ONE PERSON COMPANY: AN ANALYTICAL STUDY

First Author: Vinay Haswani

Advocate, M.P. High Court
Address: 3, Kalpana Nagar, Morar, Gwalior (M.P.)
Phone: +91-9301108203
Email: [email protected]

Co-author: Krati Rajoria

Assistant Professor,
Amity University, Madhya Pradesh
Address: 60, Sector-2, Vinay Nagar, Gwalior (M.P.)
Phone: +91-9425338625
Email: [email protected]
ABSTRACT

Under the Companies Act of 1956 the definition of body corporate excluded from its
scope ‘a corporation sole’ but the Act of 2013 has removed this exception and come up with a
new revolutionary concept i.e. one person company (OPC). But there is a difference between the
two. The concept of OPC allows a single person to run a company limited by shares, and Sole
proprietorship means an entity where it is run and owned by one individual and where there is
no distinction between the owner and the business, whereas it is not so in case of OPC. In OPC,
the company will acquire corporate personality and enjoy all the advantages of a private
company viz., limited liability, perpetual succession, separate property, capacity to sue and be
sued, contractual rights, etc.
Part I of the paper throws light on the concept, its meaning, characteristics, and the
compliance burden along with the need for the introduction of the concept of OPC in India on
the lines of UK, China, Singapore and several European countries after the recommendations of
the J.J. Irani Committee in 2005. Part II tests its utility in the context of the current scenario in
India. In order to critically examine the concept and its benefits over the sole proprietorship
points of distinction have been drawn between the two concepts. After an elaborate discussion
on its advantages the shortcomings and loop holes in the concept have been analyzed. The
article concludes with the observations and suggestions to overcome the ambiguities to further
the objectives of the new concept including its implications on the study of corporate
governance.

Keywords: Company, limited liability, single member.

PART I
CONCEPT
The new concept of one person company has been introduced in India by the Companies
Act, 2013. Under the Companies Act, 1956 a minimum of two directors and shareholders were
required to form a private limited company. Whereas, in case of a one person company, only one
person is required who can be a shareholder as well as the director. The introduction of this
concept has opened up new prospects of business and striking possibilities for sole proprietors
and entrepreneur as they can now get the benefits of limited liability and corporatization which
was not possible earlier because of the requirements of finding a second director or shareholder
to get a company registered as a private company.

MEANING

The Companies Act, 2013 defines one person company as “a company which has only
one person as a member.”1 All the liabilities in case of an OPC are limited to the company and
not to its members. Section 3 of the Act classifies OPC as a private company and it shall be
treated as a private company for all legal purposes.
It shall also be important to note that only a natural person who is a resident in India 2 and
also a citizen of India can form a one person company. It means that other legal entities like
companies or societies or other corporate entities cannot form a one person company.3
A person shall not be eligible to incorporate more than a single OPC or become nominee
in more than one such OPC. A natural person who is a member of an OPC shall meet the
eligibility criteria within a period of one hundred and eighty days in case he becomes a member
of another OPC by virtue of being a nominee in that OPC. A minor shall not become member or
nominee of the One Person Company or cannot hold share with beneficial interest. Such
Company cannot be incorporated or converted into a company under section 8 of the Act and
also cannot carry out Non-Banking Financial Investment activities including investment in
securities of any body corporates. Such company cannot 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.4

CHARACTERISTICS OF ONE PERSON COMPANY IN INDIA

1. OPC is a type of company based on the number of members.

2. OPC is a company which has only one person as a member and where legal and financial
liability is limited to the company only and that person is not personally liable.

1
Section 2(62) of the 2013 Act
2
The explanation to Rule 3 provides that “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.”
3
As per Rule 3 of Company Incorporation Rules, 2014
4
Ibid.
 3. It can be incorporated only as a private company and it is a private company for all legal
purposes, all the benefits that are available to Private Limited Companies are applicable
to One Person Companies such as access to credits, bank loans, limited liability, legal
protection for business and access to market, etc. all with a separate legal identity.
4. One person company can have only one director, although it can have up to fifteen
directors.
5. It is mandatory to appoint a nominee.
6. The words “one person company” should be mentioned in brackets below the name of
such company, where its name is printed, affixed or engraved.
7. An OPC is exempted from holding general meetings and Board meetings if
the company has only one director.
8. The Registrar of Companies should be informed about every contract entered into.

