ONE PERSON COMPANY - A CRITICAL ANALYSIS ABSTRACT

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1 ONE PERSON COMPANY - A CRITICAL ANALYSIS Namrata Gupta ABSTRACT The implementation of the Companies Act, 2013, an individual person can now constitute a New Companies Act, 2013 was approved by the Parliament in Some of the provisions of the New Comp th, 2013 while the majority of Sections came into force from 1 st April The Companies Act, 2013 has introduced some Companies Act, This article has been categorically scripted to present an overview about the revolutionary new concept of OPC as introduced by the Companies Act, The researcher has delved deep to provide a critical analysis of the concept. OPC is an opportunity for them who were previously hesitant from perpetuating their own ventures and will provide a chance to young people who were in a jinx before starting their own business. It will not only provide them an opportunity to vent into something new but will also help them to access certain facilities like bank loans, legal shield for their business and a thorough access to the market as a separate entity. Keywords: Business, Company, Liability. INTRODUCTION The concept of One Person Company (hereinafter mentioned as OPC) is comparatively new to India. The Companies Act, 2013 opens a new era for organizing a business in India by providing the concept of OPC which is a legitimate way to incorporate a company with only one member. 1 OPC is similar to the existing concept of sole-proprietorship with separate legal entity distinct from its proprietors and promoters. OPC can run and undertake its business like sole-proprietorship with the status of company. This form of business has already flourished in some of the developed countries like United States of America, Singapore, China and various other countries in Europe. This contemporary concept of business will provide a whole new * Namrata Gupta, Junior Research Scholar, Allahabad University, Allahabad, Uttar Pradesh. 1 MAYUR ZANWAR, ONE PERSON COMPANY, UNDER NEW COMPANIES ACT (2014). 11

2 bracket of opportunities for those who look forward to start their own ventures with a structure of organized business. 2 OPC is a radical idea which came into the picture with the introduction of the Companies Act, The introduction of OPC in the legal system will boost corporatization of microbusinesses. In India, in the year 2005, the J.J. Irani Committee recommended the formation of OPC. It had recommended 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 defined under Sub-Section 62 of Section 2 of the Companies Act, It defines OPC 3 liabilities are limited to the It is a kind of revolutionary concept in the new Companies Act, 2013, as previously under the old Companies Act, 1956, a minimum of two members were required to form a company. 4 Sub-Section 62 of Section 2 of the Companies Act, 2013, reads as follows: It shall also be important to note that Section 3 classifies OPC as a Private Company for all the legal purposes with only one member. All the provisions related to the private company are applicable to an OPC, unless otherwise expressly excluded. Only a natural person who is an Indian citizen and resident in India shall be eligible to act as a member and nominee of an OPC. a period of not less than one hundred and eighty two days during the immediately preceding one financial year. The main reason for consideration and introduction of the concept of OPC on the lines of what has been introduced in various other countries is to encourage the sole proprietors to enter into the organised sector of business and to restrict the liability of the proprietors to the extent of the liability of the company. The other reasons being advocated are that the concept will help 2 MASTER GUIDE TO COMPANIES ACT 2013 & COMPANY RULES - 3 As per Rule 2.1 (1) of the Draft Rules under Companies Act, 2013 only a natural person who is an Indian Citizen and resident in India shall be eligible to incorporate a One Person Company. 4 The Companies Act 2013, Ministry of corporate Affairs Government of India, (last visited on Dec. 20, 2016). 12

