FAQ ON ONE PERSON COMPANY (OPC)
Is One Person Company (OPC) preferred for small business?
Yes, One Person Company (hereinafter referred to as OPC) is preferred for small business. The concept of OPC is basically to eradicate the limitation of sole proprietorship, which is actually the most popular form for small businesses, such as unlimited liability, no legal form etc.
In case, you are registered as OPC and if your
- Paid up share capital exceeds 50 lakhs or;
- Average annual turnover exceeds 2 crores
Then it has to convert itself within 6 months from the date on which any of the above condition is fulfilled. This requirement is as per rule 6 of Companies (incorporation) rules, 2014.
Why prefer one person company (OPC) over others forms of companies?
Answer is simple; only one person is required in OPC. You don’t need another person. If you are independently want to commence your business without involving any other person then One Person Company (OPC) is idle choice for you.
When OPC concept wasn’t introduced in India, the above categories of people usually choose Proprietorship as their form of business. Proprietorship has many disadvantages like
- Cannot take investments
- No legal existence
- Unlimited liabilities
And many other as well. Further proprietorship as form of business also not considered trustworthy. One Person Company (OPC) is a solution for all the above problems. Therefore, to make the above category of businesses more organised, OPC was introduced.
“Therefore, start-ups should use OPC as their form of business to make your business more organised and more valuable”.
Why Funding is not a problem for One Person Company (OPC)?
Yes, it is true. Funding is not a problem for One Person Company (OPC) subject to if you have a good business idea and business plan.
The Reserve Bank of India (RBI) has instructed banks to increase the funding made to priority sectors, viz agriculture and small scale industries. Eligible priority sector lending:-
|Enterprises||Investment in Plant & Machinery|
|Micro Enterprises||Do not exceed 25 lakhs rupees|
|Small Enterprises||More than 25 Lakhs but does not exceed 5 crores|
|Enterprises||Investment in Plant & Machinery|
|Micro Enterprises||Do not exceed 10 lakhs rupees|
|Small Enterprises||More than 10 Lakhs but does not exceed 2 crores|
One Person Company coming under any of above category may fall under priority sector lending. There is enormous scope for One Person Companies to leverage benefits of priority sector lending.
Further, there are some additional benefits:-
- No ownership is transferred to bank.
- Bank also lends without security up to a certain limit, subject to strong business plan and projections.
- In case of any default, the liability is limited only up to the share value in the company.
Therefore, doesn’t worry about the funds, just concentrate on your core business idea, and evolve it into a plan, incorporate a One Person Company (OPC) with Carajput.com and start your business today!
Is it true that Public Limited Companies is valued higher than other forms of companies?
Yes, Public limited Companies are valued higher than every form of business. As per the statistics published by U.S. Chamber of commerce and Entrepreneur.com, private companies are valued at only four to six times, while public companies are typically valued at multiples greater than twenty times earnings. There are many reasons for it, namely
- Market liquidity
- Risk Profile
- Capitalisation/capital structure
- Operational reasons
The obvious result is an immediate and substantial increase in the net worth of its founders and shareholders.
Many companies that are about to be purchased, strategically converting themselves into public company to be purchased at a much higher price.
10 Reasons why start-ups should choose One Person Company (OPC) as their form of business
If you are person having a business idea and thinking of starting a business, One Person Company is ideal choice for you. Here are the 10 reason why you should choose One Person Company (OPC) as your form of Business:
A Separate Personality in the eyes of law
The first and foremost reason is that a Separate legal entity is created in the eyes of law, which is capable of doing almost everything a natural person can do.
An OPC can raise funds from others like venture capital, Angel investors, financial institutions etc., thus graduating itself to a private limited company.
Additional risk, limited liability
The advantage of limited liability is certainly a desire of any start-up. It encourages you to take additional risk with limited liability. (It means even if you fail, your liability will only be restricted to the value of your share capital, i.e. your personal assets are safe).
OPC need not bother too much about the compliances like other forms of companies. Therefore, entrepreneurs can concentrate on their core functional area.
