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This article has been written by Namrata Kandankovi, student of Symbiosis Law School, Pune. The author of this article has written about the inception and evolution of One Person Company, its historical background, salient features of such a company and the advantages and disadvantages of the same.

Inception and Evolution of One Person Company

The unique concept of One Person Company came into being by the way of The Companies Act, 2013. The very first recommendation of the One Company Person was put forth by the expert committee which was headed by Dr JJ Irani in the year 2005. One person Company is being praised on a larger scale, as it provides a new range of opportunities to the ones looking forward to starting their own ventures with the structure of an organised business. One Person Company (OPC) has proved to be of great advantage to the young businessmen as it provides them all the benefits including that of access to bank loans, access to market, legal protection of business, access to credits and all this, in turn, comes in the name of a separate entity. Considering all the above-mentioned points, it can be said that, when thought in a broader perspective, one person company proves to be of great advantage to a number of budding new businessmen in the corporate world.

Taking into consideration the concept of India, it can be said that One Person Company is a comparatively new concept in the Indian scenario, while on the other hand, it has been proved as a successful business strategy in the UK and in addition to this even a number of European countries have succeeded in terms of formation and working of the One Company Person for quite a long period of time.

Historical background

According to The Companies Act, 1956, there is a requirement of at least 7 members for the formation of a Public Limited Company, and in terms of shareholders it requires 2 of the shareholders to be present in order to validate the company, and hence because of this very provision, there was no formation of One Person Company in the country of India. It was only under the Companies Act of 2013, Section 2(62), that there was a provision laid down for the formation and bringing into effect the One Person Company. The very meaning of One Person Company means a company which consists of only 1 member. Another important point to be taken under consideration is that Section 3 of the Companies Act classifies One person Company as a private limited company for the sake of all the legal purposes but with only one person in the company. In addition to this, all the provisions related to a private limited company is applicable to an OPC, unless they are expressly excluded by an independent clause.

Salient features of one Person Company

The concept of One Person Company has been defined under sub-section 62 of section 2 of the Companies Act, 2013. The particular section reads one person company as follows- ‘One Person Company means a company which has only one person in it’. Another significant point to be taken under consideration is that there can be no formation of more than 5 One Person Companies (OPC) by 1 person.

The important features of a One Person Company are listed as under:

  • One Director– Every One Person Company must compulsorily require having one director and not more than that under any clause.
  • One Shareholder– Every One Person Company is required to have only one shareholder, but at that same time there exists a provision for the appointment of at least 15 shareholders and this comes under the special clauses which are to be incorporated while doing the same.
  • Nominee for the Shareholder– Every One Person Company requires having one person who would further nominate a shareholder, and this nomination would take place in accordance with the memorandum. The person whose name has been stated in the memorandum would tend to be a member of the company in the event of either death or incapability of the member of the One Person Company.

Who is eligible to form a one-person company?

The eligibility criteria for the creation of One Person Company requires the person to be a ‘natural person’ who is an Indian resident, and by the term Indian resident, it requires the person to have been staying in India for a period of not less than one hundred and eighty-two days. Such a person would be eligible for the incorporation of the One Person Company and also a nominee for the sole member of the One Person Company.

1) A-One Person Company can be formed under any of the categories mentioned below:

  • A Company limited by guarantee.
  • A Company which is limited by shares.

2) A-One Person Company, which is limited by shares shall comply with the following essentials:

  • Shall have to be paid up to a sum of 1 lakh.
  • Where there are restrictions to rights to transfer the shares.
  • Where there are prohibitions placed on an invitation to the public to subscribe to the securities of the companies.
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How can a One Person Company be formed?

It is Section 3(1) (c) of the Companies Act, which provides for the incorporation of the One Person Company. It further includes under its ambit that the company must have been formed by a lawful purpose, by one person. In addition to this, the members of the company are required to submit their names to the memorandum of the company, which would include the name of the one other person and this should be done with the prior consent of that person in the written form. The significance of the presence of one other person in the One Person Company is that, such a person would become the acting member of that company in the event of the incapacity or death of the subscriber of the company.

Such a person’s consent is required to be given in writing and there is an additional prerequisite of the consent to be filed with the registrar at the time of the incorporation of the company and this should be done along with the articles of association and the memorandum. When it comes to withdrawal of the consent of such a person, the same can be done through a manner prescribed by the said section under the Companies Act.

