In this blogpost, Pramit Bhattacharya, Student, Damodaram Sanjivayya National Law University, writes about, the concept of One Person Company. This article deals with the features of a One Person Company. The advantages and disadvantages of forming a One Person Company are also highlighted.
One Person Company is a company in which only one person is required. He is the shareholder and the Director at the same time. The concept of OPC opens up numerous opportunities for sole entrepreneurs and sole proprietors who can also take the advantage of Limited Liability Partnership and Corporation. The biggest advantage of an OPC is that limited in the case of OPC that liability is only limited to the extent of assets available to the business. In the case of sole proprietorship, the liability extends to personal assets of the proprietor also. There are various advantages of an OPC. It provides the opportunity to people to take advantage of the unique characteristics of a company while remaining independent.
Indian Context
The Companies Act of 1956 was the first comprehensive statute which related to companies and other related matters. The Companies Act, 1956 was based on the English Companies Act, 1948. Although the 1956 Act was very comprehensive, but it was very bulky. It was replaced by the Companies Act, 2013. This Act is up to date and is par with the international standards.
The concept of OPC was first recommended by the JJ Irani Committee in the year 2005.[1] The Report given by the Committee stated that with the increase in the use of computers and information technology as a whole, it is important to provide an outlet to entrepreneurs to showcase their skills. Such outlet can be provided by the creation of an economic company in the form of an economic company. To facilitate this, the Committee recommend the introduction of One Person Company. A One Person Company is provided with a relaxed regime so that the person engaged in this activity do not get much entangled in procedural matters. OPC will give businessmen all the benefits that are with a private business. With this, they’ll have limited liability, access to the market, legal protection, access to credit from banks, etc. with this the OPCs will also get the status of a separate legal entity.
Reason for formation
Under the old Companies Act, there was a requirement of at least two people to form a private limited company. This proved to be a major hurdle for those businessmen who wanted to do business alone. The only options were either to go for a private limited company with two members or a public limited company with seven members.[2] The reason why a private limited company necessarily have to have at least two people was to differentiate it from a sole proprietorship, which any individual could start on his own accord. To overcome this problem, individuals started forming companies by appointing Directors, who were nothing but nominal Directors. They were given only one share, which was mandatory to become a member of the company. The rest of the shares were retained by the person who created the company. In this manner, the law was bent to accommodate the needs of the businessman and also fulfill the legal requisites. This was considered as a fraudulent activity, even though it complied with every requirement. The intention of the legislature was defeated when people started forming companies in this manner. Later, the legislature realized that there was no harm in allowing a single individual to form a company provided that there was a proper system of check and balances in place. This thought coincided with the right provided by the Constitution also, which allows a person to start a business, trade or commerce of his own choice.
In order to achieve this, the idea of OPC was given some serious consideration for the first time in the year 2009, but unfortunately, the idea could not materialize itself into something concrete. Then again in 2012, efforts were made to implement the idea, and it became a reality with the introduction of the Companies Act, 2013.
Features of one person Company
- One Person
One of the most significant features of an OPC is that it consist of only one person as both Director and a shareholder. Since there is only one Director, he has complete over the conduct and operations of the company. He is also the single shareholder of the company. OPC starts with one person only. But the number of Directors can go up to 15.[3] The member who formed the company acts as the first Director until the other Directors are appointed.
- Minimum Share Capital An OPC should have a minimum share capital of Rs 1 lac.
- Nominee
The Act states that the Director of the company has to appoint a nominee who will control the affairs of the company if the Director dies or becomes disabled. The nominee has to be a natural person and a citizen and resident of India.[4] The nominee can be changed anytime, in which case the Registrar of Companies has to be informed.
- Meetings
Board Meetings- Board Meetings are governed by Section 149 (1) (a) of the 2013 Act. The section states that there should be at least one board meeting in each half of the calendar year. The gap between any two meetings should not be less than 90 days. Also, no board meeting is required if there is only a single Director. If there are any transactions which require the consent of the Board, and there is only one Director, consent of such Director will be sufficient.
Annual General Meeting- AGM is governed by Section 96 (1) of the Act. There is no requirement to hold an AGM. If there is a transaction which requires special or general resolution, it’ll be considered passed by the OPC if the resolution is communicated by the members to the company.
- Financial Statement
Section 40 states that a cash flow statement is not necessary for the financial statements of an OPC. Balance Sheet and Profit & Loss Statement of the company will be deemed to be enough. If there is only one Director in the Board, his signature will suffice.