COMPLIANCE BURDEN

The minimum number of directors in the case of an OPC has been limited to one. 5 An
OPC must conduct at least 1 meeting of the board of directors in each half of a calendar year
with a gap of at least 90 days between the 2 meetings. 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.6
Contracts by One Person Company
When an OPC 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 contained 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. 7
This requirement, however, will not apply to contracts entered into by the company in the
ordinary course of its business. Also, an OPC is required to inform the registrar of companies
about every such contract within a period of 15 days of the date of approval by the board of
directors.8
OPC as Private Company

Since OPC has been given the status of a private company, OPC will have to comply
with the provisions that are applicable to a private company with certain exemptions which
relatively reduce the compliance burden on them such as:
 OPC is not required to prepare a cash flow statement as a part of a financial statement;9
 OPC need not appoint a Company Secretary, as the annual return can be signed by the
director of the company;10
 OPC is also not required to hold a mandatory Annual General Meetings;11
5
Section 149(1)(a) of the Companies Act, 2013
6
Section 173(5) of the Companies Act, 2013
7
Section 193 of the Companies Act, 2013
8
ibid
9
Section2(40) of the Companies Act, 2013
10
Proviso to Section 92(1)
11
Section 96(1) of the Companies Act, 2013
  Several provisions of the Companies Act, 2013 are not applicable to OPC viz.:Power of
Tribunal to call meetings of members, etc.; 12 Calling of extraordinary general meeting; 13
Notice of meeting;14 Statement to be annexed to notice;15 Quorum for meetings;16
Chairman of meetings;17 Proxies;18 Restriction on voting rights;19 Voting by show of
hands;20 Voting through electronic means;21 Demand for poll;22 Postal ballot;23 Circulation
of members’ resolution.24

Taxation

Since nothing has been specified as such by the finance ministry, it is assumed that the rates
of taxation applicable for a private limited company shall apply to a One Person Company.
Net profits, which are calculated by deducting all allowable expenses from the turnover of
sales, shall be taxable at the rate of 30 percentage + education cess.

Related Party Transactions

Where One Person Company enters into a contract with the sole owner 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 contained in a memorandum are recorded in the
minutes of the first meeting of the Board of Directors of the company held next after entering
into contract.
Further, 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.
This clause shall be very much in vogue since the business of the One Person Company
may use many assets of the owner and may pay compensation for that. Examples may be rent
paid for using property or machinery or Furniture owned by the Owner. It may pay interest on
loans taken from the owner. It may pay salaries to the Owner. All these contracts are covered
under the section.

Process of Incorporation

The process of incorporation of a one person company involves the following steps:

12
Section 98 of the Companies Act, 2013
13
Section 100 of the Companies Act, 2013
14
Section 101 of the Companies Act, 2013
15
Section 102 of the Companies Act, 2013
16
Section 103 of the Companies Act, 2013
17
Section 104 of the Companies Act, 2013
18
Section 105 of the Companies Act, 2013
19
Section 106 of the Companies Act, 2013
20
Section 107 of the Companies Act, 2013
21
Section 108 of the Companies Act, 2013
22
Section 109 of the Companies Act, 2013
23
Section 110 of the Companies Act, 2013
24
Section 111 of the Companies Act, 2013
  The shareholder/member shall get a Director Identification Number (DIN) as well as
a digital signature certificate.
 Member should apply for the name of the company
 Then get the consent of the nominee in the prescribed forms.
 Member shall file the consent along with the incorporation forms with the MOA and
AOA and other relevant documents.
 After receiving the Certificate of Incorporation from the ROC, the OPC can
commence its business with the registered name.
 The words ‘‘One Person Company’’ shall be mentioned in brackets below the name
of such company, wherever its name is printed, affixed or engraved.

Conversion from one person company to private limited and vice versa

The Act provides that when a one person company reaches a paid up capital of 50 lakh
rupees or more or when the average turnover of the company is Rs. 2 Crores or more for a period
of 3 years, then once required amendments in the memorandum of association and articles of
association have been made the company shall convert into a private limited company and now
such company shall comply with all the requirements of a private limited company.

Conversion of a private limited company into a one person company

A private limited company which does not have a paid up capital of more than Rs. 50
lakhs or where the average annual turnover for the past 3 years is less than Rs. 2 Crores can
convert itself into a One Person Company and enjoy the benefits as such.

NEED FOR INTRODUCTION OF OPC

The concept of a one person company has existed for a number of years in countries

around the world known as Single Member Company.  Liechtenstein is the first country in the
world where the concept of Single Member Liability Company was legally recognized in 1925.
It was the J.J. Irani Committee that expressed the view that the law should recognize the
potential for diversity in the forms of companies and rather than seeking to regulate specific
aspects of each form, seek to provide for principles that enable economic inter-action for wealth
creation on the basis of clear and widely accepted principles.25
“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 law should recognize the formation of a single
person economic entity in the form of One Person Company.”
OPC allows the professionals to have personal freedom in establishing the business of
their choice. It gives a lot of scope and provides ample number of business opportunities to small
scale entrepreneurs who have an advantage of limiting their liabilities while entering into the
corporate world. It provides an incentive to people entering entrepreneurship as the legal
complicacies are minimal compared to other legal entities and minimizes the risk of wasting
time, money and effort as the liability is not unlimited.
25
CS R. Sridhan Et Al., One Person Company, The Institute of Company Secretaries of India (June 2014), p.3
 With the advent of OPC as a business model the liability on government to fulfill the
employment needs of people is reduced to a certain extent and it also points out the dynamic
nature of the new companies Act.2 6
PART II

