One Person Company- A New Business Ownership Concept

Jan 21 12:55 2013 CA A. K. Jain Print This Article

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The Companies Act,Guest Posting 2012 passed by the Lok Sabha provides for the concept of an OPC. Sec 2(1)(zzk) of the Companies Bill, 2009 brought in the concept of a “One Person Company”. It is essentially a legal entity which functions on the same principle as a Company, but with only one member and one shareholder. It was an alternative for Indians, who typically operate using the risky concept of a proprietorship.

 

One person company- As the name suggests, it means a company which has only one person as a member and where legal and financial liability is limited to the company only and not to that person. (i.e. liability is limited).

 

A New Concept - The reason why the old Companies Act of 1956 had made it compulsory for a Company to have a minimum of two members was so that it could be clearly separated from a sole proprietorship, a corporate structure which is categorically excluded from the Act. However, the duplicity of this provision was blatant and rampant. People started forming companies by adding a nominal member/ director, allotting them one single share, which is the minimum requirement for a director as per the Act, and retaining the rest of the shares themselves. Thus a person could enjoy the status and benefits of a Company while operating and functioning like a proprietary concern for all practical purposes. Hence, to make things clearer and more logical, an option has been created wherein a person can form a company as a one person entity.

 

Draft Companies Bill, 2009- OPC

 

The Draft Companies Bill, 2009, (Bill No. 59 of 2009), as introduced in Lok Sabha on 3rd August 2009, introduces the OPC concept for the first time in India. Some of the the provisions in the Draft Bill are as follows.

 

One Person Company is defined under section 2(1) (zzk) as: ‘One Person Company’ means a company which has only one person as a member”.

 

Chapter II deals with the Incorporation of the Companies. Section 3(1) (c) deals with the formation of One Person Company. It states, “One person, where the company to be formed is to be a One Person Company, by subscribing their names or his name to a memorandum in the manner prescribed and complying with the requirements of this Act in respect of registration. Provided that the memorandum of a One Person Company shall indicate the name of the person who shall, in the event of the subscriber’s death, disability or otherwise, become the member of the company. Provided further that it shall be the duty of the member of a One Person Company to intimate the Registrar the change, if any, in the name of the person referred to in the preceding proviso and indicated in the memorandum within such time and in such form as may be prescribed, and any such change shall not be deemed to be an alteration of the memorandum”

 

Section 5(1) deals with the memorandum of the One Person Company. It states “The memorandum of a company shall state— the last letters and word “OPC Limited” in the case of a One Person limited company”. Section 13(1) a, b, c deals with alteration of articles including the conversion of Private Companies, Public Companies to One Person Companies and vice-versa. One very important feature of the OPC concept is the conduction of Annual General Meeting.

 

 Section 85(1) of the Draft Bill excludes One Person Company from holding Annual General Meeting at least once in a year. Section 171 is perhaps the most important provision to look out for. It states,

 

1.                   Where a One Person Company limited by shares or by guarantee enters into a contract with the sole member of the company who is also 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 the entering into the contract. Provided that nothing in this sub-section shall apply to contracts entered into by the company in the ordinary course of its business.

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 fifteen days of the date of approval by the Board of Directors with such fee as may be prescribed, or with such additional fee as may be prescribed within the time specified, under section 364.

3.                   Where the company fails to inform the Registrar under sub-section (2) before the expiry of the period specified under section 364 with additional fee, the company shall be punishable with fine which shall not be less than twenty-five thousand rupees but which may extend to one lakh rupees and every officer who is in default shall be punishable with imprisonment for a term which may extend to six months or with fine which shall not be less than twenty-five thousand rupees but which may extend to one lakh rupees, or with both.

 

Advantages- This will bring the unorganised sector of proprietorship into the organised version of a private limited company. The organised version of OPC will open the avenues for more favourable banking facilities. Proprietors always have unlimited liability. If such a proprietor does business through an OPC, then liability of the member is limited. This will open all options for Indian entrepreneurs, with pros and cons, and leave it in the hands of such promoters to decide the best options. It will help many foreign companies, which just need to appoint nominees for the sake of a minimum two members, when they form a wholly-owned subsidiary (in India). Various small and medium enterprises, doing business as sole proprietors, might enter into the corporate domain. The concept would boost the flow of foreign funds into India, as the requirement for a nominee shareholder would be done away with. However, the mandatory clause that a resident Indian director should be on the board could be a bottleneck.

 

Formation of One-Person-Company- Firstly, the person is to give a separate name and legal identity to the Company, under which all the activities of the business are to be carried on. This ensures that a separate legal entity is formed. Secondly, the person has to nominate a name with that person’s written consent as a nominee to the OPC. This person will be the default and ad hoc member in case of the existing sole member’s death or disability. This provision will ensure perpetuity and continuity to the life of the Company. The golden rule of “members may come and go, but the Company must live on” holds good. Finally, every One Person Company should bear the letters “OPC” in brackets after it’s registered name, wherever it may be printed, affixed or engraved.

 

It also provides that the memorandum of One Person Company shall indicate the name of the other person as nominee, with his prior written consent in the prescribed form, who shall, in the event of the subscriber's death become the member of the company and the written consent of such person shall also be filed with the Registrar at the time of incorporation along with its Memorandum and Articles.

 

OPC In Other Countries

 

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 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. The concept is also very popular in Singapore.

 

Conclusion:

OPC will give greater flexibility to an individual or a professional to manage his business efficiently and at the same time enjoy the benefits of a company. Company law experts see a rise in registrations of one-person companies once the Bill is enacted into law. The concept of OPC will also help many foreign companies, which need to appoint a minimum of two nominees now when they form a wholly-owned subsidiary. OPC will open the avenues for more favourable banking facilities, particularly loans, to such proprietors. Besides, the concept will boost flow of foreign funds in India as the requirement of nominee shareholder would be done away with.

 

Experts feel the key challenge for such a company will be to ensure that supporting legislations also recognise such a company as an entity and not just an extension of a sole proprietorship.

 

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About Article Author

CA A. K. Jain
CA A. K. Jain

The Author, A. K. Jain is practicing Chartered Accountant at New Delhi since 1984 under the banner, "Tapuriah Jain & Associates"( TJA ).  
www.anilkumarjainca.blogspot.in

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