ONE PERSON COMPANY

One Person Company

Introduction:

The Companies Act, 2013 has brought about a remarkable development in the corporate arena by bringing in the concept of One Person Company (“OPC”). It has been first recommended by the Dr.J.J.Irani Committee in 2005.

Expert Committee examined that how the global changes given a chance to an individual to participate in economic activity.

Expert committee also suggested the characteristic of One Person Company-

The below is the summary of the presentation of the report of the Expert Committee on company law –

“With increasing use of information technology and computers, emergence of the service sector, it is time that the entrepreneurial capabilities of the people are given an outlet for participation in economic activity. Such economic activity may take place through the creation of an economic person in the form of a company. Yet it would not be reasonable to expect that every entrepreneur who is capable of developing his ideas and participating in the market place should do it through an association of persons. 

We feel that it is possible for individuals to operate in the economic domain and contribute effectively. To facilitate this, the Committee recommends that the law should recognize the formation of a single person economic entity in the form of ‘One Person Company’ (OPC). Such an entity may be provided with a simpler regime through exemptions so that the single entrepreneur is not compelled to fritter away his time, energy and resources on procedural matters.” 

Under the ‘old’ Companies Act, 1956 minimum two members were required for formation of a Private Limited Company. This was a hindrance to the entrepreneurs who wanted to go ‘solo’. OPC is a legitimate way to form a company with only one member. OPC can work like proprietorship but it holds the status of company and of course enjoys the benefits that come with it (limited liability, trust factor etc.) Sec 2(62) of the Companies Act, 2013 brought in the concept of a “One Person Company”. It is essentially a legal entity which functions on the same principle as a Company, but with only one member. It was an alternative for Indians, who typically operate using the risky concept of a proprietorship. Section 3 further clarifies that an OPC shall be treated as a private company for all legal purposes with only one member.

A New Concept:

The reason why the old Companies Act of 1956 had made it compulsory for a Company to have a minimum of two members was so that it could be clearly separated from a sole proprietorship, a corporate structure which is categorically excluded from the Act. However, the duplicity of this provision was blatant and rampant. People started forming companies by adding a nominal member/ director, allotting them one single share, which is the minimum requirement for a director as per the Act, and retaining the rest of the shares themselves. Thus, a person could enjoy the status and benefits of a Company while operating and functioning like a proprietary concern for all practical purposes. Hence, to make things clearer and more logical, an option has been created wherein a person can form a company as a one person entity.

Naming of the OPC:

The Companies Act, 1956 required a private limited company to have “private limited company” (Pvt. Ltd) suffixed in the end wherever its name appeared. Likewise the Companies Act 2013 requires that the name of the OPC shall include ‘One Person Company’ within brackets below the name of the company wherever the name is printed, affixed or engraved.

Formation of One-Person-Company & Nominee of the sole member:

·         The person has to give a separate name and legal identity to the Company, under which all the activities of the business are to be carried on. This ensures that a separate legal entity is formed.

·         Only natural persons can incorporate an OPC. Also, the person incorporating an OPC must be an Indian citizen who has stayed in India for at least 182 days during the immediately preceding one financial year.

·         A Person can incorporate a maximum of 5 OPC.

·         The person has to nominate another person, with that person’s written consent as a nominee to the OPC and the written consent of such person shall also be filed with the Registrar at the time of incorporation along with its Memorandum and Articles. This person will be the default and ad hoc member in case of the existing sole member’s death or disability. This provision will ensure perpetuity and continuity to the life of the Company. The golden rule of “members may come and go, but the Company must live on” holds good.

·         There can be a possibility where the original member loses trust in the nominated person or the nominated person is incapacitated or takes back his consent.

·         In such a case the nominated member may be changed by the original member. Any such change has to be intimidated to the Registrar by the OPC within prescribed time. ( time has to be prescribed yet)

·         On the death of the sole member, the nominee has all shares and the rights and liabilities of the deceased person. The board of the company shall inform the nominee regarding entitlement of such shares and rights and liabilities.

·         Within 180 days from the closure of the Financial Year, One Person Company should file the copy of the Financial Statements with Registrar

Appointment of directors:

An OPC can appoint maximum 15 directors and minimum of one director. The appointment is to be made in accordance with the articles of the OPC. If there is no provision regarding appointment of directors then the original member shall be deemed to be the director of the company until someone else is appointed. The director can be increased to 15 by passing a special resolution.

Meetings:

Provisions relating to annual general meetings, general meetings, and extraordinary general meetings are not applicable for an OPC.

Sec 173 (5) – In case of a Board Meeting, at least one meeting of the Board of Directors shall be conducted in each half of a calendar year and the gap between the two meetings shall not be less than ninety days.
Such provision shall not apply to an OPC in which there is only one director on its Board of Directors.

In an OPC, the resolution is communicated by the sole member to the company and entered into the minutes-book and signed and dated by the member.

