Although on the face it may look like that an One Person Company and sole proprietorship are the same, but it is not
During his budget speech for FY2020-21, the finance minister said that the government is taking steps to improve the business environment by making necessary amendments in the Companies Act, 1994.
Five months later, on November 18, the Parliament passed the Company Act (2nd Amendment), 2020 to introduce a provision for forming One Person Company (OPC) to attract greater investment.
The one-person company can be defined as a company that has only one natural person as the director. According to Section 11A(c), anyone who registers a one-person company must add "OPC" in the name of the company.
A primary difference between an OPC and a private limited company is that private limited companies need at least two shareholders. However, many people may ask how is OPC different from a sole proprietorship?
A sole proprietorship or sole trader is a type of business entity that is owned and run by one person and in which there is no legal distinction between the owner and the business entity. Although on the face it may look like that an OPC and sole proprietorship are the same, but it is not.
One of the major differences between a sole proprietorship and an OPC is that in the former there is unlimited liability and the owner is always at risk of losing all his assets in case the business fails. However, in an OPC, liabilities are limited. Therefore,
OPC is beneficial in this regard because by forming an OPC, a person can protect his assets.
A big number of business entities in Bangladesh are sole proprietorships, an arrangement which is not counted among the formal corporate entities in Bangladesh.
In such businesses, whenever there is a need for formalisation, especially for raising funds, the owner(s) are usually left with no other option than to turn it into a limited company, which can be a lengthy and hazardous process, because sole proprietorships sometimes do not have all the documents required for registering as a limited company.
However, if a person opts for an OPC, it is registered just like a limited company and also counted among the formal corporate bodies. In the context of an emerging economy like Bangladesh, OPC can be a very good option because through this, even small businesses will be formalised.
OPCs can also be beneficial for freelancers and other service-related proprietorship businesses. Around 500,000 out of 650,000 registered freelancers are currently working in Bangladesh and they can choose to get listed in the joint-stock through OPC.
This will help them to expand their businesses in the future.
A major debate remains on the registration ground. For example, starting a sole proprietorship is relatively easier in the context of Bangladesh.
For a sole proprietorship business, a person needs to obtain a trade license, e-tin certificate and a bank account. However, opening an OPC is not that easy because it follows the same procedure as a limited company. So, many can be concerned that OPC is not user friendly.
The law should be seen from a long-term perspective. There are many bottlenecks in the system through which companies are formed in Bangladesh but to formalise the economy in the long term and to turn informal entities into corporate bodies, OPC is an essential element.
However, the government should take steps to ensure that the registration process for OPC is smoother, more transparent and time-bound so that more businesses can be attracted towards forming these companies. The government can think about starting an online registration process, and also fix a time frame for completing the entire process. These SOPs will cut the hassle of forming an OPC.
Moreover, when more and more OPCs will be registered, the government will be benefitted too. The government can earn more revenue if more OPCs are formed. That is because revenue collection will become easier and more transparent.
Just like the limited companies, OPCs will have to submit their annual financial statement to the registrar of joint stock companies and firms (RJSC). Necessary taxes will be charged based on the financial statement of the company. It is worth mentioning that many proprietorship businesses do not have transparent reporting on their financial accounts and need not require to submit the account to the RJSC. Under the new OPC, the process of submission of financial statements of smaller entities to RJSC will be started, which will help to make the process transparent in a gradual manner.
We need to understand that in the future we will have to put more emphasis on generating domestic resources in order to ensure smooth running of our economy. The government needs to generate revenue through collection of taxes from eligible sources- these OPCs could contribute in this process. Under a same formal business arrangement for all companies and business entities, revenue generation could be increased.
OPCs should be targeted for small business entities and transitional business entities, which will become private limited company after few years of operation. According to the section 32 of the Act, businesses could to be registered as OPC if they have paid-up capital between Tk.50 lakh and Tk.10 crore. Moreover, the annual turnover for the previous financial year must be between Tk.2crore and Tk.100crore.
Now, a question may arise regarding this provision, since many small businesses do not have Tk.50lakh as their paid-up capital. Also, many big businesses with Tk.10crore turnover may take undue advantage of an OPC.
It is worth mentioning that OPCs cater to small and medium enterprises, who are not formally listed/registered at the joint-stock. From that perspective, it can be said that this provision needs to be targeted to small and medium business entities only, and necessary amendment in the clause of the Act is required. The government can rethink this provision and lower the ceiling for the paid-up capital between Tk.20 lakh and Tk.5crore. Besides, the government must also revise the annual turnover requirement to keep large corporations out of the purview of OPC. In case of India, the annual turnover for previoous three year cannot exceed Rs.2 crore. Thus, the turnover limit for previous year set was very high and needs to be reduced.
One important issue is that unlike limited companies, an OPC has only one director who is in charge of everything. So many questions may arise as to the compliance and transparency in issues like reporting, operations and decision-making.
However, it should be noted that OPCs are designed to function in this way. But since it is registered in the joint-stocks, just like any other registered company it will have to submit the audited financial reports to the RJSC, which will also reflect his/her operational decisions. But, financial reporting of companies is not out of question, there will always be a risk about the transparency of the financial statement.
However, the situation is improving. Recently, an agreement was signed between NBR and the Institute of Charter Accontants Bangladesh (ICAB) to set up a data verification system (DVS), which will allow NBR to cross-check all the audited financial statements of companies. This will ensure that there are little or no compliance issues in the financial statements submitted to the authorities.
Therefore it can be said that while a single director has all power, he/she also maintain compliance as per law. Since there is a need for reporting, there will be transparency and check and balance in OPCs.
Another important provision in the Act is one person can register only one OPC. This is required with the expectation that as the OPC grows, one person can at a later time, convert it into a limited company and can open a second OPC. That will allow a person to grow his business as an OPC and gradually expand it and turn it into a private limited company, and will initiate other businesses either as OPC or as private limited company. Thus, a director of OPC can own multiple business entities at the same time and ensure better investment in terms of getting loans from banks and financial institutions.
The most important issue here is what the government should do to ensure the registration of more OPCs. In my opinion, the government should go for major campaigns and widespread awareness-building initiatives to enlighten proprietorship businesses and individual business enities about registering their companies as OPCs.