One Person Company under the Company Law

Introduction

There are several processes inwhich a business entity can organize itself. It is purely a matter of choicefor people who intend to open a business as to which form they invest in. Thedecision is based on the type of industry, amount of capital available, thenumber of people interested in the business, etc. One form of organization of one’s business isthrough a system of a One Person Company (to be abbreviated as OPC in thearticle). The concept of OPC is new and was introduced in the year 2013 only. Theessential feature of an OPC, as is apparent from the name, is that consists ofonly one person. When the majority of the shares in a company are held by oneperson and he has the entire control of the management of affairs of thecompany in his hands, it generally is an OPC. Previously, when the concept ofOPC did not exist, if a person wanted to open a business on his own, he coulddo so through sole proprietorship which was not very conducive as the businessand the person were not considered as separate legal entities, thereby denyingthem such benefits that are attributed to a company by law. As a response tothis, the concept of OPC was introduced where a company could consist of justone person, majorly yet it shall entail all major benefits that the lawprovides to the companies, mainly the feature of limited liability which is theprincipal attraction for companies.

AnOPC is an ideal form of investment for any person who intends to open abusiness by himself, and wishes to keep all the effective control in his ownhands, yet aspires that his business operations be covered within the corporateframework. It is extremely conducive for the increasing start-up culture in thecountry. It protects people with limited resources while bringing them in theambit of corporate framework i.e. securing better rights of all relatedparties. For all these reasons, OPCbecomes an increasingly preferred option these days. This article discusses indetail about OPCs and their special feature of limited liability in detail.

One Person Company

The term One Person Company is defined in the Companies Act, 2013 (hereinafter referred as “the Act”) under Section 2(62) to mean a company that has only one person as its member. The members, during the incorporation, are nothing but the subscribers to the Memorandum of Association (hereinafter referred as “MoA”) of a company. Therefore, in an OPC, there is only one subscriber to the MoA of the company i.e. only one shareholder as the member in such a company.

The most important feature of anOPC is that it is a company. Even though there is only one member, he enjoysall the privileges and protection which the law provides to the members of acompany. OPC is a separate entity, distinct from the member. It enjoys theright to perpetual succession under a common seal. It also can sue or be suedin the name of the company i.e. it is at par with the rights and privilegesenjoyed by a company with multiple members. An important aspect here is theconcept of “limited liability”. The member of an OPC, who is the onlymember, has a limited liability which provides protection to assets andliabilities of the person. The member is not liable to repay the debts of thecompany beyond the sum pledged by him.

Features of One Person Company

The following are the main featuresof an OPC-

As per Section 3(1)(c)of the Act, the company formed by a single person can only be a privatecompany, which can be formed for any lawful purpose.
OPC can only have oneshareholder or member, unlike other private companies which can have multipleshareholders.
OPC has to necessarilynominate a nominee for the company while registering the MoA with the registrarof companies. It becomes imperative because such a company has only one memberand any untoward happening shall leave the company unstructured.
The concept ofperpetual succession will not come into picture if the person who has beennominated in the MoA declines to become a member of OPC on the death of themember.
The OPCs need to have aminimum of one director, which is in contrast to public and private companiesfor which the requirement is 3 and 2 directors respectively. However, they mayappoint a maximum of 15 directors, just like other companies.
There is no prescribedlimit for minimum paid-up share capital for OPCs as per the Act.

The above mentioned are the characteristic features of the company. The features may not be unique but are a culmination of features from different other forms. This combination of most relevant features in one group is what makes an OPC the preferential option among the corporates these days.

Membership

Only natural persons, who are citizens and residents of India, are eligible to form a One Person Company. The nominee of the company shall also be a citizen and resident. One person can only be a member or nominee of only one company at a time. Minors also are ineligible to be the members and nominees in a company. Further, a company cannot be a member of a nominee in an OPC, only a natural person can.

Formation

An OPC is formed when a person subscribes to the MoA of association of a company by fulfilling the requirements as prescribed by the Act. The MoA of the company must provide for a nominee of the company who shall become the member if the member dies or becomes incapable of entering into contractual relations. The consent of the nominee for filing of nomination shall be filed with the registrar. Such consent can be revoked by the nominee at any time by submitting an application in that regard with the registrar.

Conversion

Once an One Person Company is formed and registered; it cannot be converted voluntarily into any other form for a period of two years from incorporation. Further, a company which has been formed for charitable objects cannot be converted into any other type, public or private, as per the provision of Section 8 of the Act. There is an embargo from conversion to ensure that this feature is not used to cure a temporary deficiency in company norms. This provides protection to the legislative intent behind bringing up provisions for an OPC in the Act.

