One Person Company Concept In Indian Company Law :
The Draft Companies Bill, 2009
An Entrepreneur is an individual who chooses to go into business by himself. Often entrepreneurs decide to stay a one-person company to keep decisions and quality of work under control. These single entrepreneurs are often called solo entrepreneurs, too. These entrepreneurs are often referred to as free agents, freelancer, self-employed, sole proprietor, or home based business owner (although not all single person entrepreneurs are home-based). This often depends on the professional field they work in.
Being a one person business does not mean being completely on your own. These entrepreneurs often collaborate with other businesses or build alliances with other entrepreneurs or consultants. It all depends on their business needs. Outsourcing of basic work or certain project related work is the closest these businesses get to in regards to having "staff".
Businesses run as one-person companies often have owners that meet certain characteristics. What are typical Solo Entrepreneur characteristics?
- The desire for personal freedom that allows them to adopt the lifestyle of choice.
- The drive and passion to implement the business plan and to fulfil their personal dreams.
- The willingness to go the extra mile and the desire to succeed
- They are very passionate about what they do.
- Being committed to their venture.
2. What Is One Person Company (OPC) ?
Why the "one-person company"?
Many entrepreneurs are "refugees" from the large corporate world, while others choose to be self-employed in a "one-person company" as a change from a traditional-based small business with employees and increased management responsibilities. Being unemployed after another wave of outsourcing to India can also trigger the desire in people to become self-employed and especially to stay a "one-person company". Especially the political games played in larger corporations increase the desire to completely get away from the same. Being flexible and able to implement decisions without having to worry about the "internal political players" is a driving force to work alone.
A man is known by the company he keeps. But with the implementation of the Companies Bill 2009, a single person will constitute a Company, under the One Person Company (OPC) concept. As a structure for professionals, individual entrepreneurs, SMES and NGOs – the proposed Section 171 extends to Section 25 Companies as well – this is a godsend, as it insulates the shareholders personal assets from liability.
The new Company Bill, which proposes to do away with redundant provisions of the existing Companies Act, 1956, envisages a new entity in the form of one person company (OPC), while empowering the Government to provide a simpler compliance regime for small companies.
The proposed introduction of one-person company into the legal system is a move that would encourage corporatisation of business and entrepreneurship. At present, an entrepreneur in India has to find another person to implement his skills through incorporation of a company while in the UK, Australia, Singapore, Pakistan, etc; a single person can form a company.
OPC is a one shareholder corporate entity, where legal and financial liability is limited to the company only.
2.2 OPC In India
Existing Indian law currently requires at least two shareholders. That is why even for wholly-owned subsidiaries, an individual shareholder has to hold one share as a nominee.
The principal forms of business organisations permitted in India are sole proprietorship firms (in which only one person runs the business), partnerships (between two or more people) and companies (both private and public where it is possible for many individuals to own the business by subscribing to its shares).
Most small companies are actually owned and managed by a single individual, but currently are required to bring in another shareholder. This increases compliance requirements, for example, shareholder meetings require the presence of both the shareholders. With the implementation of the Companies Bill 2009, a single person will constitute a Company, under the One Person Company (OPC) concept. OPC will help small single entrepreneurs, who are currently operating under a proprietorship model, move to the corporate structure with benefits of limited liability but with minimal compliance.
In India, the JJ Irani Expert Committee recommended the formation of one-person company (OPC). It has suggested that such an entity may be provided with a simpler legal regime through exemptions so that the single entrepreneur is not compelled to fritter away time, energy and resources on procedural matters.
The committee proposed the following:
OPC may be registered as a private company with one member and may also have at least one director.
Adequate safeguards in case of death/disability of the sole person should be provided through appointment of another individual as nominee director. On the demise of the original director, the nominee director will manage the affairs of the company till the date of transmission of shares to legal heirs of the demised member.
‘OPC’ to be suffixed with the name of one-person companies to distinguish them from other companies.
2.3 Status Of 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.
Further, aspects relating to nomination in case of death of sole member and change of status of the firm are also covered.
2.4 Difference Between A Sole Proprietorship And An OPC
The fundamental difference between a sole proprietorship and an OPC is the way liability is treated in the latter.
A one-person company is different from a sole proprietorship because it is a separate legal entity that distinguishes between the promoter and the company.
The promoter’s liability is limited in an OPC in the event of a default or legal issues. On the other hand, in sole proprietorships, the liability is not restricted and extends to the individual and his or her entire assets.
3. Salient features of ‘OPC’
The best thing about the OPC concept is that it will help in promoting entrepreneurship across the country. The important feature for a start-up that registers as an OPC is that it de-risks the business by transferring the promoter’s liability to the company. So, the key difference between OPC and sole proprietorship is the way liabilities are treated.
For one, the OPC would have very little paper work — the Articles of Association would be simple and short, and if the same person doubling as director, there would be no need for board or shareholders’ meetings.
