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REQUIRMENT OF ONE PERSON COMPANYWHEN SOLE PROPRIETORSHIP

AND PRIVATE LIMITED COMPANY IS PREVAILING ?

BY MOHIT AGARWAL

BC0140037

INTRODUCTION

The revolutionary new concept of 'One Person Company' (OPC) has been introduced by the
Companies Act, 2013. This concept of OPC was first recommended by the expert committee
of Dr. JJ Irani in 2005. OPC provides a whole new bracket of opportunities for those who
look forward to start their own ventures with a structure of organized business. OPC will give
the young businessman all benefits of a private limited company which categorically means
they will have access to credits, bank loans, limited liability, legal protection for business,
access to market etc all in the name of a separate legal entity

The concept of One Person Company [OPC] is a new vehicle/form of business, introduced by
The Companies Act, 2013 [No.18 of 2013], thereby enabling Entrepreneur(s) carrying on the
business in the Sole-Proprietor form of business to enter into a Corporate Framework.
One Person Company is a hybrid of Sole-Proprietor and Company form of business, and has
been provided with concessional/relaxed requirements under the Act. It is registered as one
member company. It is treated as private company. It has no provision under the companies
Act, 1956. Section 2(62) of the companies Act deals with the definition of one person
company. The introduction of OPC in the legal system is a move that would encourage
corporatization of micro businesses and entrepreneurship with a simpler legal regime so that
the small entrepreneur is not compelled to devote considerable time, energy and resources on
complex legal compliances. This will not only enable individual capabilities to contribute
economic growth, but also generate employment opportunity. One Person Company of sole-
proprietor and company form of business has been provided with concessional /relaxed
requirements under the Companies Act,2013.With the implementation of the Companies Act,
2013, a single national person can constitute a Company, under the One Person Company
(OPC).

In short of with the introduction of OPC in the legal system is a move that would encourage
corporatization of micro businesses and entrepreneurship with a simpler legal regime so that
the small entrepreneur is not compelled to devote considerable time, energy and resources on
complex legal compliances. This will not only enable individual capabilities to contribute
economic growth, but also generate employment opportunity. One Person Company of sole-
proprietor and company form of business has been provided with concessional /relaxed
requirements under the Companies Act, 2013. With the implementation of the Companies
Act, 2013, a single national person can constitute a Company, under the One Person
Company (OPC) concept.

CHAPTER-II

NEED FOR ONE PERSON COMPANY

In India, the Companies Act, 1956 was the first comprehensive attempt at creating a statute
for companies and related matters. It was a piece of legislation based on the English Act.
Though comprehensive, it was a bulky legislation which had to be periodically amended.
Presently, we have the Companies Act, 2013 which has brought in a wave of new changes
that are expected to take the industries to a new level, in tune with those of the international
forum.

The most controversial of these provisions is the one relating to the concept of One Person
Companies or OPCs. This concept of OPC was first recommended by the expert committee
of Dr. JJ Irani in 2005. In its report the committee had observed,

With increasing use of information technology and computers, emergence of the service
sector, it is time that the entrepreneurial capabilities of the people are given an outlet for
participation in economic activity. Such economic activity may take place through the
creation of an economic person in the form of a company. Yet it would not be reasonable to
expect that every entrepreneur who is capable of developing his ideas and participating in
the market place should do it through an association of persons. We feel that it is possible for
individuals to operate in the economic domain and contribute effectively. To facilitate this,
the Committee recommends that the law should recognize the formation of a single person
economic entity in the form of One Person Company. Such an entity may be provided with a
simpler regime through exemptions so that the single entrepreneur is not compelled to fritter
away his time, energy and resources on procedural matters.1

1 http://www.primedirectors.com/pdf/JJ%20Irani%20Report-MCA.pdf
OPC are expected to provide a whole new bracket of opportunities for those who look
forward to start their own ventures with a structure of organized business. OPC will give the
young businessman all the benefits of a private limited company, which categorically means
they will have access to credits, bank loans, limited liability, legal protection for business,
access to market etc. all in the name of a separate legal entity.

