The recently enacted Companies Act 2013 has introduced us to a new form of business organisation in the country, viz., One Person Company (OPC). Though as a concept it may be new to India, this type of entity is prevalent in other parts of the world like the US, China, Singapore and some European countries. OPC is a significant and innovative idea of an organisation model. Here is an overview of OPC as conceived by the new Companies Act.
OPC - a legal fiction:
A company by definition denotes the coming together of more than one person. Consequently, an OPC is something quite difficult to fathom. It is an oxymoron – a contradiction in terms. The new Act has helped create a new form of business organisation through a legal fiction. As the name itself suggests OPC consists of one person who is himself the promoter, the director and the member all rolled into one. Nevertheless he is a company! In a manner of speaking it is a process of incorporating oneself.
OPC – rationale of creation:
For any individual who intends to promote a business venture the single most inhibiting factor is the potential risk attached to such a venture. This fear usually goads him to seek out an organisational model which gives him enough freedom to undertake a business venture without having to bother about the attendant risks which in the case of a sole proprietor would involve exposing even his personal properties. Consequently one tends to opt for a corporate setup or a partnership firm to pursue one’s entrepreneurial ambitions even at the cost losing some control of the enterprise and some loss of freedom which he feels he is otherwise entitled to. It is in this background that an OPC as an organisation is conceived and now sought to be given a legal status. As the OPC is deemed to be a corporate entity the financial liability of that one-person owner is limited to the extent of his commitment to the share capital unlike that of a proprietorship firm where his liability is unlimited. In a way it is a natural follow up measure after the advent of limited liability partnerships.
OPC – legal status as per the proposed Act:
Sec. 2(62) defines OPC as a company with only one person as member. Sec.3 of the Act provides the legal sanctity for creating a private limited company in the form of an OPC with only one member. Section 12 (3) of the Act also proposes that wherever the name of such a company appears the words ‘One Person Company’ shall be part of such a name.
OPC – the process of formation:
1. The person who promotes the OPC has to give a separate legal identity to the OPC separate from his own under which all activities of the company shall be carried out.
2. At the time of incorporation of the company the person concerned shall nominate another person to act on his behalf in the case of his death. The nominee shall give his written consent to be such a nominee. The member of the OPC will have the right to change the nominee at any time with due intimation to the Registrar.
3. The above nomination would become part of the documents like Memorandum of Association and Articles of Association to be filed with the Registrar at the time of incorporation.
4. The nominee shall become the legal owner with all the rights of the original person in the case of the death of that person and the latter shall nominate another to succeed him in the event of his death
OPC – relaxations in compliance requirements:
The Act contains certain relaxations in the case of OPC which are more in the nature of the form of the organisation like:
1. The minimum number of Directors for an OPC is one and the maximum is 15.
2. There is no requirement of appointment of first directors as the sole member shall be deemed to be the first director.
3. There is no need to conduct a meeting if the number of directors is only one but in the case of more than one director at least a board meeting twice a year is required to be conducted.
4. Provisions relating to AGM and EGM like conducting meetings, notices, etc. are not applicable to OPC.
5. Only one director needs to sign the Annual Returns to be submitted to the Registrar of Companies.
OPC – shortcomings and ambiguities:
Despite the apparent ease of formation of One Person Company that one person will still be called upon to ensure statutory compliances like filing of Returns, audit of accounts, etc. OPCs in the field of finance may also face problems like having to meet the minimum capital requirements which in a way have nothing to do with the Companies Act. Other issues which one may confront could include things like taxation related issues like tax on capital gains on conversion of proprietorship to OPC, remuneration to director, deemed dividends and stamp duty on transfer of business to OPC. These issues will get crystallised even as the concept evolves and rules get prescribed. One may also have to wait for clarity in cases like a reverse process of converting an OPC into a proprietorship. It remains to be seen whether an OPC can be a subsidiary of a company unless dissolution of a company is treated as death of a person.
OPC – the differentiating parameters from proprietorship:
The following are some of the differentiating features of an OPC compared to a proprietorship organisation:
1. OPC is a separate legal entity different from the owner whereas in the case of proprietorship organisation both these merge into one. There is only one identity and that is that of the owner himself.
2. Arguably the most important feature is that in the case of OPC the liability of the owner is limited whereas a sole proprietor is liable for all the liabilities of the business entity he creates.
3. Financial ratings and debt obligations are determined by the standing of the owner-individual in the case of sole proprietorship. In the case of OPC this will be different as OPC has a separate legal identity.
4. OPC will need to adhere to strict legal compliances; but that is not the case with sole proprietorship.
5. OPC will have a separate identity for tax purposes different from the owner which is not the case with sole proprietorship form of organisation.
The single most advantage of an OPC is that an entrepreneur can commence a business, however risky, without the fear of unlimited liability threatening his very existence. The compliance requirements, though a tad tedious compared to a proprietorship business, is a small price for the benefits which an OPC provides.
Now that the new Companies Act is a reality one has to wait for the Rules under the Act to be drawn up and notified. Some of them may have the effect of clarifying further the concept of OPC besides addressing some of the ambiguities.