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An Analysis of One Person Company under Companies Act 2013 by Karandeep Makkar
I worship individuals for their highest possibilities as individuals and I loathe humanity for its failure to live up to these possibilities. Ayn Rand 1. Introduction Individual entrepreneurs doing business as sole proprietors will now be able to avail the benef its of limited liability without a second person to f orm a company as the Companies Act, 2013 (hereinaf ter 2013 Ac t) proposes the concept of One Person Company (hereinaf ter OPC). Under the Companies Act, 1956 (hereinaf ter 1956 Act ) a private limited company is required to have a minimum of two shareholders and two directors. T his write-up examines provisions of the 2013 Act and the Draf t Rules to Companies Act, 2013 (hereinaf ter Rules) relating to OPC. 2. Background T he idea of OPC was mooted by the J J Irani Committee which was set up to take a comprehensive view on the changes necessary in the Companies Act, 1956 in context of the changing economic and business environment. 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. It was proposed that the concept of One Person Company may be introduced in the Act with f ollowing characteristics:1. OPC may be registered as a private company with one member and at least one director; 2. Adequate saf eguards in case of death/disability of the sole person should be provided through appointment of another individual as nominee director. On the demise of the original director, the nominee director will manage the af f airs of the company till the date of transmission of shares to legal heirs of the demised member. 3. Letters OPC to be suf f ixed with the name of OPCs to distinguish it f rom other companies. T he much-awaited Companies Bill, 2013 got the Presidents assent on 29 August 2013. T he 2013 Act seeks to consolidate and amend the law relating to the companies and intends to improve corporate governance, raise levels of transparency and to f urther strengthen regulations f or corporates. T he 2013 Act has made signif icant changes to the provisions of law and has introduced several new concepts. OPC has been def ined in section 2(62) of the 2013 Act as a company which has only one person as a member.

3. Incorporation In terms of section 3(1)(c) of the 2013 Act, an OPC may be f ormed f or any lawf ul purpose by one person. Salient f eatures in relation to incorporation include: 3.1 T he memorandum of an OPC shall indicate the name of another person, with his prior written consent, who shall, in the event of the subscribers death or his incapacity to contract become the member of the company. 3.2 T he written consent of such person shall also be f iled with the registrar of companies at the time of incorporation of the OPC along with its memorandum and articles. 3.3 T he words One Person Company must be mentioned in brackets below the name of such company, wherever its name is printed, af f ixed or engraved. [Second proviso to Section 12(3)] 3.4 A person can incorporate a maximum of 5 OPCs. [Rule 2.1(2)] 3.5 Only natural persons can incorporate an OPC. Also, the person incorporating an OPC must be an Indian citizen who has stayed in India f or at least 182 days during the immediately preceding one f inancial year. [Rule 2.1(1)] 4. Compliance burden T he def inition of private company under section 2(68) of the 2013 Act includes OPC. T hus, an OPC will be required to comply with provisions applicable to private companies. However, OPCs have been provided with a number of exemptions and theref ore have lesser compliance related burden. Such exemptions include: 4.1 OPC is not required to prepare cash f low statement as a part of f inancial statement. [Section 2(40)] 4.2 In case an OPC does not have a company secretary, the annual return can be signed by the director of the company. [Proviso to section 92(1)] 4.3 An OPC is not required to hold an annual general meeting. [Section 96(1)] 4.4 T he provisions of the f ollowing sections shall not apply to an OPC (a) Section 98: Power of Tribunal to call meetings of members, etc. (b) Section 100: Calling of extraordinary general meeting (c) Section 101: Notice of meeting (d) Section 102: Statement to be annexed to notice (e) Section 103: Quorum f or meetings (f ) Section 104: Chairman of meetings (g) Section 105: Proxies (h) Section 106: Restriction on voting rights (i) Section 107: Voting by show of hands (j) Section 108: Voting through electronic means (k) Section 109: Demand f or poll (l) Section 110: Postal ballot (m) Section 111: Circulation of members resolution 4.5 T he minimum number of directors in the case of an OPC has been limited to one. [Section 149(1)(a)] 4.6 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 f or meetings of board) will not apply. [Section 173(5)]