Reasons for formation

Under the old Companies Act, 1956 a minimum of two members were required for
formation of a Private Limited Company. This was a hindrance to the entrepreneurs who
wanted to go solo. According to the old Act2, the only options were either to form a private
company with a minimum of two members or a public company with a minimum of seven
members, which was either limited by shares or by guarantee or was unlimited. The reason
provided by the parliamentarians for having at least two members for a private company was
so as to differentiate it from a sole proprietorship concern which could be started by any
individual. But people started forming companies by adding a nominal member/Director and
allotting them a single share, which was a pre-requisite to be a Director, and retaining the rest
with themselves. This was a way of bending the law, in order to satisfy the legal provisions
while at the same time exercise dominance. This was seen by the legislatures as a fraudulent
activity. Though it was formed in compliance with the statutory provisions, it seeks to violate
the very reason for which such a restriction was imposed. I.e. the mischief sought to be
remedied by section 12 of the Companies Act, 1956 was to ensure that a company would not
be left to the sole control of an individual but would rather be shared by at least two
individuals. But this intention of the legislature was defeated by incorporating private
companies with a nominal member. Later, it was established that there is nothing wrong in
permitting one person to form a company with proper checks and balances, upholding the
Constitutional right of an individual to start a business, trade or commerce on his own,
ensuring that it is not for the purpose of defrauding the public.

It was in order to achieve this situation that the 2009 Company Law Bill first considered the
concept of OPC as proposed by the J.J. Irani Committee. It however did not materialise. The
2012 Bill however succeeded in this venture and it gave rise to the Companies Act, 2013
which includes provisions for OPCs as well.

2 The Companies Act,1956 S.12


In addition to this, it was also realised that incorporating this idea into the 2013 Act would
give the unorganised proprietorships an opportunity to incorporate themselves and thereby
gain the advantages of incorporation. An OPC would thus provide a unique blend of
functioning a sole proprietorship with the advantages of an incorporated company.

OPC provides a legitimate way to form a company with only one member. It can work like
proprietorship but it holds the status of company and of course enjoys the benefits that come
with it (limited liability, trust factor etc.)

CHAPTER-III

Distinct features of an OPC

One person

The most prominent and striking feature of an OPC is the fact that it has only:

One Director

One shareholder both rolled into one.

This is the most distinctive feature of an OPC. Since it has only one Director, he exercises
complete control over the functioning of the enterprise. He is also the only single shareholder.
It can however have a maximum of 15 Directors. 3 Member/Shareholder of the One Person
Company acts as first Director, until the Company appoints Director(s)

Minimum paid up capital

It shall have a minimum paid up capital of Rs.1lakh

Nominee

The Act clearly prescribes that the Director of the company shall appoint a nominee to take
charge of the company when the sole Director/member is disabled or diseased. The nominee

3 S. 149(1),Companies Act,2013
shall be a natural person, Indian citizen and resident 4 in India. The name of the person has to
be provided in the memorandum5

The naming can however only be done with the prior consent of the nominee in writing. The
reason being that he is accepting to take on the company with all its liabilities as well; the
registrar has to make sure that the nominee has voluntarily consented to it. The written
consent has to be filed with the registrar at the time of incorporation along with the Articles
and the Memorandum.

Provisions are provided for the nominee/ other person to withdraw his consent at any
time.6 Further, the member/Shareholder of OPC may change the nominee/other person at any
time, by giving notice to the other person and intimate the same to Company. Then the
Company should intimate the same to the Registrar

Meetings

With respect to Board Meetings ( Section 149 (1) (a) )7

At least one meeting of Board in each half of a calendar year and the gap between 2
meetings should not be less than 90 days. However, no Board Meeting is required, if there is
only one Director. If there is any business which is required to be transacted in a Board
meeting and OPC has only 1 Director, then it will be sufficient if the resolution by such
Director is entered in the minutes-book and is signed and dated by such Director and such
date shall be taken as the date of Board meeting.

With respect to Annual General Meetings ( Section 96 (1))8

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 S.3(1),Ccompanies act, 2013

6 S.3, Companies Act, 2013

7 S149(1)(a), Companies Act, 2013

8 S.96(1), Companies Act, 2013


There is no requirement of holding AGM, however any business which is required to be
transacted at an AGM or other general meeting, by means of an ordinary or special
resolution, shall be taken as passed by OPC, if the resolution is communicated by the member
to the company and entered in the minutes-book and signed and dated by the member and
such date shall be deemed to be the date of the meeting.

