Why few opt to form one-person company despite perks

When forming a small business, a single person can opt to register a one-person company or OPC to  get the benefit of protecting their assets because of limited liabilities just like large corporations whereas sole proprietorship companies have unlimited liability. In spite of this  and other advantages of the OPC, there is very little interest in forming such companies.

The government amended the Companies Act in 2020 to include one-person companies (OPCs) in it and subsequently offered tax exemptions to such firms with a view to attracting greater investment by formalising small businesses, and yet the response from investors has been rather poor.

The one-person company can be defined as a company that has only one natural person as its shareholder and a single nominee.

A number of reasons are discouraging investors in forming OPCs, including the minimum requirement of Tk25 lakh and a maximum of Tk5 crore paid-up capital, a lack of access to bank loans, and an absence of necessary awareness campaigns on the benefits of getting registered as an OPC, they add.

Data from the Office of the Registrar of Joint Stock Companies and Firms (RJSC) show that only 172 businesses have been registered as OPCs as of September this year – a very insignificant number when compared to the number of 12,500 newly-registered public and private limited companies.

Sources at the RJSC told The Business Standard that the registration of 1,480 new companies was in progress until 10 October, of which only 13 were for OPC.

Businesspeople and experts in the related field have said that the inclusion of OPC in the Companies Act is an appreciable step as it extends the protections enjoyed by corporations to sole proprietorships and thus encourages sole proprietorships to join the formal economy. 

They asked for abolishing the Tk25 lakh minimum paid-up capital limit in order to attract a large number of small and new start-up entrepreneurs. Otherwise, the tax cut benefit will not be effective to encourage small entrepreneurs to join the formal economy, they say.

The government has reduced the tax rate for OPCs to 22.5% for this fiscal year from 25% a year ago.

Company law expert Advocate Probir Neogi told TBS that the concept of OPC has been popular in many other countries and some developed countries including the USA and UK set no limit on paid-up capital for an OPC. Investors there can form OPCs by investing any amount taking approval from the government authority concerned.

On the other hand, countries like India, Pakistan, and Nepal have a 1,00,000 rupee requirement of minimum capital for an OPC in their respective currencies.

Probir Neogi also called for raising the paid-up capital limit saying the ceiling is much higher in South-East Asian countries.

Md Jashim Uddin, president of the Federation of Bangladesh Chambers of Commerce and Industry (FBCCI), stressed awareness campaigns to let investors know the benefits of forming OPCs. 

"Almost all countries of the world have a large number of one-person companies. Even though the concept is new in Bangladesh, there are no initiatives to make it popular. As a result, many investors do not know how to form such a company," he told TBS.

Many people are not aware of the advantages of a one-person company, which is also a reason why there is a lack of interest among people in OPC, he added.

Company law expert Barrister Tanzib-ul-Alam said a primary difference between an OPC and a private limited company is that private limited companies need at least two shareholders and require a minimum of Tk50 lakh paid-up capital. 

He said business organisations also need to make efforts alongside the government to raise awareness about OPC. 

The Bangladesh Bank should direct the banks to take proper initiatives to make sure OPCs get loans easily, he suggested, adding, "This will facilitate the expansion of businesses in the country."

Dr Khondaker Golam Moazzem, research director at the Centre for Policy Dialogue (CPD), in an article published in TBS writes that 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 that is not counted among the formal corporate entities, he said.

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, he noted. 

OPCs applying for conversion into private ltd company

Sources said 23 of the 124 OPCs registered in fiscal 2021-22 have applied to convert into private limited companies.

One of them is Stepbd opc, a shoe manufacturer based in Dhaka's Hazaribagh, which got registered as an OPC in March last year.

Within just one and a half years, the owner of the company, Al-Amin Dewan, this September applied to the Registrar of Joint Stock Companies to convert the company to a private limited one.

Al-Amin told TBS, "When I got the company registered, its capital was Tk28 lakh. But the business that I wanted to do required a minimum of Tk2 crore.

"I applied to a private bank for Tk1 crore in loan to my company, but the bank rejected the loan application after initial assessment. Later, I applied to another private bank and a state-owned bank and got rejected by both of them."

Al-Amin said the banks did not give any proper reason for cancelling his loan applications. 

But, officials of a number of banks told him that banks found it risky to give loans to OPCs as a single individual is a director, chairman, managing director, or everything in such a company. 

"A guarantor must be appointed in addition to giving collateral in taking a loan. There is a practice of appointing shareholders, directors, or any other persons/institutions as guarantors for taking bank loans in the name of a company. But that we could not do," said Al-Amin Dewan, adding that no individual investors wanted to invest in his company either.

Asked about this, Selim RF Hussain, chairman of the Association of Bankers Bangladesh Limited (ABB) and CEO and managing director of Brac Bank, told TBS that there is no such decision or policy of any bank that a one-person company cannot get a loan from the bank. 

Banks generally assess the debt repayment capacity of borrowers before sanctioning loans and they reject a loan application if they find out that the borrower does not have the capacity to repay the loan.

The provision of one-person companies is definitely good for the country's economy, he said, adding, "However, the government authorities concerned should take initiatives so that these companies can be run well."

OPC trend in other countries

In India, a law was enacted in 2013 to allow the setting up of one-person companies.

According to information on the website of the Indian Ministry of Corporate Affairs, about 34,000 OPCs were registered in the country in 2021.

In Pakistan, establishing OPCs has been allowed since 2006. Some 11,000 OPCs were approved there last year.

The density of OPCs is highest in Japan and China.

According to Harvard University's "Business Review", OPCs account for 31% of the companies registered in Japan every year. The ratio is about 27% in China, 13% in the USA, and 11% in Switzerland.

There are worries as well

Economist Ahsan H Mansur, executive director of the Policy Research Institute (PRI), told TBS that the concept of one-person companies is good for the economy, but it also has a downside.

He said no one could say how many of the OPCs that got registered in 2021 had come into operation. It might be found that many people were forming such companies to launder money or use black money, he observed.

The government had no specific road map for how such companies could play a role in the economy, he said, adding that there was no initiative to monitor what these companies were doing after registration.

"The government should take quick action in these matters, because in many countries a lot of revenue comes from OPCs," he said.

Sheikh Shoebul Alam ndc, registrar (additional secretary) of the Office of the Registrar of Joint Stock Companies and Firms (RJSC) said, "The procedure for opening an OPC is very simple and can be completed quickly. The process of forming an OPC is much simpler than the procedure for forming other companies."

The registration rate has increased slightly in the current financial year as compared to the last financial year, he said. He also expressed hope that businesses in greater numbers would apply to get registered as OPCs in coming days.