3 foreign companies to form their subsidiaries conveniently which would encourage foreign funds flow into India, to bring the small and medium enterprises within the domain of corporate entity and so on. 5 An OPC is a good alternative to running a sole proprietorship, largely because it gives limited liability to the business owner. This means that your liability is limited to the amount you have invested in the business; business debts cannot be recovered from personal possessions. Also, a sole proprietorship ceases to exist on the death of its promoter. In the case of an OPC, the nominee director takes over and the entity continues to exist. Single entrepreneurs who do not have another partner to start a private limited company may also consider it. 6 There is no difference in capital requirement between an OPC and a private limited company. It needs an authorised capital of Rs. 1 lakh to begin with, but none of this actually needs to be paid-up. 7 Steps to Incorporate One Person Company (OPC) 8 1. Obtain Digital Signature Certificate for the proposed director(s). 2. Obtain Director Identification Number for the proposed director(s). 3. Select suitable Company Name and make an application to the Ministry of Corporate Office for availability of name. 4. Draft Memorandum of Association and Articles of Association. 5. Sign and file various documents including Memorandum of Association and Articles of Association with the Registrar of Companies electronically. 6. Payment of Requisite fee to Ministry of Corporate Affairs and also Stamp Duty. 7. Scrutiny of documents at Registrar of Companies. 5 Supra note 2. 6 Company Secretary Module (2014), One Person Company (OPC), The Institute of Company Secretaries of India, (last visited on Dec. 20, 2016). 7 One Person Company, (last visited on Dec. 25, 2016).) 8 Intelligent Legal Risk Management Solution, ipleaders (2014). 13

4 8. Receipt of Certificate of Registration/Incorporation from Registrar of Companies FEATURES OF ONE PERSON COMPANY (OPC) Freedom from Compliance No requirement to hold annual or Extra Ordinary General Meetings: Only the resolution shall be communicated by the member of 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 meeting. 9 Board Meeting: A One Person Company may conduct at least one meeting of the Board of Directors in each half of a calendar year and the gap between the two meetings shall not be less than ninety days. 10 Quorum: The provisions of Section 174 (Quorum for meetings of Board) will not apply to One Person Company in which there is only one director on its Board of Directors. Minutes: Where the company is having only one director, all the businesses to be at the transacted meeting of the Board shall be entered into Minutes book maintained under Section 118. There is no need to hold Board Meeting in this case. Very few Registrar of Companies filing is to be filed with the Registrar of Companies. Mandatory rotation of auditor after expiry of maximum term is not applicable. 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. Perpetual Succession An OPC being an incorporated entity will also have the feature of perpetual succession and will make it easier for entrepreneurs to raise capital for business. OPC is an artificial entity distinct from its owner. Creditors should, therefore, be warned that their claims against the business cannot be pressed against the owner. 11 Only One Shareholder Only a natural person, who is an Indian citizen and resident in India, shall be eligible to 9 Supra note Mani, One Person Company13 (2013). 11 S. Bhosale, One Person Company: Soon to be Reality (2012). 14

5 stayed in India for a period of not less than 182 days during the immediately preceding one calendar year.12 This is the fundamental concept of a One Person Company. In fact, One Person Company is defined in the Companies Act as a Company which has only one member. A single shareholder holds 100 percent shareholding. The thing to be kept in mind is that the Company Incorporation Rules provide that only a natural person who is a resident of India 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. Further, it also means that non-resident Indians or Foreign citizens cannot form a One Person company. Furthermore, the rules also specify that a person can be a shareholder in only one OPC at any given time. It simply means an individual cannot have two different one person companies in his name. Nominee for the Shareholder The shareholder shall nominate another person who shall become the shareholders in case of death/incapacity of the original shareholder. Such nominee shall give his/her consent and such consent for being appointed as the Nominee for the sole shareholder. Only a natural person, who is an Indian citizen and resident in India, shall be a nominee for the sole member of a One Person Company. This is a very important concept where the person forming the One Person Company has to nominate a Nominee with his written consent who, in the event of death or inability to contract of the owner of the One Person Company, shall come forward and take over the reins of the one person company. 13 Please note that the requirements of being a resident Indian and citizen of India also apply to the nominee. Further, if the person so nominated becomes the member of such a One Person Company and is already a member of another One Person Company, at the same time, by virtue of rules, he has to decide within 6 months which one person company he has to continue. The member can change the nominee at any point of time. On the death of the sole member, the nominee shall be the person recognized by the company as having title to all the shares of the member. Such nominee shall be entitled to the same dividends and other rights and liabilities to which such sole member of the company was entitled or liable R. Saluja, One Person Company (2014). 13 The Companies Act 2013, 3(1). 14 Supra note 8. 15

