One Person Company: A Critical Analysis
A man is known by the company he keeps. But with the implementation of the Companies Act, 2013, an individual person can now constitute a Company under the concept of “One Person Company” (hereinafter mentioned as OPC).
The Companies Act, 2013 opens a new segment for organizing a business in India by providing the concept of OPC which is a legitimate way to incorporate a company with only one member. OPC is similar to the existing concept of Sole-proprietorship with separate legal entity distinct from its proprietors and promoters. OPC can run and undertake its business like Sole-proprietorship with the status of Company. This form of business is already flourished in some of the developed countries like USA, Singapore, China and various other countries in Europe. This new concept of business will provide a whole new bracket of opportunities for those who look forward to start their own ventures with a structure of organized business.
This article has been categorically scripted to present an overview about the revolutionary new concept of OPC as introduced by the Companies Act, 2013. The researchers have not only delved deep into the relationship of OPC with sole proprietorship but have also strived hard to provide a critical analysis of the concept. This fairly new concept of business may encourage various small and medium size enterprises doing business as sole proprietors to organise their business into the corporate domain.
One Person Company (hereinafter mentioned as OPC) is a radical idea which came into the picture with the introduction of the Companies Act, 2013. The concept of OPC was first recommended by an expert committee constituted under the leadership of Dr. J. J. Irani in 2005. OPC is an opportunity for them who were previously hesitant from perpetuating their own ventures. OPC will provide a chance for all the young people who were in a jinx before starting their own business. It will not only provide them an opportunity to vent into something new but will also help them to access certain facilities like bank loans, legal shield for their business and a thorough access to the market as a separate entity.
OPC is defined under sub section 62 of section 2 of the Companies Act, 2013. It defines OPC as a company which has only one person as a member where all the legal and financial liabilities are limited to the company and not to its members. It is a kind of revolutionary concept in the new Companies Act, 2013, as previously under the old Companies Act, 1956 a minimum of two members were required to form a company.
Sub- Section 62 of Section 2 of the Companies Act, 2013, reads as follows:
'One Person Company means a company which has only one member'
It shall also be important to note that Section 3 classifies OPC as a Private Company for all the legal purposes with only one member. All the provisions related to the private company are applicable to an OPC, unless otherwise expressly excluded.
The only exception provided by the Act to an OPC is that according to the rules only "NATURALLY-BORN" Indian who is also a resident of India is eligible to incorporate an OPC. Meaning thereby, the advantages of an OPC can only be obtained by those INDIANs who are naturally born and also a resident of India. At the same, it shall also be worth mentioning that a person cannot form more than 5 OPC's.
The concept of OPC is comparatively new to India. As mentioned earlier, the propounded term was already in vogue in other countries prior to its inception in India. In the US several states have given their assent for companies registering as OPC’s and they are known as Limited Liability Companies. Many other countries like Singapore introduced the concept of OPC in 2004, followed by China in 2005. The concept of OPC also exists in other countries like Mauritius, UK, Ireland, Qatar and Bahrain. Pakistan also inducted this concept by amending their companies act. In most countries the law provides that OPC should or can have more than one director and exempts from holding annual general meeting.
Main Reason for its induction:
The main reason for consideration and introduction of the concept of OPC on the lines of what has been introduced in various other countries is to encourage the sole proprietors to enter into the organised sector of business and to restrict the liability of the proprietors to the extent of the liability of the company. The other reasons being advocated are that the concept will help foreign companies to form their subsidiaries conveniently which would encourage foreign funds flow into India, to bring the small and medium enterprises within the domain of corporate entity and so on.
OPC and Foreign Jurisdictions:
It introduced OPC in 2005 in which the promoting individual is both the director and the shareholder. In China one person is allowed for opening a limited company with a minimum capital of 1,00,000 Yuan. The amended law of China prescribes the owner should pay the investment capital at one time and bars him from opening a second company of the same kind.
The amended 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.
UK Companies Act, 2006 and the Companies (Single Member) Private Companies Regulations 1992 provides for such concept.
Company Amendment Act of 2004 and other regulations.
United Arab Emirates:
One Person Company was recognized with only Articles of Association.
United States of America:
In US several states have given their assent to the formation and operation of a company with a single member they call as Limited Liability Company.
An OPC can be formed in any below categories:
a. Company limited by guarantee
b. Company limited by shares
The prerequisites for an OPC limited by shares:
a. Shall have minimum paid up capital of INR 1 Lac.
b. Restricts the right to transfer its shares.
c. Prohibits any invitations to public to subscribe for the securities of the company.