Conversion of One Person Company into a Private Limited Company

The conversion of the One Person Company to a Private Limited Company can take place under the following circumstances- Whenever the paid-up share capital of the one person company exceeds fifty lakh rupees or on the other hand, if the average annual turnover of the company exceeds two crore rupees during the relevant period of time, then under such cases the company ceases to be continued as a One Person Company. Eventually, such a company would be required to convert itself into a private limited company.

In contrary to the above, a private company registered itself under section 8 of the Companies Act having been paid a share capital of fifty lakh rupees or less or on the other hand if the average turnover of the company is turning out to be less than two crores in the relevant period, then such a company is under an obligation to convert into a one-person company by passing a special resolution which should be at the general meeting.

Advantages of One Person Company

One of the significant questions to be undertaken while dealing with the concept of one person Company is that- why would a person prefer a company to a proprietorship? Providing an answer to this question it can be said that the very rationale behind the One Person Company is to provide all the benefits of the incorporation while functioning as a sole proprietor at the same time. The advantages of the One Person Company can be listed as under:

  • Legal Identity– One Person Company is known to have a separate legal identity from that of its shareholders, which means the company and the shareholders act as two different identities in all possible cases.
  • Sole Decision Maker– In the One Person Company there exists only decision-marker. Hence, no shareholder meeting consensus or majority opinions are taken into consideration, while the only member shareholder meeting is held once every 6 months at a gap of at least 90 days between two meetings. The sole idea which the One Person Company tries to uphold is the personal commitment to the business.
  • Independent Corporate Existence– The added advantage which the One Person Company has is the separate independent identity from that of its director shareholders and director. This very principle came into existence from the landmark case of Salomon v. Salomon and Co. Ltd. In this case, it was held that the Company forms a distinct legal personality from that of its members and hence, a company should be treated as a person in law.

In another landmark case of T.R. Pratt v. E.D. Sassoon & Co. Ltd, the Bombay High Court while delivering the judgment came out with the verdict that ‘the incorporated company is a separate and different entity under the law, although it is possible that the entire share should be controlled by one person, the company should be identified as a distinct personality’.

  • Limited Liability– One Person Company tends to limit the liability of Entrepreneurship as the company has its own identity. Limited Liability is considered to be the most prized advantage possessed by the One Person Company. President Eliot of Harvard once considered the limited liability of One Person Company as the most precious characteristic of the company, and it was in turn regarded that the members come and go but the company continue to remain as a separate legal entity.

Deficiencies of One person Company

The very idea behind the inception of the One Person Company was to promote and boost the economic growth of the country, by the way, promoting entrepreneurship, in contrary, only a naturally born Indian, who is also an Indian resident could start a One Person Company. In one way this step tries to encourage small entrepreneurship and on the other hand, it discourages foreign direct investment by the way of disallowing foreign companies. The two most significant disadvantages of one Person Company have been listed below:

  • Investment- As the territory of the One Person Company is new and comparatively untested investors may wary from investing in the company and this acts as a major disadvantage.
  • Taxation- The One Person Company is taxed both on income as well as the distribution of profits, and this is seen as a major disadvantage which does not act in favour of the One Person Company. The One Person Company is hence, said not to enjoy any tax benefits but, on the contrary, the tax acts as a burden on the part of the company.

Conclusion

This article has included under its ambit the complete analysis of the One Person Company, which has covered numerous aspects of the One Person Company which are of paramount importance in order to be understood by the readers. The procedural requirements for the functioning of the company are fewer in number as there are numerous exemptions provided under the said sections of the act. In the end it can be concluded that, the One Person Company has its own benefits as having been listed under and at the same time there exist various disadvantages as well and with the evolution of time the disadvantages can be curbed and the One Person Company can be made more effective and advantageous so that it can serve its purpose better.

References

Cases

1) Salomon v A Salomon and Co Ltd [1897] AC 22.

2) T.R. Pratt (Bombay) Ltd. vs E.D. Sassoon And Co. Ltd. And Anr. on 18 September 1935, AIR 1936 Bom 62.

Online Sources

  1. Dheeraj Verma, One person company, Legal Services India (August 28, 2017) http://www.legalservicesindia.com/article/2407/One-person-company.html.
  2. Sabarnee Chaterjee, One person Company and its limited liability, Corporate Law Reporter (March 25, 2014) http://corporatelawreporter.com/2014/03/25/one-person-company-limited-liability/.  
  3. Swasti Gupta, Can a Company be the one-person in a One Person Company?, Ipleaders (June 21, 2018) https://blog.ipleaders.in/one-person-company-ten-legal-provisions-must-know/.
  4. Vatsala Singh, One Person Company- A Concept For New Age Business Ownership, Singh and Associates (28 November 2013) 

 

 

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