The One Person Company (OPC) concept was introduced under the Companies Act of 2013. An OPC is essentially a business established and managed by a single individual, as indicated by its name. It enjoys all the attributes of a traditional company, such as perpetual succession, limited liability, and a distinct legal identity. Prior to the enactment of the Companies Act of 2013, individuals seeking to start a business were limited to sole proprietorships due to the requirement of having at least two persons to form a company. For instance, a private company requires at least two directors and two members, while a public company needs a minimum of three directors and seven members. Traditionally, only groups of people could form corporations. However, the Companies Act 2013, specifically Section 2(62), now allows a company to be formed with just one director and one member, who can be the same person. An OPC has fewer compliance obligations compared to a private company. Thus, a One Person Company combines the benefits of a corporation and a sole proprietorship and can be established by a single individual who is an Indian citizen, whether residing in India or abroad.
The Ministry of Corporate Affairs (MCA) has recently made changes to the Companies (Incorporation) Rules, 2014, through the Companies (Incorporation) Third Amendment Rules, 2016. This amendment involves the substitution of the existing Rule 3(2) of the Incorporation Rules, 2014, which relates to one person companies (OPC).
According to the updated Rule 3(2) of the Amended Incorporation Rules, 2016, “An individual cannot be a member of more than one One Person Company simultaneously, and they cannot act as a nominee for more than one One Person Company.”
In contrast, the previous Rule 3(2) of the Incorporation Rules, 2014 stated that “a person could not establish or act as a nominee in more than one One Person Company.”
Nominee – The memorandum of a One Person Company must include the name of another person (nominee), along with his prior written consent in the specified form (Form No. INC.3). In the event of the subscriber’s death or inability to engage in contracts, this person will become the company’s member. The written consent of this individual must be submitted to the Registrar during the incorporation of the One Person Company, along with its memorandum and articles. Additionally, the term “One Person Company” must be indicated in brackets below the company’s name wherever it is displayed.
Note – in India, only a natural person can form a ‘one person company’, i.e. a company cannot become the sole person in the one-person company.
Objective – The introduction of OPC into the legal system signifies a move towards encouraging the transformation of entrepreneurship and small businesses into corporate entities. A simpler legal framework would alleviate the burden on small business owners, sparing them from dedicating excessive time, effort, and resources to navigate complex legal issues and comply with regulations. This streamlined approach enables individuals of varying capabilities to actively participate, fostering the creation of employment opportunities and contributing to economic growth. The Companies Act of 2013 provides options for both sole proprietors and companies, with lenient requirements, underlining the flexibility of this statute. OPC allows any individual to establish a corporation, promoting the idea of a single person forming and operating a company. One person companies are in existence in certain countries. (ICSI, 2014).
Genesis – In India this concept has been mooted by the Ministry of Corporate Affairs by allowing One Person Companies in India in line with UK, China, USA, Australia, Singapore, Qatar, Pakistan and several other countries. (ICSI, 2014). In USA several States permit the formation of a single member Limited
Liability Company (LLC). Control by one person/family is not a new concept in the companies. The genesis of the concept of OPC may be found in the landmark cases of Saloman V Saloman & Lee v Lee’s Air Farming Ltd. (however it is debatable). China introduced One Person Company in 2005 while going amending thoroughly its companies’ legislation. In India, the idea of OPC was proposed in the report of the Dr. J.J. Irani Committee, specifically in Chapter III titled “Classification and Registration of Companies.”
As per section 2(62) of the Companies Act, 2013, “One Person Company” means a company which has only one person as a member.
The key benefits of the OPC include personal freedom, allowing skilled professionals (having small business) to pursue their chosen businesses. It involves a personality-driven passion for implementing a business plan, an entrepreneurial willingness to take extra risks and responsibilities, and a deep personal commitment to the business. Despite being run by an individual, OPCs are distinct legal entities similar to registered corporations.
An OPC is incorporated as a private limited company with only one member and one director allowed at any given time. Both the member and nominee must be natural persons, Indian citizens, whether resident in India or not. A person is considered a resident if they have stayed in India for at least 182 days in the preceding calendar year.
A single person cannot establish more than one OPC or be a nominee in multiple OPCs. If a member of an OPC becomes a member in another OPC due to their nominee status, they must meet the eligibility criteria of being a member in one OPC within 180 days.
An OPC loses its status if its paid-up capital exceeds Rs. 50 lakhs or if its average annual turnover exceeds 2 crores in three consecutive years. Minors cannot be members or nominees of an OPC or hold shares with beneficial interest. Furthermore, an OPC cannot be incorporated or converted into a company under section 8 of the Companies Act, 2013.
Additionally, an OPC cannot engage in Non-Banking Financial Investment activities, including investing in securities of any other body corporate. It cannot voluntarily convert into any other type of company unless two years have passed since its incorporation, except in cases where capital or turnover threshold limits are reached. An existing private company with a paid-up share capital of Rs. 50 lakhs or less or an average annual turnover of Rs. 2 crores or less can convert itself into an OPC by passing a special resolution in a general meeting.
Advantages of the One Person Company –
OPCs offer innovative business ideas to startup entrepreneurs. They serve as a platform for professionals to channel their entrepreneurial aspirations. One of the primary attractions for shareholders opting for the ‘single-person company’ structure is the benefit of limited liability. Unlike sole proprietorship businesses, OPCs provide a distinct entity, safeguarding both the company and the individual from potential liabilities.
In contrast to private or public limited companies, OPCs face fewer compliance requirements. Existing proprietorship businesses can seamlessly transition into OPCs without complications. OPCs necessitate minimal initial capital, and as recognized corporate entities, they can attract funding from sources such as venture capital and financial institutions, allowing them to evolve into private limited companies.
Additionally, OPCs are exempt from the mandatory rotation of auditors after the expiration of the maximum term.
Rule – 3 , Companies (Incorporation) Rules, 2014
Sources – https://www.icsi.edu/media/webmodules/companiesact2013/ONE%20PERSON%20COMPANY.pdf
Taxmann Company Law & Practice, 2019 Edition
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