An OPC is required to give a legal identity by specifying a name under which the activities of the business could be carried on. The words 'One Person Company' should be mentioned below the name of the company, wherever the name is affixed, used or engraved. The member of an OPC has to nominate a nominee with the nominee’s written consent, and file it with the Registrar of Companies (RoC). This nominee in the event of death or in event of any other incapacity shall become a member of an OPC. The member of an OPC at any time can change the name of the nominee providing a notice to the RoC in such manner as prescribed. On account of Death of a member, the nominee is automatically entitled for all shares and liabilities of OPC.
Memorandum & Articles of Association of OPC:
Although the OPC will be formed by one person only by subscribing the Memorandum of Association but the Memorandum of OPC shall also indicate the name of any other person nominated by OPC with his prior written consent in the prescribed form, who shall, in the event of the subscriber’s death or his incapacity to contract become the member of the company and the written consent of such person shall also be filed with the Registrar at the time of incorporation of the OPC along with its Memorandum and Articles of Association. The Member of OPC may at any time change the name of such other person by giving notice to the Registrar of Companies in such manner as may be prescribed.
Upon the death of the member of OPC, the nominee shall be entitled to all the shares. The nominee will be entitled to the same rights & liabilities to which sole member of company was entitled or liable. On becoming member such nominee will nominate any other person as nominee with his prior written consent in the prescribed form and intimate the same to Registrar of Companies.
Number of Directors:
A Minimum of one director is required for OPC but there is no constraint to recruit more than one director with a maximum of fifteen directors. Every OPC shall have at least one director who has stayed in India for a total period of not less than one hundred and eighty-two days in the previous calendar year.
Appointment of directors:
If there is no separate provision made in the Articles of OPC, an individual being the member of OPC shall be deemed to be its first director. Other Directors shall be appointed in General Meeting. The Articles of OPC may confer on its Board of Director the power to appoint any person as an additional director at any time who fails to get appointed as a director in a general meeting who shall hold office up to the date of the next annual general meeting.
The OPC having only one director shall not require holding Board Meeting. In case of more than one director then 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 to comply with the provisions under the Companies Act, 2013.
Where there is only one director on the Board of Director of OPC, any business which is required to be transacted at the meeting of the Board of Directors of a company, it shall be sufficient if the resolution by such director is entered in the minutes-book which is required to be maintained under section 118 and signed and dated by such director and such date shall be deemed to be the date of the meeting of the Board of Directors for all the purposes under this Act.
Annual General Meeting:
Section 122(1) of Companies Act, 2013 provides that the provisions of Section 98, Section 100 and Section 111 are not applicable to OPC. In other words the provisions relating to General Meeting, Extra-Ordinary General meeting and Notice convening to general meeting are not applicable to OPC. However, for the purposes of Section 114 where any business is required to be transacted at an annual general meeting or other general meeting of a company by means of an ordinary or special resolution, it shall be sufficient if the resolution is communicated by the member to the company and entered in the minutes-book which is required to be maintained under section 118 and signed and dated by the member and such date shall be deemed to be the date of the meeting for all the purposes under this Act.
Contract by OPC:
The OPC limited by shares or by guarantee when enters into a contract with the sole member of the company who is also the director of the company, the OPC shall, unless the contract is in writing, ensure that the terms of the contract or offer are contained in a memorandum or are recorded in the minutes of the first meeting of the Board of Directors of the company held next after entering into contract. However, this condition shall not apply to contracts entered into by the company in the ordinary course of its business. The OPC shall inform the Registrar of Companies about contract entered into by it and recorded in the minutes of the meeting of its Board of Directors within a period of fifteen days of the date of approval by the Board of Directors.
Financial Statement and Annual return
The Financial Statement shall be signed by only one director and the annual return shall be signed by the company secretary, or where there is no company secretary, by the director of the OPC.
OPC & Sole Proprietorship:
a. Succession: In an OPC there is a nominee designated by the member. The nominee who will be a citizen of India and who resides in India. The nominee shall in the event of death of the member become a member of the company and will be responsible for the running of the company. But in the case of sole proprietorship this can only happen through an execution of WILL which may or may not be challenged in the court of law.
b. Limited Liability: Fundamentally the basic difference between a sole proprietorship and an OPC is the way and manner in which the liability is treated in an OPC. OPC is different from sole proprietorship because it is a completely separate entity and that is the distinction between the promoter and the company. The liability of the share holder will be limited to the unpaid subscription money in his name. On the other hand the liability in a sole proprietorship, the person/owner is alone liable for the claims which will be made against the business.
c. Tax Bracket: Though the concept of an OPC has been incorporated in the Companies Act, 2013 but the concept of same does not exist in tax laws as yet, as a result an OPC can be put in the same bracket of taxation as other private companies. According to Income Tax Act,1961 a private limited company is under the tax bracket of 30% on total income with an additional surcharge of 5% if the income exceeds 10 million with an addition to 3% of education cess.
d. Compliance: OPC has to file annual returns, etc. just like a normal company and would also need to get its accounts audited in the same manner. On the other hand a sole proprietorship would only need to get audited under the provisions of Section 44 AB of the Income Tax Act, 1961 once its turnover crosses the certain threshold.
