This article is written by Keshav Bhardwaj, pursuing a Diploma in Companies Act, Corporate Governance and SEBI Regulations from LawSikho.com. 

Introduction

One person Companies appear to be a popular option among small enterprises and Startups to launch their product or service independently. The Companies Act mandated at least two members for any Private Limited Company, at least three members for the Public Limited Company. The sole entrepreneur searches another minded individual to carry out the business jointly. This is the reason because of which the person who desired to launch its product or service in the Market solely, found Sole proprietorship as the best business structure.

Although they wanted to promote their company worldwide as a Company, the Company Act, 1956 restricts this as a single person cannot form the Company. To deal with this, the One Person Company concept was introduced in the Companies Act, 2013. It opens the opportunity for those who looking out to form as the Separate Legal Entity which means the individuals working in or regulating the Company are separate from the Corporate Entity. It paves the way to register as Company to promote itself worldwide as well as work as a Sole Proprietorship.

But many people assume that One Person Company & Sole Proprietorship as similar terms. This is somewhat puzzling; the simple difference can be understood by knowing the scope of the word “Liability” regarding both terms.

The One Person Company limits the liability of shareholders/members to an extent, thereby making the Company liable as a Separate Legal Entity. For example, if any creditor has to recover the amount of debt, such can be recovered from the account of Company; they cannot recover such debt amount from the Personal Account of the member of Company. But when it’s come to Sole Proprietorship, there isn’t any concept like Separate Legal Entity & also there is Unlimited Liability. Let’s understand this with an example if any creditor has to recover the amount of debt, such can be recovered from the account of Company as well as the Personal Account of the member of Company. The sole proprietorship is not provided with the privilege of Limited Liability.

This concept of Separate Legal Entity came into presence from the landmark case of Salomon v. Salomon and Co. In the given case stated that the Company and the members (operating at different levels for the Company’s functioning) are considered as Separate Legal Entities of the Companies. Therefore, the Company will be recognized as a Legal Personality.

Comparison of One Person Company and Sole Proprietorship 

The table given under displays the distinction between Proprietorship and One Person Company in different ways: 

Business Formation

Criteria	Sole Proprietorship	One Person Company (OPC)
Enrollment	No agreement or any kind of filling required to run the business as Proprietorship	It required to register itself with all regulatory bodies as mentioned in the Companies Act, 2013 as well as Completing all filings given therein.
Owners	Single Member	Single Shareholder.
Directors	Proprietor manages all business activities on his own	At least One Director.
Registration related fees or charges	Registration is not required, means no Cost	There are Registration fees as mentioned in Companies Act, 2013. It does not much differ from Private Limited Company.

Benefits of Business Structure

Auditing and Legal Requirements

Taxation and Start-Up Credentials

How the Concept of One Person Company evolved in Company 

One Person Company concept has been declared a revolutionary concept; it is accepted and welcomed by many entrepreneurs. It’s led to a boost in the economic development of the Company.

Origin of this Concept 

The Companies Act, 2013 introduced so many concepts in corporate society. One of such essential concept was One Person Company. For re-codification in the Companies Act, 1956, a Committee was set with Chairmanship of JJ Irani in 2005 by the Government of India suggested One Person Company in Chapter Title “Classification & Registration of the Companies” in the Report. The Committee divided the Companies by classified as:

(i) Based on Size e.g. Small Company or Medium Company,

(ii) Based on Members e.g. Private Company or Public Company.

In addition to this, it’s recommended that with the advent of the service sector, digital technology, and Computer abilities the person having entrepreneurial capabilities should be allowed to engage in the Economic Activities. From the Global perspective, this concept has been successful in many countries such as China, Singapore, the United States of America & many European Countries for a long period.

What was the purpose of introducing One Person Company?

There wasn’t such a concept for the solo entrepreneur before which protect naive entrepreneurs e.g. Limited Liability. Also, before this concept was introduced, the entrepreneur began adding members by providing them just share just for the sake to meet out the requirement of Companies Act, 1956. They hold the dominant position and keep running the Company. This will moreover support the entrepreneurs to access certain privileges, such as bank loans by permitting them to enter into the market as a Separate Legal entity that provides legal protection to their business.

Loopholes of Sole Proprietorship 

• Unlimited Liability – The proprietor will be liable for all financial defaults, the creditor can obtain back debts from the enterprise as well as the personal asset of the proprietor.
• Single person – A single person as the proprietor has to manage, control, and regulate all the activities of Companies.
• Difficulty to raise capital – It’s kind of difficult for Sole Proprietorship to raise capital in place of equity from Angel Investors or Venture capitalists.
• Limited Resources – The proprietor requires managing the finance on its own since personal savings or borrowing from others. As it’s a little hectic for banks to provide borrowing to the Business.
• Accounts-related Compliances – Bank account by Personal Name and Firm’s Name, Professional Tax Enrollment, and Income Tax Filing.
• Limited Life of Enterprise – The insolvency, death, or illness leads to the permanent closure of the business.
• Start-Up Programme – The Sole Proprietorship does not come within the scope of the Company, therefore it can take the privileges as being provided to Company by Government.
• Difficult in Contracts or Agreements – The businesses, Government Agencies & Consulting Group find it a little difficult to trade with the unincorporated enterprises. As it does not maintain its structure and legitimacy as Companies like incorporated enterprises.
• Difficult to sell or transfer the enterprise – The owner itself and property both attached as there isn’t any Separate Legal Concept in case of Sole Proprietorship Business. It’s tricky to conduct the valuation properly as such not been governed by an Act. Hence, it’s complicated to transfer the owner’s property after death as there isn’t any nominee in this case.