Section 193 of the 2013 Act provides that 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 of f er are contained in a memorandum or are recorded in the minutes of the f irst meeting of the board of directors of the company held next af ter entering into contract. T his 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 inf orm the registrar of companies about every such contract within a period of 15 days of the date of approval by the board of directors. 5. Nomination by the subscriber or member of OPC In terms of section 4(1)(f ), the memorandum of an OPC should state the name of the person who shall become the member of the company in the event of death of the subscriber. Such nominee may withdraw his consent subsequently. [Section 3(1)] 5.1 T he subscriber to the memorandum of an OPC shall nominate a person, af ter obtaining his/her prior written consent, who shall, in the event of the subscribers death or his incapacity to contract, become the member of that OPC. [Rule 2.2(1)] 5.2 T he member of OPC may at any time change the name of such nominee by giving notice as prescribed. [Section 3(1)] 5.3 T he notice by the member of OPC as stated above must be provided by the OPC to the registrar of companies once the same is intimated by the member to the OPC. Any change in the name of nominee shall not be deemed to be an alteration of the memorandum. [Section 3(1)] 5.4 Only a natural person who has stayed in India f or a period of not less than 182 days during the immediately preceding one f inancial year is entitled to be a nominee f or the sole member of an OPC. [Rule 2.1(1)] 6. Conversion of OPC into private or public company OPC can get itself converted into a private or public company af ter increasing the minimum number of members and directors to two or minimum of seven members and three directors as the case may be, and by maintaining the minimum paid-up capital as per requirements of the 2013 Act f or such class of company and by making due compliance of section 18 of the 2013 Act f or conversion. [Rule 2.4(6)] T he Rules prescribe certain circumstances when an OPC will be mandatorily required to convert into a private or public company. In terms of Rule 2.4, where the paid up share capital of an OPC exceeds 50 lakh rupees or its average annual turnover during the period of immediately preceding three consecutive f inancial years exceeds 2 crore rupees, it will not be entitled to continue as an OPC. Such OPC shall be required to convert itself into either a private company or a public company in accordance with the provisions of section 18 of the 2013 Act:(i) within 6 months of the date on which its paid up share capital is increased beyond 50 lakh rupees; or (ii) the last day of the period immediately preceding three consecutive f inancial years during which its average annual turnover exceeded 2 crore rupees; or (iii) the close of the f inancial year during which its balance sheet total exceeded 1 crore rupees, as the case may be,. T he OPC is required to alter its memorandum and articles by passing an ordinary or special resolution in accordance with sub-section 5 (3) of section 122 of the 2013 Act to give ef f ect to the conversion and to make necessary changes incidental thereto. 7. Benefits An OPC gives the advantage of limited liability to entrepreneurs whereby the liability of the member will be limited to the unpaid subscription money. T his benef it is not available in case of a sole proprietorship. Explaining some of the advantages of OPC, Corporate Af f airs Minister Sachin Pilot stated in a recent press conf erence,

Small entrepreneurs can now set up one person companies to directly access target markets rather than being forced to share their profits with middlemen This would provide tremendous opportunities for millions of people, including those working in areas like handloom, handicrafts and pottery. They are working as artisans and weavers on their own, so they dont have the legal entity as a company. But 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. 1 An OPC being an incorporated entity will also have the f eature of perpetual succession and will make it easier f or entrepreneurs to raise capital f or business. Also, since it will have lesser compliance burden compared to private companies, it can be pref erred mode of business f or small industries. 8. Conclusion While the idea of an OPC looks promising, doing business in OPC structure may ef f ectively result in higher tax implications on the businesses as the rate of taxation on companies is higher. Also, since a company is a separate legal entity, the distribution of dividend by an OPC may attract dividend distribution tax. Sole proprietors, on the other hand are taxed at the rates applicable to individuals, i.e., dif f erential rates f or dif f erent slabs of income. It remains to be seen if the OPC model is widely adopted. [1] One person companies to eliminate middlemen: Sachin Pilot, available at http://articles.economictimes.indiatimes.com/2013-09-08/news/41873696_1_sachin-pilot-corporate-af f airsminister-sachin-new-companies-act. [2] Image taken f rom http://charmandrich.com/personal-power/i-rule/