Also Read Section 180: Restriction on Power of Board

Benefits of a One Person Company

The OPCs enjoy many benefits underthe Act:

Theyare not bound to hold annual general meetings as in case of all othercompanies.
Thefinancial statements of the OPC need not include cash flow statements.
There is no requirement for a companysecretary to sign annual returns of an OPC. It can sufficiently be done by the directorhimself.
Thereis no requirement to have an independent director for the OPCs.
Theprovisions for quorum of meetings are also not applicable in the OPCs.
Itis easier for an OPC to gather its funding. It can raise funds through venturecapitals, financial institutions, angel investors, etc. It, therefore, becomesan equivalent to a private company for the matter of investment.
Sincethere is only one person who is making the decisions, controlling the affairsand managing the business, the decisions are taken speedily. The processbecomes more flexible and beneficial to all stakeholders.
AnOPC gets the benefits of tax deductions just like other companies. One majorbenefit of an OPC in comparison with a sole proprietorship is the tax benefitthat an OPC gets but a sole proprietorship doesn’t.
Furthermore,as it gets the tag of a company, it automatically gains the trust and prestigeassociated with it.

Limited Liability in A One Person Company

The evolution of one-person companyis based on combining two types of business objects, the concept of soleproprietorship in the limited liability form. The concept of limited liabilityand sole proprietorship are firstly explained for the ease of understanding theexact character of an OPC.

LIMITED LIABILITY- As the term apparently states, it means that the financial liability of the investor is limited to the extent of the fixed amount that he has invested in the company. In other words, an individual cannot be made personally liable for the debts, losses or liabilities of a company. The matter of liability generally comes up during the winding up of the company. In case of a Limited Liability Company, the liability of an investor shall only be up until the realization of the amount unpaid by him on the pre-agreed contribution for the shares of the company. It is in contrast to the liability of sole proprietors and general partnerships where the liability of the office bearers is unlimited i.e. their personal assets may be attached for the losses and debts of the company. This becomes beneficial when the company starts incurring massive losses, irrespective of the liability on the company, the shareholders can only be asked to pay only the amount unpaid on the value of shares held by them. This provides protection to the personal assets of the person investing in a company. This privilege has majorly contributed to the growth of investments in companies.
This is in contrast to the concept of unlimited liability which refers to a business model where the obligations of the member, financial and legal, are unlimited. It means that the members (sole proprietor, partners or the shareholders) make themselves personally liable for the losses of the business. If there is any liability which cannot be relieved by the business, personal assets of members can be used for relieving such liability. Here, the owners of the business are fully liable for all business actions, jointly and severally. It is a private form of organization and an unlimited liability company cannot be public in nature. Here, the entity is not taxed separately thereby having one benefit.
The credibility of an unlimited liability company is on a greater level, which seems like one of the major highs of the model but it is generally not conducive for occasional investors. The reduced risk factor in the limited liability concept is a reason for its tremendous growth in the recent past.
SOLE PROPRIETORSHIP– It is the simplest form of existence for a business entity. It has a single owner. The person just needs to get a social security number or the necessary permit/license, if any before commencing the business. It is economical and preferred for small businesses. Since there is only one person conducting the business, the law makes no distinction between the individual and the business.A sole proprietor operates the form of an organization which includes a single business entity. In this medium, the business and the individual running it are one and the same legal persons.
It exists in contrast to various other forms of business formations. One example is a partnership, which comes into existence with an agreement between two or more people to operate business collectively on the terms and conditions as agreed via the agreement. It is also a cost-friendly method and convenient for capital generation as more than one person can contribute to capital generation. Even here, the business has no separate existence of its own. Every member is responsible for the losses and liabilities of the company jointly and severally to the extent of full realization. Another example is a company, which shall come into existence if a corporation registers itself under the law. As a company is considered as a separate entity under the law, the members are protected from personal liability beyond the amount of capital paid by them. The ownership here is transferrable like a movable property through stock exchanges.
The evolution of an OPC is a combination of limited liability form and the sole proprietorship mode of operation. An OPC provides the benefits of both of them as the control of the company is held by one person efficiently. In an OPC, one person holds majority shares in a company which makes it a sole proprietorship in essence. To fulfill the statutory requirements in regards to shareholders and directors, a few shares and some lesser important positions are given to other people who also are the family member or close aides of the principal shareholder. Thereby, a company is formed in the legal terminology whereas, in effect, it is a sole proprietary as one person retains the exclusive control over the entire organisation. The specific aspect which differentiates it from a sole proprietor from an OPC is the privilege of limited liability that the OPC holds.
Not only an OPC can have limited liability but it is one of the intrinsic features of an OPC. It is a characteristic which distinguishes it from other types of business entities and makes it unique and preferred option.

