A guide to understanding One person company under Indian Company Law

 

By Harshvardhan Tripathi, for Legal Corner LLP. Harshvardhan is a fifth year student of NALSAR University of Law and will be graduating in 2022.

The views expressed here are not to be considered as legal opinion. You may not rely on this article as legal advice. You should reach out to me (chetana@legalcornerllp.com) if you are planning to consider incorporate or expand your existing business in the US so as to get legal advice that is specific to your business needs

As per the Ministry of Corporate Affairs, there were 34,235 One Person Companies out of a total number of about 1.3 million active companies in India, as of 31 December 2020.

What is one person company?

Section 2 of the Indian Companies Act, 2013 defines a one-person company as a company that only has one person as a member. The members of a company are nothing but subscribers to its Memorandum of Association (MoA), or its shareholders. These companies get all the benefits of a private company such as they too have access to credits, bank loans, limited liability, legal protection, etc.

What are the advantages of a one-person company?

1. Legal status

 The OPC receives a separate legal entity status from the member. The separate legal entity of the OPC gives protection to the single individual who has incorporated it. The liability of the member is limited to his/her shares, and he/she is not personally liable for the loss of the company.  Thus, the creditors can sue the OPC and not the member or director.

2. Easy to obtain funds 

Since OPC is a private company, it is easy to go for fundraising through venture capitals, angel investors, incubators etc. The Banks and the Financial Institutions prefer to grant loans to a company rather than a proprietorship firm. Thus, it becomes easy to obtain funds.

3. Less compliances 

The Companies Act, 2013 provides certain exemptions to the OPC with relation to compliances. The OPC need not prepare the cash flow statement. The company secretary need not sign the books of accounts and annual returns and be signed only by the director.

4. Easy incorporation 

 It is easy to incorporate OPC as only one member and one nominee is required for its incorporation. The member can be the director also. The minimum authorised capital for incorporating OPC is Rs.1 lakh but there is no minimum paid-up capital requirement. Thus, it is easy to incorporate as compared to the other forms of company.

5. Easy to manage 

Since a single person can establish and run the OPC, it becomes easy to manage its affairs. It is easy to make decisions, and the decision-making process is quick. The ordinary and special resolutions can be passed by the member easily by entering them into the minute book and signed by the sole member. Thus, running and managing the company is easy as there won’t be any conflict or delay within the company.

6. Perpetual succession 

The OPC has the feature of perpetual succession even when there is only one member. While incorporating the OPC, the single-member needs to appoint a nominee. Upon the member’s death, the nominee will run the company in the member’s place.

7. Suitable for only small business 

OPC is suitable for small business structure. The maximum number of members the OPC can have is one at all times. More members or shareholders cannot be added to OPC to raise further capital. Thus, with the expansion and growth of the business, more members cannot be added.

What are the disadvantages of one person company?

1. Restriction of business activities 

The OPC cannot carry out Non-Banking Financial Investment activities, including the investments in securities of anybody corporates. It cannot be converted to a company with charitable objects mentioned under Section 8 of the Companies Act, 2013.

2. Ownership and management

Since the sole member can also be the director of the company, there will not be a clear distinction between ownership and management. The sole member can take and approve all decisions. The line between ownership and control is blurred, which might result in unethical business practices.

How to incorporate such a company?

Section 3 provides for incorporating such a company. It mentions that a company may be formed for any lawful purpose by one person. The memorandum of the one-person company has to state the name of some other person with his prior written consent in the prescribed form who will become the member of the company in the event of death of the person forming the one-person company or in case of his incapacity to contract.

The written consent of such person has to be filed with the registrar at the time of incorporation of the company. Such a person may also withdraw his/her consent in the prescribed manner. The one person member of the company may at any time substitute such person with another person by giving notice in the prescribed manner.

It is the duty of the member of one person Company to inform the company of the change of the other person nominated by him by indicating in the memorandum or otherwise within a specified time and manner as may be prescribed. The company has to inform the registrar of any such changes in the prescribed time and manner. However, any such change does not to amount to an ‘alteration’ of the memorandum.

Position of directors in OPC

Only one director is compulsory for such a one-person company. As per Section 149, the requirements that every company has to have at least one director state in India for a total period of not less than 182 days in the previous calendar year, would have to be complied with by the one person himself. Alternatively, he may have to keep another person as a director for such compliance. An individual who is a member is deemed to be the first director of the one person company till such time that subsequent director or directors are appointed in accordance with the provision of the act.

Requirement of meetings for OPC

In the case of one person company, a small company, and a dormant company the requirement of two meetings is deemed to have been complied with if at least one meeting of board has been conducted in half a calendar year and the gap between the two meetings is not less than 90 days. The provisions of section 174 which concerns the quorum of the meeting will also not apply to one person company.