Benefits of being a Small Scale Industries (SSI)
An OPC can avail various benefits available to the SSI units. E.g. Loans at lower rate of Interest, funding without any security from banks up to a certain limit, various benefits under Foreign Trade policy and many other as well. These benefits can really provide you early assistance, which is a boon for any business in the initial years.
You are the Only Owner
You being the only owner give you full control over the entity. Further, faster decision making will also help your business grow effectively.
Your credit rating doesn’t matter
If OPC applies for the loan, then your credit rating is not relevant, rating of OPC is relevant. In other words, if you are having a bad credit rating, then also you can easily get funds, if the rating is OPC is as per norms.
Benefits under Income Tax Law
Being registered as OPC, any remuneration paid to the director will be allowed as deduction under income tax law unlike proprietorship. Other benefits of presumptive taxation are also available subject to income tax act.
Receive interest on any late Payment
Since all start-ups are generally SSI’s, they are all covered under Micro, small and Medium Enterprises development Act, 2006. If any buyer or service receiver pays you after a specified period than you are also entitle to interest which is three times the bank rate.
Increased Trust and prestige
Any business which runs in the form of company always enjoys an increased trust and prestige than any other form of business.
“Existing proprietors can also convert themselves into the One Person Company (OPC) or any other company as per the requirements and can avail the above mentioned benefits.”
Start Ups – Take Home 30% Extra!
The Twenty First Century will belong to Knowledge! The statement is off course holds true when we look up at the big giants like Google, Microsoft etc. Also, when we look up at the start ups across the world, the kind of innovation that they create is out of the world and with this they earn a lot of dollars.
But, hold a second, how do feel if with all the hard work you did to earn hefty money and you get only the seventy percent of that? Shocked? But that’s what happens in the real world. You do all the hard work and then maybe somebody impressed with your work may buy your start up and pays you hefty dollars, however on that income you will have to pay tax @ 30% (assume tax rate is 30%), and at the end you will be left only with 70%.
In other words, it means that if earn 100 Crores by selling your start up, then you will get only 70 Crores net. Couldn’t we do anything? Is there any solution? Yes there is!
With the simple tax planning, we can avoid the tax liability and keep the 100% income with our self and further to say its all legal!
This tax planning is particularly for Profession. Profession can be IT, Designing, Marketing or anything which require intellectual skills. Now let’s have a look at the tax planning!
Planning is very simple. While selling your start up, you just has to remember that you are not selling any assets, company or anything you are selling your brand, your goodwill. When you give your transaction this kind of shape, then tax machinery will fail and you will benefit. Accordingly no tax will be levied upon you and your whole income is tax free and remembers it’s your legal tax free white income. You can do whatever you want to do with this income.
Also remember that “money saved is money earned”
So, always think, plan and then execute before you commit for any big transaction because with a simple planning you may save hefty money.
If A Person Is Non Resident In Both The States! Where to Tax the Income?
Facts of the Case
Assessee is an employee of a Canadian Company. He went to Canada on 1st March, 2013 and he came back to India on 2nd October, 2013. Then on 17th November, 2013 he again went to Canada and came back on 22nd November, 2013. Assessee was paid salary outside India and that was also in a Bank Account which is also operated outside India. It also to be noted that during the period of stay in India, neither salary was paid in India nor any other payment was received by the employee from the company in India.
The question before us is that whether employee was liable to be taxed in India for the period he stayed in India?
Analysis on the query
This is the case where taxability as per Indian domestic law and taxability as per Double Taxation Avoidance Agreements (hereinafter referred to as ‘DTAA’) has to be checked and those provisions which are most beneficial to the assessee will be applied to the case.
Taxability as Per Indian Domestic Law
Let us check the residential status of the assessee based on the taxability of income will have to be decided.
Step 1: Residential status
Assessee went to Canada on 1st March, 2013 and came back to India on 2nd October. Then he stayed in India till 17th November. Therefore his period of stay in India is 47 days. Then assessee again came back to India on 22nd November, 2013 and then continues to stay during the entire previous year. The total stay in India of the assessee is 177 Days.
As per section 6 of the Income tax act, 1961 (hereinafter referred to as ‘act’), if any person stays in India for the period of 182 days or more, then he shall be treated as ‘Resident’ for the purpose of the act. This is to be noted that the condition of 182 days or more has to be checked for each previous year separately.
