Incorporation of one person company
Introduction-
With the implementation of the Companies Act, 2013, a single person could constitute a Company, under the One Person Company (OPC) concept.
The new Companies Act, 2013 has done away with redundant provisions of the previous Companies Act, 1956, and provides for a new entity in the form of one person company (OPC), while empowering the Central Government to provide a simpler compliance regime for small companies.
The introduction of OPC in the legal system is a move that would encourage corporatisation of micro businesses and entrepreneurship.
In India, in the year 2005, the JJ Irani Expert Committee recommended the formation of OPC. It had suggested that such an entity may be provided with a simpler legal regime through exemptions so that the small entrepreneur is not compelled to devote considerable time, energy and resources on complex legal
compliance.
OPC is a one shareholder corporate entity, where legal and financial liability is limited to the company only.
Position of OPC in India under the Companies Act 2013
The Companies Act, 2013 classifies companies on the basis of their number of members into One Person Company, private company and public company. As stated above, a private company requires a minimum of 2 members. In other words, a One Person Company is a kind of private company having only one member.
As per section 2(62) of the Companies Act, 2013, “One Person Company” means a company which has only one person as a member.
Section 3(1)(c) lays down that a company may be formed for any lawful purpose by one person, where the company to be formed is to be One Person Company that is to say, a private company. In other words, one person company is a kind of private company.
A One person company shall have a minimum of one director. Therefore, a One Person Company will be registered as a private company with one member and one director.
By virture of section 3(2), an OPC may be formed either as a company limited by shares or a company limited by guarantee; or an unlimited liability company.
Rule 3 of Companies (Incorporation) Rules, 2014 – One Person Company
(1) Only a natural person who is an Indian citizen and resident in India-
(a) shall be eligible to incorporate a One Person Company;
(b) shall be a nominee for the sole member of a One Person Company.
Explanation-For the purposes of this rule, the term “resident in India” means a person who has stayed in India for a period of not less than one hundred and eighty two days during the immediately preceding one calendar year.
(2) A natural person shall not be a member of more than a One Person Company at any point of time and the said person shall not be a nominee of more than a One Person Company.
(3) Where a natural person, being member in One Person Company in accordance with this rule becomes a member in another such Company by virtue of his being a nominee in that One Person Company, such person shall meet the eligibility criteria specified in sub rule (2) within a period of one hundred and eighty days.
(4) No minor shall become member or nominee of the One Person Company or can hold share with beneficial interest.
(5) Such Company cannot be incorporated or converted into a company under section 8 of the Act.
(6) Such Company cannot carry out Non-Banking Financial Investment activities including investment in securities of any body corporates.
(7) No such company can convert voluntarily into any kind of company unless two years have expired from the date of incorporation of One Person Company, except threshold limit (paid up share capital) is increased beyond fifty lakh rupees or its average annual turnover during the relevant period exceeds two crore rupees.
Benefits of One Person Company
The concept of One person company is quite revolutionary. It gives the individual entrepreneurs all the benefits of a company, which means they will get credit, bank loans, access to market, limited liability, and legal protection available to companies.
Prior to the new Companies Act, 2013 coming into effect, at least two shareholders were required to start a company. But now the concept of One Person Company would provide tremendous opportunities for small businessmen and traders, including those working in areas like handloom, handicrafts and pottery.
Earlier they were working as artisans and weavers on their own, so they did not have a legal entity of a company. But now the OPC would help them do business as an enterprise and give them an opportunity to start their own ventures with a formal business structure,
Further, the amount of compliance by a one person company is much lesser in terms of filing returns, balance sheets, audit etc. Also, rather than the middlemen usurping profits, the one person company will have direct access to the market and the wholesale retailers. The new concept would also boost the confidence of small entrepreneurs.
Contract by One Person Company
Section 193 (1) provides that where One Person Company limited by shares or by guarantee enters into a contract with the sole member of the company who is also the director of the company, the company shall, unless the contract is in writing, ensure that the terms of the contract or offer are recorded in a memorandum or are recorded in the minutes of the first meeting of the Board of Directors of the company held next after entering into contract.
However, above said provision shall not apply to contracts entered into by the one person company in the ordinary course of its business.
As per section 193 (2), the company shall inform the Registrar about every contract entered into by the company and recorded in the minutes of the meeting of its Board of Directors under sub-section (1) within a period of fifteen days of the date of approval by the Board of Directors.