OPC v SOLE PROPRIETORSHIP

The concept of OPC allows a single person to run a company limited by shares, and Sole
proprietorship means an entity where it is run and owned by one individual and where there is no
distinction between the owner and the business. The distinction between both the structures is as
follows:

 Limited Liability - Fundamentally the basic difference between a sole proprietorship and
an OPC is the way and manner in which the liability is treated in an OPC. OPC is
different from sole proprietorship because it is a completely separate entity and that is the
distinction between the promoter and the company. The liability of the share holder will
be limited to the unpaid subscription money in his name. On the other hand the liability
in a sole proprietorship, the person/owner is alone liable for the claims which will be
made against the business.
 Tax Bracket - Though the concept of an OPC has been incorporated in the Companies
Act, 2013 but the concept of same does not exist in tax laws as yet, as a result an OPC
can be put in the same bracket of taxation as other private companies. According to
Income TA,1961 a private limited company is under the bracket of 30% on total income
with an additional surcharge of 5% if the income exceeds 10 million with an addition to
3% of education cess.
 Succession - In an OPC there is a nominee designated by the member. The nominee
which will be a Natural Born citizen of India and who resides in India. The nominee shall
in the event of death of the member become a member of the company and will be
responsible for the running of the company. But in the case of sole proprietorship this can
only happen through an execution of WILL which may or may not be challenged in the
court of law.
 Compliances - A One Person Company has to file annual returns etc just like a normal
company and would also need to get its accounts audited in the same manner. On the
other hand a sole proprietorship would only need to get audited under the provisions of
Section 44 AB of the Income Tax Act, 1961 once its turnover crosses the certain
threshold.

THE IMPACT OF OPC IN INDIAN ENTREPRENEURSHIP

The concept of an OPC is in its initial stage and very new in Indian entrepreneurship, it
will take time for such a new concept to mature and implemented with complete efficiency. With
the passage of time an OPC will be adopted as one of the most successful business concepts. The
benefits arising out of it are many viz., its incorporation involves less paper work; it has the
ability to form a company with just one member without any additional shareholder, and if the
member is willing to add shareholders, all he needs to do is to modify the Memorandum of
26
http://lexquest.in/expository-analysis-one-person-company-concept-arrow-shot-dark-serving-purpose/
Association and file it before ROC. OPC is a feasible option for small entrepreneurs viz., traders,
artisans, weavers, small to mid level entrepreneurs. Any foreign company or investor who wishes
to establish in India through either an investment, a merger or a joint venture will have to just
deal with the member of an OPC, and the venture will be expected to start sooner with more
effective results. The foreign investors in order to establish a corporate relationship need not
have to deal with a score of shareholders/ directors as that might involve disparity in ideas,
concepts, etc for the business to grow. In upcoming years the impact of an OPC will be
remarkable and it is a promising future for Indian Entrepreneurship. Expectedly, there will be
good Foreign Investments, Joint Ventures, and Mergers etc. An OPC is doing well in European
countries, In United States and Australia the same is resulting in strengthening the economy of
the countries. In India when the expert committee of Dr. J.J. Irani proposed the concept of an
OPC, it was solely aimed for the structured organized business, with a different legal entity
altogether and to organize the private sector of the entrepreneurship, which indeed is expected to
be done, along with a significant growth in Indian Economy benefiting the country on the Global
Level.

During the financial year 2014-15 (up to 31.12.2014), a total of 1,403 One Person companies
were registered with collective authorized capital of R 31.13 crore.27

CONCLUSION

27
Government of India, Annual Report on Working and Administration of Companies Act (Ministry of Corporate
Affairs (2014-15)
The concept of one person company is expected to give big impetus to Corporatization in the
country. The only care to be taken is that there should be no regulatory mess ups like the ones
which hampered the growth of Limited Liability Partnerships in this country. Otherwise the rules
framed so far with respect to One Person Company have been very sensible.
REFERENCES
Primary Sources:
1. Companies Act, 1956
2. Companies Act, 2013
3. J.J. Irani Report
4. Government of India, Annual Report on Working and Administration of Companies Act
(Ministry of Corporate Affairs (2014-15)
Secondary Sources:
Books:
1.  Arvind P Datar and S. Balasubramanian, A Ramaiya Guide to the Companies Act
(LexisNexis, Gurgaon, 18th edn., 2014).
2. Avtar Singh, Introduction to Company Law (Eastern Book Company, Lucknow, 11th
edn., 2014).
3. Karn Gupta, Introduction to Company Law (LexisNexis, Gurgaon, 1st edn., 2013).
4. N.V. Paranjape, The New Company Law (Central Law Agency, Allahabad, 6th edn.,
2014).
5. Prachi Manekar, Insight into the new Company Law (LexisNexis, Gurgaon, 1st edn.,
2013).
6. Rajkumar S. Adukia and Rishabh R. Adukia, All you want to know about one person
Company (Bharat Law House Pvt. Ltd., New Delhi, 1st edn., 2014).