In this blog post, Tanvi Bhatnagar, a lawyer by profession, presently working with G.S Rijhwani & Co., an IPR firm dealing with National and International Trademark, Copyright and Patents, who is also pursuing a Diploma in Entrepreneurship Administration and Business Laws from NUJS, Kolkata, discusses the advantages of a Private Company over a One Person Company for a single founder.
Under Section 2 (62) of the Companies Act, 2013, One Person Company (OPC) is defined as a company which has only one person as a member/shareholder.
Under Section 2 (68) of the Companies Act, 2013 a Private Company is defined as a company having a minimum paid-up share capital of one lakh rupees or such higher paid-up share capital as may be prescribed, and which by its articles,—
(i) restricts the right to transfer its shares;
(ii) except in case of One Person Company, limits the number of its members to two hundred:
Provided that where two or more persons hold one or more shares in a company jointly, they shall, for the purposes of this clause, be treated as a single member:
Provided further that—
(A) persons who are in the employment of the company; and
(B) persons who, having been formerly in the employment of the company, were members of the company while in that employment and have continued to be members after the employment ceased, shall not be included in the number of members; and
(iii) prohibits any invitation to the public to subscribe for any securities of the company.
Well broadly considering, the basic requirements of both the companies are same, that they require a minimum of two members to incorporate a company, where a Private Company directly requires minimum two shareholders to incorporate a company, a One Person Company requires only one shareholder, along with a nominal shareholder, who shall become the shareholder and take care of the company in case of death or incapacity of the original shareholder. Also, both the companies require an initial share capital of Rs. 1 lakh and the other pre and post incorporation processes are also similar, except that One Person Company has been provided with certain exemptions in ROC filings and conduction of Annual or Extra General Meeting i.e., there is no requirement to hold an Annual General Meeting. If there is a transaction which requires special or general resolution, it’ll be considered passed by the One Person Company if the resolution is communicated by the members to the company.
Even though the concept of One Person Company has been recently introduced under the Companies Act, 2013 keeping in mind the hardships that individuals have faced while incorporating a company, as the only option that was available as per the Companies Act, 1956 was forming a sole proprietorship which had its own pros and cons. The very idea of being given an option to incorporate a One Person Company by a single member, has been a sigh of relief for individuals who were more willing to work alone than to find another shareholder to match the basic requirement of incorporating a Private Company and availing the benefits of being a Company formed under the Companies Act. However, there are certain advantages that incorporation of a Private Company may have over the incorporation of a One Person Company for a single founder. When it comes to raising a share capital, a Private Company always has an upper hand, as it does not restrict the number of shareholders. A Private Company requires a minimum of two shareholders, which can extend up to 200 shareholders, which makes it easier for the Private Company to raise paid up share capital for its business as and how it requires. However, a One Person Company faces difficulty when it comes to raising share capital by adding more shareholders, as it cannot have more than one shareholder or else the basic concept of a One Person Company will change. There is another drawback that One Person Company faces is that it restricts the limit of paid up share capital it can raise i.e., if the threshold limit is increased beyond Rs. 50 lakhs or its average annual turnover during the relevant period exceeds Rs. 2 crores, then the One Person Company has to invariably file forms with the ROC for conversion into Private or Public Limited Company, within a period of six months on breaching the above threshold limit.
There are certain other advantages of having a Private Company over a One Person Company, i.e., in a Private Company, a shareholder has the freedom to sell or transfer its shares to another party or to any other shareholder with a condition that a shareholder cannot sell or transfer their shares without offering them first to other shareholders for purchase, whereas One Person Company cannot exercise such freedom to transfer its shares to another shareholder or any other person as whole or in parts as it ceases to be One Person Company if the shares are so transferred, as partly transferring the shares shall mean having another shareholder in the Company which is against the basic idea of a One Person Company. Also, when it comes to shareholders that are required to incorporate a Private Company, the criteria is a lot simpler as a Private Company can have a shareholder who is a natural person i.e., a Indian National or a Foreign National, or it can be a Company i.e., an Indian Company or a Foreign Company, whereas there is a strict rule as to the One Person Company that the shareholder of a One Person Company should be a natural person who is an Indian citizen and resident in India who shall be eligible to incorporate a One Person Company. In this case, “Resident in India” shall mean a person who has stayed in India for a period of not less than 182 days during the immediately preceding one calendar year. Also, when it comes to adding minors as shareholders, Private Company is a little flexible as a minor can become a shareholder in a Private Company when fully paid up shares are transferred or gifted to him or when the shares are passes on to him by way of transmission, but the same rule does not apply to a One Person Company, as a minor cannot become a shareholder as per the norms of One Person Company.
There is also a concept of an Employee Stock Option Plan (ESOP), which has gained significance in India and is more applicable in Private Company than in One Person Company. The Concept of ESOP or ESOS (Employee Stock Option Schemes) has been introduced to encourage the performance of the employees and give them the benefit of purchasing the shares of the Company at a future date at pre-determined prices. The very idea behind providing ESOP’s to employees is to align the interest of Employees with that of the shareholders of the Company. However, such benefits are not provided for in the concept of One Person Company.
In my view incorporating a One Person Company has its own perks, however when it comes to practically managing the company and raising funds for its expansion and managing other risks involved, incorporating a Private Company is always an advantage over incorporating a One Person Company for a single founder, as it provides flexibility in funds, expansion of business and raising share.