Benefits of A Limited Liability Company

The concept of limited liability isgaining significance throughout the corporate systems due to multiple causes.The following are a few of them-

Thecompanies and the Limited Liability Companies allow an investor to protectone’s personal assets. They enjoy protection against liability from losses ofthe company or its debts. Therefore, their assets are safe from recovery incase of the company going into losses.
Evenotherwise, the personal liability of any shareholder or an office bearer isextremely restricted. For example, if a company gets into a legal scuffle, themember and officers are protected from being personally involved in theirpersonal capacity in most cases.
Itenjoys a separate legal status differentiated from its members andshareholders. It can sue and be sued in its own name; it is capable of owningand transferring property and funds, etc.
Ithas better credibility and faith for customers and the money lenders as theirpayments and rights are secured through law. It is also an assumption that acompany has long term business plans whereas a sole proprietorship orpartnership generally is less reliable.
Italso registers your business. This assures that no other person can register asame or a deceptively similar name for his business.
Itis beneficial from the viewpoint of tax purposes as well. The companies areallowed more deductions from their profits while calculating the taxable incomethan any other entity.
Itbecomes easy for a Limited Liability Company to raise capital for the business.Since a Limited Liability Company is more reliable, it becomes easier for thecompany to raise funds through various means.
Itdoes not die with the death of the owner, rather has a perpetual existenceunder a common seal, of the company.
Theshares of a company are considered as movable property as per the law and canbe transferred from one person to another.
The laws for Companiesand Limited Liability Companies are stringent and more comprehensive. It,therefore, provides for an opportunity of transparency in working, goodgovernance internally thus benefitting all the stakeholders.

Also Read The Major changes affecting Private Companies

Impact in India

The concept of OPC is not very oldin the Indian corporate scenario. The law for the establishment of an OPC wasbrought only in the year 2013 with the Act as has been already mentioned.Therefore, the process is still new and will take time to grow and prosper inthe Indian set-up.

In a country like India where smallbusinesses like weavers, artisans, traders, shopkeepers, etc. are the ones whoactually run the economy. Our economy is sustained by these midlevelentrepreneurs, because of which, the future of OPC seems bright in a setup likeIndia.

For investors from foreign, theconcept of OPC is more suitable as they will have to deal with one person only,in this case, which makes it easier than having to deal with a company withmultiple shareholders. Also, the process of investment gets easier in thissystem as it cuts down on the formalities when an investment is proposed in anOPC.

Withtime, the OPCs are expected to grow in India with the rise of entrepreneur andstart-up culture. The set-up of the new business models like a start-up is moresuitable in the form of OPCs. It provides convenience for a person wishing tostart a specialized business in the service sector. For the facts mentionedabove, OPCs have been successful in the country till today and better resultsare expected with the coming time.

Conclusion

OPC is a business model, which hasbeen established recently. It is similar to various other models on differentaspects but has certain characteristics which make it unique. Such featuresalso make it the preferred mode of investment for peopleafter it was recently brought into the Indian Corporate scenario in the year2013. This model is preferred over other business models because of variousreasons. Like, an OPC is similar to a sole proprietorship. Both have similaradvantages, but, to the disadvantage of sole proprietorship, it entailsunlimited liability whereas in an OPC the liability is limited. The conceptallows a single person to establish a company which provides a platform tomultiple entrepreneurs to establish a company of their own. An OPC does nothave to go through the technicalities of a company in general, yet it canentail the best advantage of a company, which makes it the most preferredchoice. It will promote the inclusion of small businesses within the corporatewalls. In a country like India, with minimal regulations on non-organisedbusinesses, exploitation of labour at its peak and highway for tax evasion, itbecomes imperative to bring as many areas under the garb of organised businessas possible. It reduces the chances of frauds, misrepresentation, anddeficiency in the services as well. The special feature of an OPC i.e. thelimited liability clause is a reason why new investors are diverting theirresources in this set-up. In very little time, OPCs have become significant inthe Indian economy which is tremendous and a praiseworthy growth.