The second basic condition for the residential status does not apply to the assessee.
Therefore, assessee is a non Resident for the purpose of the act.
Step 2: Taxability of Income
Since the assessee is a Non resident, therefore the following income shall be taxable in India
- Income accrued in India or deemed to be accrued in India
- Income received in India or deemed to be received in India
As per the facts of the case, assessee has earned his salary in India for 177 days, therefore, as per section 9 of the act, the salary income which is earned in India will be deemed to arise in India. Therefore, that portion of salary which is earned in India will be taxable in India.
This has to be taxed in India despite the fact that salary amount is credited by the foreign company outside India in a bank account which is also located outside India, this has been held in Elly Lilly Vs. CIT (2011) SC.
Salary income earned outside India, before his arrival in India will not be taxable in India because it has not been earned in India and section 9 does not attract in this case.
Taxability as Per Dtaa
Now we have to analyze the DTAA between India and Canada and to check whether any benefit can be given to the assessee or not.
The salary income has to be decided as per Article 15 of the tax treaty. The article 15 of the treaty is as follows:-
- Subject to the provisions of Articles 16, 18 and 19, salaries, wages and other similar remuneration derived by a resident of a Contracting State in respect of an employment shall be taxable only in that State unless the employment is exercised in the other Contracting State. If the employment is so exercised, such remuneration as is derived there from may be taxed in that other State.
- Notwithstanding the provisions of paragraph 1, remuneration derived by a resident of a Contracting State in respect of an employment exercised in the other Contracting State shall be taxable only in the first-mentioned State if :-
|v (a)||v The recipient is present in the other Contracting State for a period or periods not exceeding in the aggregate 183 days in the relevant fiscal year;|
|v (b)||v The remuneration is paid by, or on behalf of, an employer who is not a resident of the other State; and|
|v (c)||v The remuneration is not borne by a permanent establishment or a fixed base which the employer has in the other State.|
- Notwithstanding the preceding provisions of this Article, remuneration in respect of an employment exercised aboard a ship or aircraft operated in international traffic by an enterprise of a Contracting State, may be based in that State.
As per para 2 of article 15, if any person resident in Canada exercise the employment in India, and if the aforesaid conditions are fulfilled then, the salary income will be taxable in Canada only.
If we read our facts in the light of above law, then it can be concluded that in our case the aforesaid conditions are fulfilled as
- Assesseee is present in India for less than 183 days, hence first condition is fulfilled
- Remuneration is paid by company which is not resident of India, hence second condition is also fulfilled;
- The remuneration is paid directly by the foreign company and no part of salary is being borne by the permanent establishment.
Therefore, when all the conditions are fulfilled, then it can be concluded that the salary income earned in India will be taxable in Canada only and no part of income is taxable in India.
However, some other facts may also be off prime importance in the deciding this issue, Facts are, in Canada, tax period starts from 1st January and ends on 31st December, so their tax period are as per calendar year. However in India, tax period is always from 1st April to 31st March. In our case, assessee has already paid tax in Canada for the period 1st Jan, 2013 to 31st Dec, 2013. And for next year, i.e. 1st Jan, 2014 to 31st Dec, 2014 he will be treated as Nonresident.
In India, assessee is already a non resident for the PY 2013-14. Therefore, the question is that where will the income for the period 1st Jan, 2014 to 31st March 2014 will be taxable because for the period from 1st January to 31st March, 2014, assessee is nonresident in the both the Countries. It has to be noted that since assessee is not a resident in Canada for the period 1st January to 31st March, then he will not be allowed to avail the benefit of article 15, because article 15 clearly talk about being resident of contracting state. But in our case, assessee is nonresident for both the countries and therefore, article 15 will not apply.
However, since assessee has rendered his services in India and also no DTAA benefit is available to the assessee, hence as per section 9 of the domestic tax laws of India, the salary earned for the period 1st January to 31st March, 2014 will be taxable in India.
In the absence of applicability of article 15, case has to be decided as per domestic law and as per domestic law read with Elly Lilly v. CIT (2011) SC, the salary income earned during 1st January to 31st March, 2014 will be taxable in India.
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