As per section 152 (1), in case of a One Person Company an individual being its member shall be deemed to be its first director until a director or directors are duly appointed by the member in accordance with the provisions of that section.
Privileges of a One Person Company
The privileges enjoyed by an OPC over other companies are as follows:
Section Nature of Privileges
2(40) The financial statement, with respect to One Person Company, may not include the cash flow statement;
67(2) Financial assistance can be taken by the member from the OPC for purchase of or subscribing to its own shares
92(1) The annual return shall be signed by the company secretary, or where there is no company secretary, by the director of the company. In other words it need not be signed by a company secretary in practice.
96(1). – Need not hold annual general meeting
121(1). – Need not prepare a report on Annual General Meeting
122(1) – The provisions of section 98 and sections 100 to 111 (both inclusive) of Chapter VII shall not apply to a One Person Company
122(3) – For any business which is required to be transacted at an annual general meeting or other general meeting of a company by means of an ordinary or special resolution, it shall be sufficient if, in case of One Person Company, the resolution is communicated by the member to the company and entered in the minutes-book required to be maintained under section 118 and signed and dated by the member and such date shall be deemed to be the date of the meeting for all the purposes under this Act.
122(4) – Where there is only one director on the Board of Director of a One Person Company and any business is required to be transacted at the meeting of the Board of Directors of the company, it shall be sufficient if, in case of such One Person Company, the resolution by such director is entered in the minutes-book required to be maintained under section 118 and signed and dated by such director and such date shall be deemed to be the date of the meeting of the Board of Directors for all purposes under this Act.
134(1) – Financial statement and Board’s report can be signed only by one director
134(3)(p). – Need not prepare a statement indicating the manner in which formal annual evaluation has been made by the Board of its own performance and that of its committees and individual directors;
134(4) – In case of a One Person Company, Board’s report shall mean only a report containing explanations or comments by the Board on every qualification, reservation or adverse remark or disclaimer made by the auditor in his report.
137(1)(Third proviso) – File a copy of the financial statements duly adopted by its member, along with all the proviso) documents which are required to be attached to such financial statements, within 180 days from the closure of the financial year
149(1). – One person company need not to have more than one director on its Board.
149(4) – Need not to appoint Independent directors on its Board
152(6) – Retirement by rotation is not applicable.
164(3) – Additional grounds for disqualification for appointment as a director may be specified by way of articles.
165(1) – Restrictive provisions regarding total number of directorships which a person may hold in a public company do not include directorships held in One Person company which are neither holding nor subsidiary company of a public company.
167(4) – Additional grounds for vacation of office of a director may be provided in the Articles.
173 (5) – It is required to hold at least one meeting of the Board of Directors in each half of a calendar year and the gap between the two meetings should not be less than ninety days. For an OPC having only 1 director, the provisions of section 173 (Meetings of board) and section 174 (Quorum for meetings of Board) will not apply.
190(4). – The provisions relating to contract of employment with managing or whole-time directors does not apply to a One Person Company
197(1) – Total managerial remuneration payable by a one person company, to its directors, including managing director and whole-time director, and its manager in respect of any financial year may exceed eleven per cent. of the net profits.
Status of OPC in other countries
Even in other countries like UK, Australia, Singapore, Pakistan, etc; a single person can form a company.
Various countries permit this kind of a corporate entity (China introduced it in October 2005) in which the promoting individual is both the director and the shareholder.
The amended company law of Pakistan permits one person to form a single-member company by filing with the registrar, at the time of incorporation, a nomination in the prescribed form indicating at least two individuals to act as nominee director and alternate nominee director.
In US, several states permit the formation and operation of a single-member Limited Liability Company (LLC).
In China, one person is allowed to apply for opening a limited company with a minimum capital of 1, 00,000 Yuan. The amended law of China prescribes that the owner should pay the investment capital at one time and bars him from opening a second company of the same kind.
In most countries, the law governing companies enables a single-member company to have more than one director and grants exemptions to such companies from holding AGMs, though records and documents are to be maintained.
Difference between a Sole Proprietorship and an OPC
The fundamental difference between a sole proprietorship and an OPC is the way liability is treated in the latter.
A one-person company is different from a sole proprietorship because it is a separate legal entity that distinguishes between the promoter and the company.
The promoter’s liability is limited in an OPC in the event of a default or legal issues. On the other hand, in sole proprietorships, the liability is not restricted and extends to the individual and his or her entire assets.