6 On becoming member, such nominee shall nominate any other person with the prior written consent of such person who shall, in the event of the death of the member, become the member of the company. Director One Person Company must have a minimum of one Director; the Sole Shareholder can himself be the Sole Director. The company may have a maximum number of 15 directors. The other important point is that a One Person Company may have only one director. But at the same time, there is no bar on more number of directors. However, as per the Act, the total number of directors shall not be more than As per the Companies Act, if nothing is mentioned in the incorporation document, it would be assumed the sole shareholder shall also be the sole director in the One Person Company and which shall be practically the case in most One Person Companies incorporated. Limited Liability debts of the business. The biggest difference between a sole proprietor and a One Person Company would be that in case of a One Person Company, your liability is limited to only the business assets. In case of a proprietorship, the liability is unlimited and the creditors of your business can even take hold of your home and personal assets like your house, personal bank accounts, jewellery, etc. which can be used to settle the business liabilities. 16 Greater Credibility As an OPC needs to have its books audited annually, it has greater credibility among vendors and lending institutions. Simple to Get Loan from Banks Banking and financial institutions prefer to lend money to the company instead of proprietary firms. In a large portion of the circumstances, the entrepreneurs convert their firms into a 15 Supra note S. Naiyyar, OPC under the new Companies Act 13 (2014). 16

7 Private Limited company before authorizing funds. So, it is ideal to register your start-up as a One Person company rather than proprietary firm. DISADVANTAGES OF ONE PERSON COMPANY 1. One person Company can have a minimum or maximum number of one member. 2. A minor shall not be eligible to become a member or nominee of the One Person Company or can hold share with beneficial interest. 3. Only a natural person who is an Indian citizen and resident in India shall be eligible to incorporate a One Person Company and shall be a nominee for the sole member of a One Person Company. 4. OPC is suitable only for small business. OPC can have maximum paid up share capital of Rs. 50 lakhs or turnover of Rs. 2 crores. Otherwise OPC need to be converted into Private Ltd Company One Person Company cannot carry out non-banking financial investment activities including investment in securities of anybody corporate The concept of One Person Company is not a recognized concept under Information Technology Act, 2000 and hence, such companies will be put in the same tax slab as other private companies for taxation purposes. As per the Income Tax Act, 1961, private companies have been placed under the tax bracket of 30% on total income. On the other hand, sole proprietors are taxed at the rates applicable to individuals, which mean that different tax rates are applicable for different income slabs. Thus, from taxation point of view, this concept seems to be a less lucrative concept as it imposes heavy financial burden as compared to a sole proprietorship. The basic income tax rate for a one person company is 30% which may result in a higher tax as compared to the income tax slab rates of an individual (i.e., 10% to 30%). Proprietorships have a clear advantage herein that a proprietor is subject to individual income tax slab rates from 10% to 30% and get benefits of basic exemptions. Hence, if you select a One Person Company over a proprietorship, you will have to give up these advantages Supra note Supra note Supra note 8. 17