Some OPC regimes in other jurisdictions have a mandatory requirement of two directors, and therefore board meetings are necessary, though not physically as the Bill will recognise the validity of such meetings being held by video or teleconferencing.
Quorum requirements, proxies, maintaining of various registers of members, filing of multiple e-forms fade away, leaving the single operator free from the fetters of corporate governance, except that he has to maintain his books of accounts, prepare and file annual audited balance sheet and profit and loss accounts, without the Board’s report.
The memorandum of a One Person Company shall indicate the name of the person who shall, in the event of the subscriber’s death, disability or otherwise, become the member of the company.
The memorandum of a company shall state the last letters and word “OPC Limited” in the case of a One Person limited company.
The One Person Companies are also not required to hold any Annual General Meeting under the new Companies Draft Bill, 2009. This facility is not extended towards any other type of companies.
4. The ‘OPC’ concept and the Draft Companies Bill, 2009
The Draft Companies Bill, 2009, (Bill No. 59 of 2009), as introduced in Lok Sabha on 3rd august 2009, introduces the OPC concept for the first time in India.
The Bill will provide a substantive legal framework while leaving the procedural issues to the rules to be notified subsequently.
Articulation of shareholders democracy with protection of the rights of minority stakeholders, responsible self regulation with disclosures and accountability has been the objective behind this simplified company law.
Following are some of the glimpses of the provisions in the new Draft Bill. The provisions are those which deal with aspect of One Person Company.
One Person Company is defined under section 2(1) (zzk) as:
““One Person Company” means a company which has only one person as a member”
Chapter II deals with the Incorporation of the Companies. Section 3(1) (c) deals with the formation of One Person Company. It states:
“One person, where the company to be formed is to be a One Person Company, by subscribing their names or his name to a memorandum in the manner prescribed and complying with the requirements of this Act in respect of registration:
Provided that the memorandum of a One Person Company shall indicate the name of the person who shall, in the event of the subscriber’s death, disability or otherwise, become the member of the company:
Provided further that it shall be the duty of the member of a One Person Company to intimate the Registrar the change, if any, in the name of the person referred to in the preceding proviso and indicated in the memorandum within such time and in such form as may be prescribed, and any such change shall not be deemed to be an alteration of the memorandum”
Section 5(1) deals with the memorandum of the One Person Company. It states
“The memorandum of a company shall state— the last letters and word “OPC Limited” in the case of a One Person limited company”.
Section 13(1) a, b, c deals with alteration of articles including the conversion of Private Companies, Public Companies to One Person Companies and vice-versa.
One very important feature of the OPC concept is the conduction of Annual General Meeting.
Section 85(1) of the Draft Bill excludes One Person Company from holding Annual General Meeting at least once in a year.
Section 171 is perhaps the most important and fascinating provision to look out for. It states:
“Contracts by One Person Companies-
171. (1) Where a One Person Company limited by shares or by guarantee enters into a contract with the sole member of the company who is also director of the company, the company 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 the entering into the contract:
Provided that nothing in this sub-section shall apply to contracts entered into by the company in the ordinary course of its business.
(2) The company shall inform the Registrar about every contract entered into by the company and recorded in the minutes of the meeting of its Board of Directors under sub-section (1) within fifteen days of the date of approval by the Board of Directors with such fee as may be prescribed, or with such additional fee as may be prescribed within the time specified, under section 364.
(3) Where the company fails to inform the Registrar under sub-section (2) before the expiry of the period specified under section 364 with additional fee, the company shall be punishable with fine which shall not be less than twenty-five thousand rupees but which may extend to one lakh rupees and every officer who is in default shall be punishable with imprisonment for a term which may extend to six months or with fine which shall not be less than twenty-five thousand rupees but which may extend to one lakh rupees, or with both.”
OPCs are imperative because they would give entrepreneurial capabilities of people an outlet for 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.
The fears may be addressed through adequate precautions. The law pertaining to the formation of companies should address some specific issues such as:
Whether only an individual or even a legal person can form a one-person company?
Whether a single member can form a company without any limit on the paid-up capital or some ceiling?
If the turnover of the one-person company exceeds certain limits, whether it should to be converted into private/public limited. Still the move is expected to ease start-up formalities for prospective entrepreneurs. Similarly, small entrepreneurs who are running their businesses under the proprietorship model could convert to OPCs, with the benefit of limited liability and none of the cumbersome compliance requirements. On a positive note, OPCs are expected to attract investors who were earlier afraid to take risk in investing in sole proprietorship business because of unlimited liability. With the process of starting a business getting simpler it could be a boon for every form of small business. It could also present an opportunity for a lot of Non Resident Indians (NRIs) and Persons of Indian Origin (PIOs) who can set up their companies in India.
The author can be reached at: firstname.lastname@example.org