- Annual Return
An OPC should submit its Annual Report, and it should be signed by the Secretary of the Company (CS). If there is no Company Secretary, then it has to be signed by any Director of the company.
Advantages of OPC
- Independent Existence
The OPC like any other company has its own independent existence, i.e. it is considered as a separate legal entity. In the eyes of the law, a company is a person, having a common seal, and having perpetual succession. Hence, an OPC also becomes a body corporate after it has been registered. It gets the authority to exercise all the functions of an incorporated person. This is not the case in a sole proprietorship, where no separate identity is given to the proprietorship.
- Limited Liability
An OPC functions like a private company.[5] While the concept of limited liability of an OPC is not stated expressly, it is implied that in the case of OPC the liability of the member will be up to the extent of his share in the company. In an OPC, one person holds all the share and has complete authority over the operation of the business. So, it can be interpreted that the liability of the person will be to the extent he has invested in the business. All his shares can be attached if any liability is needed to be discharged, but his personal property wouldn’t be attached.
But in the case of a proprietorship, even the personal property of the proprietor can be attached to discharge the liabilities.
- Perpetual Succession
An OPC also follows the principle of perpetual succession. Thus, a Director has to compulsorily appoint a nominee who will look after the affairs of the company if the Director is disabled or dies. The business will continue to survive even if it is handed over to any other person.[6]
In the case of a proprietorship, the business ceases to exist as soon as the proprietor becomes disabled or dies, as a sole proprietorship do not follow the principle of perpetual succession.
- Transferability of Shares
In the case of an OPC, there is only one shareholder. The issue of transferring a portion of the share do not arise at all because if it is done, the company will cease to be a “one person” company. Transferring all the shares is also not practicable as it’ll change the entire structure of the company as the owner of the company is changing. The issue hasn’t yet been dealt with, and interpretation of the law may provide us with the explanation that in an OPC, transfer of share is not allowed.
- Separate Property
An OPC will have its own separate property as it gains its own identity and functions as a separate legal entity. The OPC will become the owner of its assets, and the members will not have any insurable rights in the assets of the company.
In the case of a proprietorship, the distinction of identity is not there. All the property of the proprietorship will also be the owner’s property. This is the reason why the personal property can also be attached while discharging any liability in case of a sole proprietorship.
Conversion of an OPC
An OPC will cease to be an OPC either the paid-up share capital of the company exceeds Rs 50 lac or either the average annual turnover of the company exceeds Rs 2 crores. In such a case the OPC will have to convert itself into a private or public limited company.
Disadvantages of an OPC
- Tax Liability
Since an OPC is incorporated as a company, its tax liability is very high. An OPC has to pay a corporate tax of 30%. OPC is considered as a company and will be taxed more than a sole proprietorship.
- Fraud
In the case of an OPC, the chances of fraud go up, since there is no actual system of check and balance. One person acts both as a member and the Director. It is easier for a single person to commit fraud for his own personal gains. For instance, under the law, one person can incorporate as many as five OPC. A single person may open up a number of OPCs and transfer the assets from one OPC to the other to avoid liabilities and to evade tax.
- Liability of the Directors
The law has made it pretty clear that a Director is liable for the action of the company. In case there is only one Director, it becomes very easy to make him criminally liable. Even in the case where the Director is not personally liable, the liability will be directed towards him only as he is the governing authority of the business.
Concluding Remarks
OPC can indeed act as a forerunner in the growth and development process as a lot of people who have good ideas, but not enough finances will also be able to access the market. However, improvements in the legislation are always welcome. For instance, there can be a regulatory body which ensures that there is a proper system of check and balances in case of OPC. Also, provisions like a single person allowed to open up 5 OPCs at a time should be made a little more stringent. A few more restrictions may be imposed to ensure that OPCs does not become a platform to commit fraud for personal benefits. All things said the advantages of an OPC cannot be denied, and it is expected that a concept like this will give a boost to the economy as well as the corporate sector.
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[1] http://www.primedirectors.com/pdf/JJ%20Irani%20Report-MCA.pdf
[2] The Companies Act,1956 – S.12
[3] The 2013 Act at S. 149(1) of
[4] Resident in India will mean a person who has stayed in India for a period of not less than 182 days during the immediately preceding one financial year.
[5] The 2013 Act at S.3
[6] Gower, Principles of Modern Company Law, 76 (3rd Edn., 1969)