8 7. Perpetual Succession is the very concept of a separate legal entity being created for a perpetual succession, that is, continuation of the company even after the death or retirement of a member. It is also challenged because the nominee whose name has been mentioned in the memorandum of association will become the member of the company in the event of death of the existing member. However, it is doubtful that it would do any good for the company because the person is not being a member of the company and also not involved in the day-today operation of the company, would not be able to succeed the business after the death of the member. 8. As compared to proprietorships, One Person Companies need to be registered with the Registrar of Companies under the Companies Act, This would entail upfront expenditure on government charges and professional fees which will have to be paid to Chartered Accountants or Company Secretaries Though the Act extends slew of exemptions to a One Person Company in terms of conducting Annual General Meeting, Extraordinary General Meeting, Quorum of Meetings, restriction on voting rights or filing its financial statements, yet the incorporation of such a company requires lots of paper work as compared to a sole proprietorship. These procedural complexities with respect to incorporation of One Person Company might make this concept less attractive for sole entrepreneurs. 10. Compared to proprietorships, a one person company would have recurring compliance costs yearly, as it will need to get its accounts audited and will need to file returns every year with the Registrar of Companies like any other company. The Ministry of Corporate Affairs is sceptical about a single person in charge of a large corporation. Therefore, it requires all OPCs to be converted into private limited or public limited companies on crossing a certain revenue number. Currently, in case of an average turnover of Rs. 2 crore or more for the three consecutive years or a paid-up capital of over Rs. 50 lakh, the OPC must mandatorily be converted into an OPC. The cost of an OPC is only marginally lower than that of a private limited company. 20 Harsh, One Person Company Disadvantages in India (2014). 18

9 11. Separation of Owner and Control is one of the characteristics of the company, which is seriously challenged by the new Companies Act, 2013, where the line between the ownership and control is blurred, which might result in unethical business practices. 12. A person shall not be eligible to incorporate more than one OPC or become nominee in more than one such company. 21 Non-resident Indians are not allowed to incorporate One Person Company. CONCLUSION The concept of One Person Company is advantageous, both for the regulators and the market players. From regulators perspective, One Person Companies by organizing the unorganized sector of proprietorship will make the regulation of these entities convenient and effective. Further, the conferment of the status of private limited company on a One Person Company will not only limit the liability of sole entrepreneurs but also provide access to market players to various credit and loan facilities and hence, would encourage entrepreneurship. However, this concept has been criticized on grounds of excessive procedural formalities and tax burden. Further, this concept is also being regarded as unnecessary as India already has a Limited Liability Partnership Act, 2008, which limits the liabilities of the members of a partnership. Eventually any decision on which legal business structure to select will depend on a case-bycase basis and individual needs and requirements of a specific business. But, one should be aware of the above disadvantages of a One Person Company before either starting a new proprietorship or deciding to convert your existing proprietorship into a One Person Company in India. This new concept opens up spectacular possibilities for sole proprietors and entrepreneur who can take the advantages of limited liability and corporatization but were held back in doing so because of the requirements of finding a second director or second shareholder. This is a concept that 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 21 Companies Act, 2013, Incorporation of Companies and Matters Incidental Thereto, The Institute of Company Secretaries Of India (2014) (last visited on Dec. 5, 2016). 19

10 framed so far with respect to One Person Company have been very sensible. With the Companies Act, 2013, the concept of OPC has now become reality. This concept has been of keen interest among entrepreneurs looking forward to doing business with the entrepreneurial freedoms as afforded by proprietorships but without the baggage of personal liability that a proprietorship is bound to carry. OPC provides many opportunities to all those who are looking forward to kick start their own venture with a structure of the organized business. This concept will help the young or start-up entrepreneurs test a business model, a product or a service before attracting new investors. The compliance pressure, which has to be mandatorily followed, is comparatively less and the feature of limited liability is an added privilege to it. Such a concept will benefit a lot to all the individual proprietors and proprietors engaged in small scale industries. It will provide a greater flexibility to an individual to manage his business and at the same time, enjoy the benefits of a company. The point to be noted here is that with the use of this concept, it will make a way for more favourable banking facilities, particularly loans and advances to individual proprietors. At the same time, it will also boost the foreign funds in India as the requirement of nominee shareholder would be done away with. ********** 20

A Critique on the Concept of One Person Companies, and its Relevance in Indian Entrepreneurship

A Critique on the Concept of One Person Companies, and its Relevance in Indian Entrepreneurship Aditi Vinzanekar Symbiosis Law School, Pune Abstract In 2013, the Indian Government passed the Companies