Benefits of OPC:
1. All unfortunate events in business are not always under an entrepreneur’s control; hence it is important, to secure the personal assets of the owner, if the venture falls into crisis. While doing business as a proprietorship, the personal assets of the proprietor can be at risk in the event of failure, but this is not the case for a One Person Private Limited Company, as the shareholder liability is limited to his shareholding. This means any loss or debts which is purely of business nature will not impact, personal savings or wealth of an entrepreneur.
2. One Person Company is a Private Limited Structure; this is the most popular business structure in the world. Gives suppliers and customers a sense of confidence in business. Large organizations prefer to deal with private limited companies instead of proprietorship firms. Pvt. Ltd. business structure enjoys corporate status in society which helps the entrepreneur to attract quality workforce and helps to retain them by giving corporate designations, like directorship. These designations cannot be used by proprietorship firms.
3. This leads to fast decision making. Yet he/she can appoint as many as 15 directors in the OPC for administrative functions, without giving any share to them.
4. The OPC business helps Startup Entrepreneurs to easily test the business model, a prototype and upon building a marketable product approach Angel investors, Venture capitalists for funding and easily convert into multi shareholder Private Limited company.
5. Banking and financial institutions prefer to lend money to the company rather than proprietary firms. In most of the situations Banks insist the entrepreneurs to convert their firm into a Private Limited company before sanctioning funds. So it is better to register your startup as a One Person private limited rather than proprietary firm.
6. In an OPC, it is possible for a company to make a valid contract with its shareholder or directors. This means as a director you can receive remuneration, as a lessor you can receive rent, as a creditor you can lend money to your own company and earn interest. Directors’ remuneration, rent and interest are deductible expenses which reduce the profitability of the Company and ultimately brings down taxable income of your business.
7. OPC is one of the easiest forms of corporate entities to manage. Very few ROC filing is to be filed with the Registrar of Companies (ROC). No need to conduct Annual General Meeting (AGM).
Limited Liability Partnership Act, (LLP Act) 2008 was enacted on January 7, 2009. The LLP Act was introduced with the objective of providing limited liability for the partners in business, besides bringing the all small and medium enterprises in the unorganised sector into organised sector. The concept of LLP has not been successful and till date approximately only 10,000 entities are registered. The LLP model of business is not fully encouraged even by professionals. The success of the very concept is doubtful to some extent due to some reasons which have been mentioned below:
1. The existing proprietors are free to raise funds from their relatives, friends and others when the need arises. On the other hand, an OPC, being a private limited company, is not permitted to borrow from others.
2. Several existing private limited companies may be as good as proprietorship firms but such private companies may consider and introduce several other shareholders, up to a limit of 200. On the other hand, the capital of the OPC is only to the extent of available funds of the person who owns OPC.
3. The concept of nomination is slowly being introduced in bank accounts, share trading etc., but has not come into the business enterprises. Normally, the existing proprietorship business assets are shared by the legal heirs which may be more than one. Conversion of existing proprietorship business into OPC requires providing one nominee which may not be acceptable to the other family members.
4. Foreign companies may not be able to incorporate their subsidiaries as OPC’s as the subscriber has to be only an individual and that too, with a nomination of another individual. The concept of subsidiary company is that the entire shares are held by the holding company and therefore, it is not possible for MNCs to incorporate their subsidiaries as OPCs.
5. The expectation that the bankers will provide funds easily to OPCs seems unrealistic. At present, bankers do insist on collateral and other securities for extending credit facilities to small individual business entrepreneurs. Since the OPC now allows the same individual proprietors to claim limited liability, the risk avenue is more to the bankers.
6. Above all, the requirement of filing documents with the Regulator may not encourage small business entrepreneurs to incorporate as or to switch over to OPCs.
OPCs are imperative because they would give entrepreneurial capabilities of people an expeditious participation in economic activity and such economic activity may take place through the creation of an economic person in the form of a company. However, there has been criticism in certain quarters against the formation of such a company as it may give room for evasion of public funds and tax liability by an individual.
OPC will provide greater flexibility to an individual 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 doors 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.