Limited Liability Protection: Limits the personal liability of the owner.

• Separate Legal Identity: The OPC has a separate legal status, distinct from its owner.

• Easy to Raise Funds: Increases credibility and ease in attracting investments.

• Perpetual Succession: The company continues to exist even after the death of the member.

• Tax Benefits: Avail of corporate tax benefits under the Income Tax Act, 1961.

Legal Provisions for Conversion

• Section 18 of the Companies Act, 2013: Allows the conversion of an existing entity into another form of company, including an OPC.

• Section 366 of the Companies Act, 2013: Deals with the conversion of existing firms into a company.

• Rule 7 of the Companies (Incorporation) Rules, 2014: Provides the framework for converting a sole proprietorship into an OPC.

Pre-requisites for Conversion

• DIN and DSC: The proprietor must obtain a Director Identification Number (DIN) and Digital Signature Certificate (DSC).

• Nominee Appointment: A nominee must be appointed who will take over in case of the owner's death or incapacity.

• Name Reservation: The proposed name should be unique and reserved using RUN (Reserve Unique Name) service of the Ministry of Corporate Affairs (MCA).

• Minimum Paid-up Capital: Though OPCs don't have a strict capital requirement, it is advisable to have an initial capital based on business needs.

Step-by-Step Process for Conversion

Step 1: Obtain Digital Signature Certificate (DSC)

The first step is to acquire a DSC for the proprietor and the nominee. This will be used for digitally signing all forms and documents.

Step 2: Apply for Director Identification Number (DIN)

The proprietor must apply for a DIN through the SPICe+ (Simplified Proforma for Incorporating Company Electronically Plus) form during the incorporation process.

Step 3: Name Reservation

• Apply for name reservation via the RUN service on the MCA portal.

• The name should be unique and end with the words “(OPC) Private Limited”.

Step 4: Drafting Legal Documents

Prepare the following documents:

• Memorandum of Association (MoA)

• Articles of Association (AoA)

• Nominee Consent Form (INC-3)

• Declaration by the Proprietor (Form INC-9)

• Affidavit of the nominee

Step 5: File Incorporation Application (SPICe+ Form)

Submit the SPICe+ form with the following attachments:

• PAN card and Aadhar card of the proprietor

• Address proof of the registered office (utility bill, rent agreement)

• Identity and address proof of the nominee

• MoA and AoA

• Digital signature of the proprietor and nominee

• Declaration in Form INC-8 stating compliance with all requirements

• Proof of ownership or no-objection certificate (NOC) from the property owner

Step 6: Apply for PAN and TAN

• The application for Permanent Account Number (PAN) and Tax Deduction and Collection Account Number (TAN) can be made along with the SPICe+ form.

Step 7: Certificate of Incorporation (COI)

Upon verification, the ROC will issue a Certificate of Incorporation (COI), confirming the establishment of the OPC.

Post-Incorporation Compliance

• Bank Account Opening: Open a current bank account in the company’s name.

• GST Registration: Apply for GST registration if applicable.

• Accounting and Auditing: Maintain proper books of accounts and get them audited annually.

• Annual Returns: File Form AOC-4 and MGT-7A for annual compliance.

• Income Tax Filing: File income tax returns under the Income Tax Act, 1961.

Documentation Checklist

• PAN and Aadhar card of the proprietor and nominee.

• Address proof of the registered office.

• Passport-size photographs of the proprietor and nominee.

• Digital Signature Certificates (DSC).

• Director Identification Number (DIN).

• MoA and AoA.

• Consent of the nominee (Form INC-3).

• NOC from the property owner.

• Declaration of compliance (INC-9).

• Bank statement of the initial capital contribution.

Frequently Asked Questions (FAQs)

- Is it mandatory to appoint a nominee for OPC?

Yes, appointing a nominee is mandatory under Section 3(1)(c) of the Companies Act, 2013.

- Can an OPC have more than one shareholder?

No, an OPC can have only one shareholder. However, if the paid-up capital exceeds ₹50 lakh or turnover exceeds ₹2 crore, it must be converted into a Private Limited Company.

- What is the time frame for conversion?

The conversion process usually takes 15-20 business days, subject to documentation and approvals.

- Can an NRI incorporate an OPC in India?

No, only resident Indian citizens can incorporate an OPC in India.

- Is it mandatory to open a bank account after conversion?

Yes, opening a bank account in the name of the OPC is mandatory for financial transactions.

- Can an OPC be converted back to a sole proprietorship?

No, once converted, an OPC cannot revert to a sole proprietorship but can be converted to another form of company.

- Are there tax benefits for OPCs?

Yes, OPCs enjoy corporate tax benefits and can claim deductions under the Income Tax Act, 1961.

- What is the compliance cost for OPCs?

While initial incorporation costs are minimal, annual compliance costs can range based on the business scale and auditor fees.

- Can an OPC issue equity shares?

Yes, OPCs can issue shares, but only to the sole member.

- Is the GST registration mandatory for OPCs?

Yes, if the annual turnover exceeds the threshold limit, GST registration is mandatory.

Conclusion

Converting a Sole Proprietorship into an OPC is a strategic move that offers legal recognition, limited liability, and business growth potential. Adhering to the provisions under Section 18 and Section 366 of the Companies Act, 2013, and ensuring thorough documentation will ensure a seamless transition. Consulting with legal and tax experts can further simplify the process, ensuring that all regulatory compliances are met efficiently.