The corporate laws in India got revolutionized by The Companies Act, 2013 with the introduction of various new concepts that were non-existent previously. The introduction of the concept of One Person Company was one of the game-changers. A whole new way of starting businesses was recognized which granted flexibility that an entity like a company could offer. It also protected limited liability that was lacking in partnerships and sole proprietorships.
The ability of individuals to form a company was already identified by various other countries like the USA, China, Singapore, UK and Australia before the new Companies Act 2013 was enacted.
One-person Company is a company that has only one person as its member according to Subsection 62 of Section 2 of the Companies Act, 2013. Because members of a company are recognized as the company’s shareholders or the subscribers to its Memorandum of Association, One Person Company (OPC) is functionally a company with only one shareholder as its member.
OPCs are usually formed when the business has just one founder or promoter. Due to the many advantages that OPCs offer, entrepreneurs whose businesses are at a nascent stage give more preference to the creation of OPCs rather than sole proprietorships.
An OPC and a sole proprietorship form of business might come across to be alike since both the forms of businesses have a single person involved who owns the business, but in reality, they are quite different from each other. The nature of the liabilities carried by both of them is the major difference between the two forms.
OPC being a separate legal entity on its own which is distinctive from its promoter has its own liabilities and assets. The promoter cannot be held liable personally to pay off the debts of the company.
Whereas, the sole proprietorship and its proprietor is the same. So, in the case of non-fulfilment of the liabilities of the business, the promoter’s assets are attached and sold by the law.
The general features of a One-Person Company are as follows.
Section 3(1)(c) of the Companies Act, 2013 states that a company can be formed by a single person for any purpose recognized by the law. OPCs are further described as private companies.
Unlike other private companies, OPCs can have only one shareholder or member.
The sole member of the company nominates a nominee during the registration of the company. This is a feature unique to OPCs and this distinguishes it from all other types of companies.
The death of the only member of the company allows the nominee to either reject or choose to become its sole member. In other kinds of companies, the concept of perpetual succession is followed.
Minimum one person needs to be the director of OPCs, which is the member in this case. There can be a maximum of 15 directors.
For OPCs, any minimum paid-up share capital has not been prescribed by the Companies Act, 2013.
Many privileges and exemptions are enjoyed by the OPCs under the Companies Act that other types of companies are not entitled to.
An OPC can be created by a single person by subscribing his name to the Memorandum of Association and fulfilling the other prerequisites prescribed by the Companies Act, 2013. The MoA also needs to declare all the details of a nominee who would go on to become the sole member of the company in case of death of the original member or he becomes incapable to enter any contract.
The MoA and the nominee’s consent to his nomination are to be submitted to the Registrar of Companies in addition to the application of registration. That nominee is allowed to withdraw his name at any given point of time by submitting the required application to the Registrar. The member is also entitled to cancel his nomination later.
In India, only natural individuals who are the citizens and residents of the country are eligible to create an OPC. The nominees of OPCs are also guided by the same directive. Also, such a natural person is not allowed to be a member or nominee of more than one OPC at any given point of time.
One significant point is that only a natural person can become a member of an OPC which doesn’t apply in case of companies. Companies can themselves be members and own shares of the companies. Additionally, minors are prohibited by the law from becoming members or nominees of OPCs.
Regulations monitoring the formation of OPCs explicitly impede the conversion of OPCs into companies under Section 8, the ones that have philanthropic objectives. Until the expiry of two years from the date of their incorporation, OPCs can’t convert into other types of companies voluntarily.
One-Person Companies benefit from the following privileges and exemptions under the Companies Act:
OPCs don’t have to conduct annual general meetings.
Cash flow statements need not be included in their financial statements.
Directors could sign the annual returns too; a company secretary is not mandatorily required.
Provisions in regards to the independent directors are not applied to OPCs.
Directors can take home more remuneration as compared to other companies.
Q1: Does an OPC follow the principle of perpetual succession?
Ans: No, it does not. An OPC can reach its end with the death of its sole member.
Q2: OPC was recognized under the Companies Act, 1956. TRUE or FALSE?
Ans: FALSE. The concept of OPCs was introduced by the Companies Act, 2013.