One Person Company under Companies Act 2013-Its advantages

1. Introduction

Individual entrepreneurs doing business as sole proprietors will now be able to avail the benefits of limited liability without a second person to form a company as the Companies Act, 2013 (hereinafter “2013 Act”) proposes the concept of “One Person Company” (hereinafter “OPC”). Under the Companies Act, 1956 (hereinafter “1956 Act”) a private limited company is required to have a minimum of two shareholders and two directors. This write-up examines provisions of the 2013 Act and the Draft Rules to Companies Act, 2013 (hereinafter “Rules”) relating to OPC.

2. Background

The idea of OPC was mooted by the J J Irani Committee which was set up to take a comprehensive view on the changes necessary in the Companies Act, 1956 in context of the changing economic and business environment. In its report the committee had observed,

“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’. 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.”

It was proposed that the concept of ‘One Person Company’ may be introduced in the Act with following characteristics:-

1. OPC may be registered as a private company with one member and at least one director;
2. 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.
3. Letters ‘OPC’ to be suffixed with the name of OPCs to distinguish it from other companies.

The much-awaited Companies Bill, 2013 got the President’s assent on 29 August 2013. The 2013 Act seeks to consolidate and amend the law relating to the companies and intends to improve corporate governance, raise levels of transparency and to further strengthen regulations for corporates. The 2013 Act has made significant changes to the provisions of law and has introduced several new concepts. OPC has been defined in section 2(62) of the 2013 Act as a company which has only one person as a member.

3. Incorporation

In terms of section 3(1)(c) of the 2013 Act, an OPC may be formed for any lawful purpose by one person. Salient features in relation to incorporation include:

3.1 The memorandum of an OPC shall indicate the name of another person, with his prior written consent, who shall, in the event of the subscriber’s death or his incapacity to contract become the member of the company.
3.2 The written consent of such person shall also be filed with the registrar of companies at the time of incorporation of the OPC along with its memorandum and articles.
3.3 The words ‘‘One Person Company’’ must be mentioned in brackets below the name of such company, wherever its name is printed, affixed or engraved. [Second proviso to Section 12(3)]
3.4 A person can incorporate a maximum of 5 OPCs. [Rule 2.1(2)]
3.5 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. [Rule 2.1(1)]

4. 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 been provided with a number of exemptions and therefore have lesser compliance related burden. Such exemptions include:

4.1 OPC is not required to prepare cash flow statement as a part of financial statement. [Section 2(40)]
4.2 In case an OPC does not have a company secretary, the annual return can be signed by the director of the company. [Proviso to section 92(1)]
4.3 An OPC is not required to hold an annual general meeting. [Section 96(1)]
4.4 The provisions of the following sections shall not apply to an OPC -

(a) Section 98: Power of Tribunal to call meetings of members, etc.
(b) Section 100: Calling of extraordinary general meeting
(c) Section 101: Notice of meeting
(d) Section 102: Statement to be annexed to notice
(e) Section 103: Quorum for meetings
(f) Section 104: Chairman of meetings
(g) Section 105: Proxies
(h) Section 106: Restriction on voting rights
(i) Section 107: Voting by show of hands
(j) Section 108: Voting through electronic means
(k) Section 109: Demand for poll
(l) Section 110: Postal ballot
(m) Section 111: Circulation of members’ resolution

4.5 The minimum number of directors in the case of an OPC has been limited to one. [Section 149(1)(a)]
4.6 An OPC must conduct at least 1 meeting of the board of directors in each half of a calendar year with a gap of at least 90 days between the 2 meetings. For an OPC having only 1 director, the provisions of section 173 (Meetings of board) and section 174 (Quorum for meetings of board) will not apply. [Section 173(5)]

Section 193 of the 2013 Act provides that when an OPC enters into a contract with the sole member of the company who is also the 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 entering into contract. This requirement, however, will not apply to contracts entered into by the company in the ordinary course of its business. Also, an OPC is required to inform the registrar of companies about every such contract within a period of 15 days of the date of approval by the board of directors.

5. Nomination by the subscriber or member of OPC

In terms of section 4(1)(f), the memorandum of an OPC should state the name of the person who shall become the member of the company in the event of death of the subscriber. Such nominee may withdraw his consent subsequently. [Section 3(1)]

5.1 The subscriber to the memorandum of an OPC shall nominate a person, after obtaining his/her prior written consent, who shall, in the event of the subscriber’s death or his incapacity to contract, become the member of that OPC. [Rule 2.2(1)]
5.2 The member of OPC may at any time change the name of such nominee by giving notice as prescribed. [Section 3(1)]
5.3 The notice by the member of OPC as stated above must be provided by the OPC to the registrar of companies once the same is intimated by the member to the OPC. Any change in the name of nominee shall not be deemed to be an alteration of the memorandum. [Section 3(1)]
5.4 Only a natural person who has stayed in India for a period of not less than 182 days during the immediately preceding one financial year is entitled to be a nominee for the sole member of an OPC. [Rule 2.1(1)]

6. Conversion of OPC into private or public company

OPC can get itself converted into a private or public company after increasing the minimum number of members and directors to two or minimum of seven members and three directors as the case may be, and by maintaining the minimum paid-up capital as per requirements of the 2013 Act for such class of company and by making due compliance of section 18 of the 2013 Act for conversion. [Rule 2.4(6)]

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 share capital of an OPC exceeds 50 lakh rupees or its average annual turnover during the period of immediately preceding three 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 a 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 years 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 an 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.

7. Benefits

An OPC gives the advantage of limited liability to entrepreneurs whereby the liability of the member will be limited to the unpaid subscription money. This benefit is not available in case of a sole proprietorship.
Explaining some of the advantages of OPC, Corporate Affairs Minister Sachin Pilot stated in a recent press conference,

“Small entrepreneurs can now set up ‘one person companies’ to directly access target markets rather than being forced to share their profits with middlemen… This would provide tremendous opportunities for millions of people, including those working in areas like handloom, handicrafts and pottery. They are working as artisans and weavers on their own, so they don’t have the legal entity as a company. But the OPC would help them do business as an enterprise and give them an opportunity to start their own ventures with a formal business structure.” ¹

An OPC being an incorporated entity will also have the feature of perpetual succession and will make it easier for entrepreneurs to raise capital for business. Also, since it will have lesser compliance burden compared to private companies, it can be preferred mode of business for small industries.

8. Conclusion

While the idea of an OPC looks promising, doing business in OPC structure may effectively result in higher tax implications on the businesses 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. 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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