Financial Statements

Financial statements of OPC may not include the Cash Flow Statement (Section 40). It may
only include Balance Sheet, Profit & Loss and any explanatory note, as a part of the same.
Unlike other companies, here it is to be signed by only one Director. A copy of the financial
statements is to be filed with the Registrar of Companies, within 180 days from the closure of
the financial year.

Style of writing Name of Company

(One Person Company) is required to be mentioned in brackets below the name of such
name of the company, wherever its name is printed, affixed or engraved9

Annual Return

Annual return is required to be prepared by OPC and be signed by the Company Secretary
(CS) of Company and when there is no CS, by any Director of Company. However, it is not
clear, whether the same is required to be filed with ROC, as the time limit of filing return is
connected to the date of holding AGM, however, we know that OPC is not required to hold
AGM. Hence, it is an open question.

Non-applicable Clauses

As far as an OPC is concerned, in Chapter VII, it is provided that the following sections
prescribing certain formalities and procedures are not applicable. This is to ensure less
technicalities and efficient functioning of an OPC. This can be treated as an exception or an
exemption as suggested by Mr. J.J. Irani

Provisions which are not applicable to an OPC as per the Companies Act, 2013 are scheduled
below:

9Section 12 (3),Companies Act 2013


Clause 98: Power of Tribunal to call meetings of members,

Clause 100: Calling of extraordinary general meeting,

Clause 101: Notice of Meeting,

Clause 102: Statement to be annexed to notice,

Clause 103: Quorum for meetings,

Clause 104: Chairman of meetings,

Clause 105: Proxies,

Clause 106: Restriction on voting rights,

Clause 107: Voting by show of hands,

Clause 108: Voting through Electronic means,

Clause 109: Demand for poll,

Clause 110: Postal Ballot,

Clause 111: Circulation of members resolution.10

The OPC has been exempted from the above provisions in view of the opinion of the Irani
Committee and also in view of its special nature. Most of the powers are exercised by the sole
Director himself; as a result many of the above provisions lose their relevance with respect to
an OPC.

FEATURES OF ONE PERSON COMPANY

One person company can only be incorporated as a private limited company.


OPC can have only one person as its shareholder/ member.
The minimum paid up share capital required is Rs. 1,00,000/-
No need of Annual General meeting.
If no director appointed by the company in AOA then, the member is deemed to be
the director of the company till duly.

10 Supra f.n.1
It should be clear mentioned the successor of the company, in his absence either due
to the death or incapacity to contract, with the consent of such appointed person.
Only one director is sufficient to sign the financial statements/ directors Report.
It can also be incorporated for the charitable purposes.

CHAPTER_IV

OPC V/S. SOLE PROPRIETORSHIP

OPC SOLE PROPRIETORSHIP


Separate Legal entity Not a Separate Legal Entity
Limited Liability unlimited liability
Perpetual succession No perpetual succession
Loan not the sole responsibility of the owner Loan-sole responsibility of the of the owner
Registration required Registration not required
Finance credit record of the OPC Owner Finance credit record of the owner

OPC structure would be similar to that of a proprietorship concern without the ills generally
faced by the proprietors. One most important feature of OPC is that the risks mitigated are
limited to the extent of the value of shares held by such person in the company. This would
enable entrepreneurial minded persons to take the risks of doing business without the
botheration of litigations and liabilities getting attached to the personal assets. One Person
Company has a separate legal identity from its shareholders i.e., the company and the
shareholders are two different entities for all purposes. On the other hand proprietorship does
not have a separate legal identity from its members. The existence of a One Person Company
is not dependent upon its members and hence, it has a perpetual succession i.e., death of a
member does not affect the existence of the company and the Sole proprietorship is an entity
whose existence depends on the life of its members and death or any other contingency may
lead to the dissolution of such an entity.

In OPC the business head is the decision maker, he is not dependent on others for suggestions
or implementation of suggestions etc., resulting in quicker and easier decision making. He is
the sole person who runs the business and hence, the question of consensus or majority
opinion etc., does not arise.

As per section 2(62) of the Companies Act, 2013, One Person Company means a company
which has only one person as a member Salient features of OPC

The salient features of OPC are:

Desire for personal freedom that allows the Professional skilled person to adopt the
business of his choice.
Personality driven passion and implementation of a business plan.

