One Person Company: Indian Corporate World Setting New Milestones

Abhinav Gaur, Research Associate

Existing Companies Act, 1956 has been amended on August 29, 2013 through new Companies Act. Old bill was too complex and many representations were made to the Govt. to simplify it and incorporate present days requirements.    In this new Bill, in addition to number of amendments new law of ONE PERSON COMPANY has also been made. However, this Person Company (OPC) provision is already in practice in other countries like Singapore, China and USA.

ONE PERSON COMPANY

One-person company means a company, which has only one member. According to clause 2(62) of the Companies Act, 2013 it is such a corporate entity which has only one share holder. In this company legal and financial liabilities are limited to the company only.

Important features of OPC are as under:

  • It is formed as a private limited company and has only one person as a member.
  • Such company must bear “ONE PERSON COMPANY” under it’s name.
  • OPC should be formed for lawful purposes and should have minimum 1 director.
  • The annual return of such company must be signed by a Company Secretary. In case, there is no Company Secretary, it can be done by one director
  • One Person Company, small company and dormant company shall be deemed to have complied with the provisions if at least one meeting of the board of directors has been conducted once in six months and gap between the two meetings must not be less than 90 days.
  • Whenever one person company enters into a contract with the member of the company who is a director also, shall inform the registrar about every such contract within 15 days of approval of the board.
  • The financial statements shall be approved by the board and signed by the only one director, for submission to the auditor for their report.

FORMATION

To form an OPC, person has to give a name and legal identity to the proposed company under which business is to be carried on. Nominate has to be made with written consent as a nominee to the OPC. Nominee will be the default and ad hoc member in case of the existing sole member’s death or disability. This provision ensures 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. Finally, OPC should bear the letters “OPC” in brackets after its registered name, wherever it may be printed, affixed or engraved.

RELAXATIONS IN COMPLIANCE REQUIREMENTS

The act contains certain relaxations in the case of an OPC which are more in the nature of the form of the organization like:

  • Minimum number of directors for an OPC is one and the maximum is 15.
  • There is no requirement of the appointment of first director as the sole member shall be deemed to be the first director.
  • Provisions relating to AGM and EJM are not applicable to OPC.
  • Only one director needs to sign the annual returns to be submitted to the registrar of companies.

DIFFERENTIAITNG PARAMETRES FROM A SOLEPROPRIETORSHIP

  • OPC is a separate legal entity from the owner whereas in the case of proprietorship organization both these merge into one.
  • In case of OPC, liability of the owner is limited, whereas in a proprietorship owner is liable for all the liabilities of the business entity he creates.
  • In case of sole proprietorship, Financial ratings and debt obligations are determined by the standing of the owner individual. However, In case of OPC this will be different as it is a separate legal entity.
  • OPC will have a separate legal entity for tax purposes different from the owner which is not the case with sole proprietorship form of business.

 

OPC IN OTHER COUNTRIES

Number of countries permits“One Person Company” kind of a corporate entity. In October 2005, China introduced it in which the promoting individual is both the director and the shareholder. 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 also one person is allowed to apply for opening a limited company with a minimum capital of 1 Lac Yuan. Chinese Act prescribes that owner should pay the investment capital at one time and bars him from opening a second similar company. In several  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.

ADVATANGES

OPC concept will bring the un-organized sector of proprietorship into the organized version of a private limited company. The organized version of OPC will open the avenues for more favorable banking facilities. Proprietors always have unlimited liability. If such a proprietor does business through an OPC, then liability of the member is limited. This will open all options for Indian entrepreneurs, with pros and cons, and leave it in the hands of such promoters to decide the best options. It will help many foreign companies, which just need to appoint nominees for the sake of a minimum two members, when in India they form a wholly-owned subsidiary. Various small and medium enterprises, doing business as sole proprietors, might enter into the corporate domain. The concept will boost the flow of foreign funds into India, as the requirement for a nominee shareholder would be done away with. However, the mandatory clause that a resident Indian director should be on the board could act a bottleneck.

SHORTCOMINGS AND AMBIGUITIES

Formation of OPC appears to be easy but one person will still have to ensure statutory compliances like filing of returns, auditing of accounts. OPC’s in the field of finance may also face issue like to meet the minimum capital requirement which in a way has nothing to do with the companies act.   Other issues which could confront may include taxation related issues like tax on capital gains on conversion of proprietorship to OPC, remuneration to director, deemed dividends and stamp duty on transfer of business to OPC. The issues will get clear when the concepts evolve more and the required rules are prescribed.  We have to wait for clarity in cases like a reverse process of converting an OPC in  proprietorship. So a lot of issues have to be kept in mind which can be analyzed only after the growth of this concept in our nation.

CONCLUSION

OPC will give greater flexibility to an individual or a professional to manage his business and enjoy the benefits of a company. Company law experts see a rise in registrations of one-person companies once the Bill is enacted into law. 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 favorable banking facilities, particularly loans, to such proprietors. In addition to it, this concept will boost flow of foreign funds in India as the requirement of nominee shareholder would be done away with.

The main issue thus remains that this is completely new concept and not just an extension of the existing concept of sole proprietorship form of business

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