Contract by a One Person Company :

In case a OPC enters into any contract, enters into any contract, not in the ordinary course of business, with its sole member who is also a director, then such contract must :

-          Either be in writing (or)

-          Entered in Memorandum (or)

-          Recorded in the minutes of the meeting held for the first time after entering of the contract

Particulars of the said contract must be filed by the company with the registrar within 15 days of the approval of the contract by the board.

Conversion of OPC into Private or Public Company:

Voluntary conversion -

OPC can get itself converted in to Private or Public company after increasing the minimum number of members and directors to  2 or minimum of 7 members and 3 directors as the case may be, and by maintaining the minimum paid up capital as per requirement of the 2013 Act for such class of company and by making due compliance of Section 18 of the 2013 Act for conversion.

Compulsory conversion -

The rules prescribe certain circumstances when an OPC will be mandatorily required to convert into a private or public company. In terms of Rule 2.4, where the paid up capital of an OPC exceeds 50 lakh rupees or its average annual turnover during the period of immediately preceding 3 consecutive financial years exceeds 2 crore rupees, it will not be entitled to continue as an OPC. Such OPC shall be required to convert itself into either a private company or public company in accordance with the provisions of Section 18 of the 2013 Act:

(i)                Within 6 months of the date on which its paid up share capital is increased beyond 50 lakh rupees; (or)

(ii)              The last day of the period immediately preceding three consecutive financial year during which its average annual turnover exceeded 2 crore rupees; (or)

(iii)            The close of the financial year during which its balance sheet total exceeded 1 Crore rupees, as the case may be.  

The OPC is required to alter its memorandum and articles by passing  ordinary or special resolution in accordance with sub section 5 (3) of section 122 of the 2013 act to give effect to the conversion and to make necessary changes incidental thereto.

 

Compliance burden:

The definition of ‘Private Company’ under Section 2(68) of the 2013 Act includes OPC. Thus an OPC will be required to comply with provisions applicable to Private companies. However, OPCs have lesser compliance related burden. Such exemption include :

·         OPC is not required to prepare cash flow statement as a part of financial statement.

·         In case an OPC does not have a company secretary, the annual return can be signed by the director of the company.

·         An OPC is not required to hold an Annual General Meeting

·         The provision of the following sections shall not apply to an OPC

o   Section 98 – Power of tribunal to call meetings of members ,etc.

o   Section 100 – Calling of Extraordinary General Meeting

o   Section 101 – Notice of Meeting

o   Section 102 – Statement to be Annexed to notice

o   Section  103 – Quorum for meetings

o   Section 104 – Chairman of meetings

o   Section 105  - Proxies

o   Section 106 – Restriction on voting rights

o   Section 107 – Voting by show of hands

o   Section 108 – Voting through electronic means

o   Section 109 – Demand for poll

o   Section 110 – Postal ballot

o   Section 111 – Circulation of members’ resolution

Advantages of One Person Company:

OPC will bring the unorganised sector of proprietorship into the organised version of a private limited company. Various small and medium enterprises, doing business as sole proprietors, might enter into the corporate domain. The organised version of OPC will open the avenues for more favourable banking facilities. Proprietors always have unlimited liability. If such a proprietor does business through an OPC, then liability of the member is limited.

OPC in Other Countries:

Various countries permit this kind of a corporate entity. China introduced it in October 2005 in which the promoting individual is both the director and the shareholder. The amended company law of Pakistan permits one person to form a single-member company by filing with registrar, at the time of incorporation, a nomination in the prescribed form indicating at least two individuals to act as nominee director and alternate nominee director. In US, several states permit the formation and operation of a single-member Limited Liability Company (LLC). In China, one person is allowed to apply for opening a limited company with a minimum capital of 1, 00,000 Yuan. The amended law of China prescribes that the owner should pay the investment capital at one time and bars him from opening a second company of the same kind. In most countries, the law governing companies enables a single-member company to have more than one director and grants exemptions to such companies from holding AGMs, though records and documents are to be maintained. The concept is also very popular in Singapore.

Conclusion:

OPC will give greater flexibility to an individual or a professional to manage his business efficiently and at the same time enjoy the benefits of a company. The concept of OPC will also help many foreign companies, which need to appoint a minimum of two nominees now when they form a wholly-owned subsidiary. OPC will open the avenues for more favourable banking facilities, particularly loans, to such proprietors. Besides, the concept will boost flow of foreign funds in India as the requirement of nominee shareholder would be done away with.

While the idea of an OPC looks promising, doing business in OPC structure may effectively result in higher tax implications on the business as the rate of taxation on companies is higher. Also, since a company is a separate legal entity, the distribution of dividend by an OPC may attract dividend distribution tax. In the case of Sole proprietors, on the other hand are taxed at the rates applicable to individuals, i.e., differential rates for different slabs of income. It remains to be seen if the OPC model is widely adopted. 

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