The desire of the entrepreneurial person to take extra risk and willingness to take additional
responsibility.

Personal commitment to the business which is a sole idea of the person and close to his
heart. It is run by individuals yet OPCs are a separate legal entity similar to that of any
registered corporate.

A One Person Company is incorporated as a private limited company.

It must have only one member at any point of time and may have only one director.

The member and nominee should be natural persons, Indian Citizens and resident in India.
The term "resident in India" means a person who has stayed in India for a period of not less
than 182 days during the immediately preceding one calendar year.

One person cannot incorporate more than one OPC or become nominee in more than one
OPC.

If a member of OPC becomes a member in another OPC by virtue of his being nominee in
that OPC then within 180 days he shall have to meet the eligibility criteria of being Member
in one OPC

OPC to lose its status if paid up capital exceeds Rs. 50 lakhs or average annual turnover is
more than 2 crores in three immediate preceding consecutive years.

No minor shall become member or nominee of the One Person Company or hold share with
beneficial interest

. Such Company cannot be incorporated or converted into a company under section 8 of the
Companies Act, 2013. Such Company cannot carry out Non Banking Financial Investment
activities including investment in securities of anybody corporate.

No such company can convert voluntarily into any kind of company unless 2 years have
expired from the date of incorporation, except in cases where capital or turnover threshold
limits are reached.

An existing private company other than a company registered under section 8 of the Act
which has paid up share capital of Rs. 50 Lakhs or less or average annual turnover during the
relevant period is Rs. 2 Crores or less may convert itself into one person company by passing
a special resolution in the general meeting.

ONE PERSON COMPANY- PRIVILAGES

Privileges available to

OPC Some of the privileges and benefits identified with OPCs are:

OPCs would provide the start-up entrepreneurs with new business idea.
OPC provides an outlet for the entrepreneurial impulses among the professionals.

The advantages of limited liability. The most significant reason for shareholders to
incorporate the single-person company is certainly the desire for the limited liability.

OPCs are not proprietorship concerns; hence, they give a dual entity to the company as
well as the individual, guarding the individual against any pitfalls of liabilities. This is the
fundamental difference between OPC and sole proprietorship.

Unlike a private limited or public limited company (listed or unlisted), OPCs need not
bother too much about compliances.

Businesses currently run under the proprietorship model could get converted into OPCs
without any difficulty.

OPCs require minimal capital to begin with. Being a recognized corporate, could well raise
capital from others like venture capital financial institutions etc., thus graduating to a private
limited company.

Mandatory rotation of auditor after expiry of maximum term is not applicable. 8 One Person
Company (OPC)

The annual return of a One Person Company shall be signed by the company secretary, or
where there is no company secretary, by the director of the company.

The provisions of Section 98 and Sections 100 to 111 (both inclusive), relating to holding
of general meetings, shall not apply to a One Person Company.

A One Person Company needs to have minimum of one director. It can have directors up to
a maximum of 15 which can also be increased by passing a special resolution as in case of
any other company.

For the purposes of holding Board Meetings, in case of a one person Company which has
only one director, it shall be sufficient compliance if all resolutions required to be passed by
such a Company at a Board meeting, are entered in the minutes-book, signed and dated by the
member and such date shall be deemed to be the date of the Board Meeting for all the
purposes under this Act. For other One Person Companies, atleast one Board Meeting must
be held in each half of the calendar year and the gap between the two meetings should not be
less than 90 days.

The financial statements of a one person company can be signed by one director alone. Cash
Flow Statement is not a mandatory part of financial statements for a One Person Company.
Financial statements of a one person company need to be filed with the Registrar, after they
are duly adopted by the member, within 180 days of closure of financial year along with all
necessary documents.
Boards report to be annexed to financial statements may only contain explanations or
comments by the Board on every qualification, reservation or adverse remark or disclaimer
made by the auditor in his report.

Types of OPC (Section 3(2))11

A company limited by shares; or

A company limited by guarantee; or

An unlimited company

ONE PERSON COMPANY vs LLP VS COMPANY

The comparison chart will give you a clear distinction between the compliance requirements
of all the three forms of business.

11 S.3(2) Companies Act,2013