By this, we come to understand, Sole Proprietorship has many loopholes that require to be filled out. The One Person Company meets out many such requirements. 

Minimum requirements for registering a One Person Company in India

• One Director.
• One Nominee.
• One member/shareholder.
• The applicant must be an Indian Citizen.
• The Paid-Up Capital of the Company must less than INR 50 Lakhs and turnover shall be less than INR 32 Crores.
• Document required in case of fire or are Scanned Copy of PAN, Scanned Copy Passport/ Voter ID), latest telephone bill/ bank statement & Passport Size Photograph.
• Notarized Copy of rent agreement, NOC obtained from the property owner, Sale deed/ Property Deed in case of owned property.
• Obtaining Digital Signature Certificate.
• Obtaining Director Identification Number.
• Filing of the application for approval of the Name.
• Drafting Memorandum of Association & Article of Association.
• Filing the SPICE with MCA.
• Issuance of certificate of incorporation.

By fulfilling the requirement, any entity including the Sole Proprietorship can convert itself into the One Person Company.

Mandatory Conversion of One Person Company into Private Limited Company

If any One Person Company has paid-up capital exceeds INR 50 Lakhs or Annual Turnover exceeds INR 2 Crores then it’s necessary to convert into Private Limited Company.

Method of Conversion

• Inform the Registrar of Companies about the purpose to convert into a Private Company.

Passing Board Resolution with the objective to itself into Private Limited Company.

• The resolution must be passed by members in a general meeting with Alteration in Memorandum of Association & Article of association of Company, the appointment of Additional Directors of the Company, and endorsement for rising the Capital of Company if the need of. 
• Filling of forms MGT-14 & INC-6.

With the 30 days of passing special resolution file MGT-14 attached with the certified copy of minutes of Meeting. Similarly, file INC-6 (within 30 days in case of voluntary conversion and six months for mandatory conversion of passing resolution) along with the fees and documents. After this, an application filed within 15 days to the registrar of companies attached with a copy of the resolution for conversion of One Person Company into a Private Company.

Documents/ Attachments to be attached along with the form:

• Notice to board of directors.
• Copy of board resolution approving delivery of notice.
• Copy of changed Memorandum of Association.
• Copy of changed Articles of Association.

• Declaration from directors.
• List of Members.
• Copy of No Objection Certificate (NOC) from Secured Creditors.
• Copy of No Objection Certificate (NOC) from directors and shareholders.
• Latest Audited Financial Statements.
• It is necessary to attach a certificate from the Chartered Accountant if the conversion exceeds the average annual turnover.
• Grant of certificate – Grant of a certificate certifying the conversion of OPC to a private limited company.

Conclusion 

One Person Company Concept emerged as an expanded version of the Sole Proprietorship. It encourages the vitality of entrepreneurship in India. The government provided the concept of One Person Company by making a route-way between Sole Proprietorship and Private Limited Company. It also makes the welcome move for Sole proprietor to shift towards the One Person Company.

But still, there are several things which required attention, for making One Person Company more helpful business structure for entrepreneurs. 

Tax slab can be maintained at a nominal rate as it’s too higher than tax (Income Tax) in Sole Proprietorship. The young entrepreneur may not able to stand stable in the case of a small enterprise.

Rules are required to protect gullible investors or traders who looking out to deal with One Person Company.

Make compliance and procedure simpler to understand and implement for the naive entrepreneur.

Frequently Asked Questions

• Can an Indian citizen, living abroad permitted to incorporate One Person Company?

No. This is not permitted under Act; Person who is Citizen of India can incorporate a One Person Company. Non-resident Indians or individuals who do not live in India for more than 182 days cannot form One Person Company.

• Is Foreign Direct Investment allowed for One Person Company?

It’s not permitted for One Person Company. If such a thing is found, then it will lose the status of One Person Company.

• Can a foreigner/ NRI become a Nominee of One Person Company?

No, the Act mentioned that the Nominee must also be an Indian resident citizen.

• What if, a nominee of One Person Company becomes the nominee of another One Person Company?

According to the Act, Nominee of One Person Company, cannot hold the nominee position in any other One Person Company. The Nominee requires withdrawing his membership from any of the One Person Companies within 180 days.

• Can OPC become a member of another private Limited company?

There isn’t such a restriction given under the Companies Act, 2013. Hence, One Person Company can become a member of another private Limited company.

• Whether a Non-Banking Financial Investment Company can be formed as a One Person Company?

According to the provisions of the Act, The One Person Company cannot conduct the business of Non-Banking Financial Investment activity comprising financial investment in the security of any Company.

• If the director/s is not specified anywhere in Certificate of Incorporation, who will become director of the company.

It could be understood that the sole shareholder shall be the only director, in case the director/s is not mentioned in the Certificate of Incorporation.

• Can the Private Company having Foreign Direct Investment convert itself into One Person Company?

Firstly, the person or corporate body holding Foreign Direct Investment in the Company requires transferring its share to the individual who is going to be the owner of the One Person Company and then inform such conversion to the Reserve Bank of India thereof.

• Can the subscriber change Nominee of One Person Company?

 Yes, It can. By intimating in written form, whether due to Death or Incapacity & appoint another person as the nominee with his Prior Consent.

• What if subscriber ceases to be the member, in case of death?

In such circumstances, the Nominee will become a member of One Person Company. He required appointing another Nominee within 15 days of becoming a member of the Company.

References

1. https://companiesinn.com/articles/difference-between-proprietorship-and-opc-one-person-company
2. https://blog.abhyankarcs.com/company-formation-in-india/opc-faq
3. https://taxguru.in/company-law/opc-sole-proprietorship.html
4. https://www.companysuggestion.com/conversion-of-proprietorship-firm-to-one-person-company/

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