One Person Company: An Overview of Provisions and Relaxation

By | January 9, 2013

One Person Company: Beginning of New Era

Sec 2(1)(zzk) of the Companies Bill, 2009 brought in the concept of a “One Person Company (OPC)”. 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.

This remained dormant till this year, but now the Parliament of India legislated has approved the idea. The Companies Act, 2012 passed by the Lok Sabha provides for the concept of an OPC.

So what is a 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).

How is it different from the existing scenario and why has it been introduced?

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 hypocrisy 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.

One Person Company V/s Sole Proprietorship

One Person Company vs Sole Proprietorship

How do I form a One-Person-Company?

Although the exact rules are not clear, the following rules have been proposed –

  1. 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.
  2. 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.
    At the same time subscriber can also change the nominee by giving prescribed notice. Upon changing the nominee member shall give intimation to company and company in turn shall inform to registrar within time limit to be prescribed by rules made in this behalf. Minimum share capital shall be same as in the case of private limited company-Rupees One Lakh.
  3. Finally, every One Person Company should bear the letters “OPC” in brackets after its registered name, wherever it may be printed, affixed or engraved.

Three types of company can be formed as OPC

  1. Company limited by shares
  2. Company limited by guarantee
  3. Unlimited company

Provisions and Relaxations:

• Proviso to clause 12(3) requires that word “One person company” shall be mentioned in brackets below name of company.

• As per clause 149(1)(a) minimum one director required in OPC. However there bar on appointment of more than one director. Until director(s) appointed individual being member shall be deemed director of the company-clause 152(1).

• Annual return in other companies shall be signed by director and company secretary whereas in the case of OPC annual return shall be signed by CS and if no CS, it shall be signed by director of the company.

• By virtue of clause 96(1) OPC are exempted from holding AGM.

• As per clause 122(1) provision of clause 98, 100 to 111(both inclusive) pertaining to procedural aspect of general meetings and voting at general meeting are not applicable to OPC. Clause 122(3) and 122(4) of the bill has created deeming fiction for holding of general meeting and board meeting respectively. In respect of business required to be transacted only at General Meeting through special or ordinary resolution, member of the company shall communicate the resolution to the company, enter it into minutes book, sign and date. Meeting shall be deemed to have been held on the date so entered.

• In the case of OPC having only one director, compliance with provisions of conducting of Board meeting impracticable, hence it is made not applicable. In that case business which required to be transacted at board meeting shall be sufficient if resolution is entered in to the minutes book, signed and dated. Such date shall be deemed to be the date of meeting of board of directors.

• As per clause 134 every company is required to place financial statements along with directors’ report and auditors’ reports before members in general meeting. Directors’ report must include explanation and information required under clause 134(3). However in the case of OPC Directors’ report shall include only explanation on qualification, reservation, disclaimers or adverse remarks of the auditors if any. All other information as required under clause134(3) need not be given in directors’ report of OPC.

• By virtue of clause 2(68) OPCs have been relaxes from preparing Cash Flow Statement and they have to prepare profit and loss account, balance sheet and explanatory notes only. Moreover as per clause 134, Financial Statement shall be signed by only one director and submitted to the auditor for his report thereon.

• Time limit of 180 days from the closure of financial statement has been granted to OPC to file financial statement with Registrar.-proviso 3 to clause 137(1).

• 3rd proviso to clause 173(5) states that provisions related to minimum board meeting to be conducted during the year by a company and minimum quorum at board meeting shall not apply to OPC having only one director. In case OPC has more than one director, it shall conduct at least one board meeting in each half year and time gap between two meetings should be minimum 90 days.

• When OPC enters into contract which is not entered into in ordinary course of business with its member who is also director of OPC, it should ensure that contract is in writing. If such contract is not made in writing, OPC should ensure that terms of the contract are contained in memorandum or recorded in minutes books. Such minutes should be adopted in next board meeting.- Clause 193 of companies bill 2012.

So, shut down my Pvt. Ltd. and change over to a One Person Company?

Not at all. A One Person Company is still an idea in its infancy and is best for small enterprises looking at testing the waters, as an alternative to a proprietorship.

However, a Company has the following advantages:

  1. Expansion of a Company is easy and possible. All you need to do is to increase the authorized capital and allot shares
  2. Investment and investors prefer a Private Limited Company, since it is the only structure where it is possible to issue shares to third parties, and also have a board from which supervision is possible.

Hiring may be easier, since employees can be given incentives like Employee Stock Option Plans, which is not possible in the case of a One Person Company.

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