One is company: A glance at One Person Company

How is ‘One Person Company' defined?

According to Clause 2(62) of the Companies Bill, 2011, a ‘One Person Company' means a company which has only one person as a member. It is thus a one shareholder corporate entity, where despite having just one person, legal and financial liability is limited to the company alone.

Why was it excluded from the Companies Act all these years?

The logical reason why the Companies Act, 1956 had made it compulsory for a company to have a minimum of two members was so that it could clearly separate it from a sole proprietorship, a form of carrying out business which is categorically excluded from the Act.

And why is it being included now?

However, the hypocrisy of this provision was too glaring to ignore. People started forming companies by adding a nominal member/director and allotting them one single share, which is the minimum requirement for a director as per the Act, and retaining the rest of the shares for 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.

Besides this, young entrepreneurs found themselves investing their creative energy in unproductive paperwork and legal formalities which a full blown private limited company necessitated.

According to the J.J. Irani Committee constituted in 2005, which also pioneered the ground-breaking introduction of Limited Liability Partnership:

“It would not be reasonable to expect that every entrepreneur who is capable of developing his ideas and participating in the market place should do it through an association of persons. Such an entity (OPC) may be provided with a simpler regime through exemptions so that the single entrepreneur is not compelled to fritter away his time, energy and resources on procedural matters.”

In brief, he advocated the irrelevance of the “more than one member” restriction on Companies and lamented the toll the additional procedures took on the intellectual resources of our country.

Procedure

First, 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.

Second, 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 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 its registered name, wherever it may be printed, affixed or engraved.

Advantages

The major advantage of the One Person Company will be that apart from completing basic procedural formalities for oneself, the sole member needn't delve into other time consuming procedures such as annual general meetings, getting resolutions passed in case of changes etc. and focus fully on functionality and scalability.

At the same time, this sole member can hire employees in the name of the company, transact as an agent of the company and even appoint a full-fledged board to allow a corporate style of operation.

Glaring omissions

As usual, the Act is silent on the definition of a “person”. Broadly, a person can mean a Company, a registered firm or any other body corporate. The Act has been silent in this context, even though the suggestion of the J. J. Irani Expert committee was made with the view of promoting and harvesting our individual entrepreneurs.

Secondly, there have been no restrictive clauses as to the minimum or maximum limit of capital that can be introduced in an OPC. It was expected that a ceiling limit would be placed on the maximum capital an OPC might be allowed, exceeding which the OPC would automatically be treated as a Private Limited Company. This limit is nowhere to be found. With large amounts of capital invested, the trust deficit that a single person company may have will only increase.

(This column has been contributed by vakilsearch (www.vakilsearch.com), an online legal guidance and legal solutions provider to The Hindu Business Line- 17th Dec, 2011.)