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ALL ABOUT ONE PERSON COMPANY

29-Nov-2014

        Today India is marching towards global verdict. “Aache din aanewale hai” means good days are ahead. The re-voluntarily change in the Companies Act 1956 taking shape in to the New Companies Act 2013 is a landmark step taken by the Central Government of India.

        The New Companies Act had been notified on 30/08/2013 at the house of parliament. The Act includes 29 chapters clubbing 470 sections and 7 schedules. The various sections have been introduced partially and periodically. There upon simultaneously, the company rules have been framed. Those are made applicable gradually.

        The concept of one person company (OPC) had been widely approved by the western countries. It had been introduced in the New Company Bill 2013. In the present article we are going to discuss the merits and demerits of the one person company (OPC) depend upon it we are at the liberty to decide whether the concept of OPC is a gift or not.

        In the recent scenario the small enterprises has a very good option of OPC to indulge in to business. Is it a boon or a curse, the time will decide.

        

  1. As per section 1 the operation of OPC Company extends to the whole of India.

  1. As per section 2(20) a company means a company incorporated under this Act or under any previous company law.

  1. As per section 2(62) the one person company means a company which has only one person as member.

  1. As per rule 3 the one basic pre-requisite to incorporate on OPC is that, the only natural born citizens of India, including small business man, entrepreneurs, artisans, weavers or traders among others can take advantage of the OPC concept outlined in the New Companies Act.

  1. Non-resident Indians or individuals who do not reside in India forever for 182 days cannot incorporate an OPC; it had been framed in the draft rule of the companies.

  1. One person company can be registered only as a private company.

  1. One person company may be either a company limited by shares or a company limited by guarantee or an unlimited company.

  1. An OPC limited by shares should have minimum paid up capital of Rs. 1lakhs and restricts the right to transfer its shares and prohibits any invitation to public to subscribe for the securities of the company. These 3 norms are required to be followed in case an OPC limited by shares could be formed. It is the most operational systems of a private limited company which could be adopted by small business houses.

  1. As per 2nd proviso to section 12(3) the word OPC should be titled with the company name, wherever the name is affirmed, used or engraved such as, Amitabh Bacchan one person company.

  1. The Memorandum of Association and Article of Association of the OPC should name another person, with his written concept, who shall become the member in case of death or in capacity or insane of the subscriber. Such written consent of the other person should be filed with ROC. The nominee/the other person can withdraw his consent at any time and on the other hand the existing member /shareholder of the OPC may change the nominee by giving notice to such other person and intimate the same to the ROC.

  1. In case of death of subscriber or the existing member, the nominee/other person shall become the member of OPC.

  1. As per section 152(1) the original member/share holder of the OPC is defined as the 1st director until the company appoints any other person as director.

  1. As per section 149 the minimum directors of the OPC is one in number whereas, the maximum should be limited to 15 directors. In other words, it can be said that the member and director could be the different person of an OPC. However, the upper limit of 15 directors can also be increased by passing special resolution.

  1. As per section 3(1)(c) an OPC may be formed for any lawful purpose by one person, by subscribing his name to the memorandum and complying with the requirements of the Act in respect of registration.

  1. According to section 3 and the facility of nomination clause the OPC does not stand dissolved on the death of an individual.

  1. As per section 173 (5) in OPC it Is require to hold any two board meeting during a calander year and one meeting in each half of the calander year but the gap between two meetings should not be more than 90 days.

  1. The OPC means a company which has only one person as a member and were legal and financial liability is limited to the company only and not to the person i.e, the liability is limited.

  1. As per section 96 an OPC is not required to hold the annual general meeting mandatorily.

  1. As per section 173 in case of an OPC which has only one director, it shall be sufficient compliance, if all resolutions required to be passed by such a company at a board meeting are entered in a minute book and such are signed and dated by the member and such date shall be deemed to have the date of the board meeting for all the purposes under the companies act.

  1. An OPC cannot convert itself voluntarily into any kind of company for a period of 2 years from the date of its incorporation, unless within that period, its paid up share capital increases to more than Rs.50lakhs or average annual turnover during the relevant period exceeds Rs. 2crore. In other words, an OPC could not hold the paid up share capital of above 50lakhs or average annual turnover of above 2crores. If either of the limit is exceeded as per rule 6 of the companies (incorporation) rules, provides that within 6months the said OPC should be converted into a private/public company. It is a principal limitation or demerit of the concept of One Person Company.

  1. The OPC is charged at a based tax rate of 30% in income tax along with other applicable taxes like, minimum alternate tax (base tax rate 18.5%), dividend distribution tax (base tax rate 15%) and others.

  1. According to section 92 of the Companies Act 2013 the annual return of the OPC shall be signed by the company secretary or there is no company secretary, then by the director of the company.

  1. As per section 134 the board report and audit report will be a part of financial statements for filing with ROC.

  1. As per u/s. 149(1) a women director is not require to be appointed on the board of OPC like private limited company.

  1. As per u/s. 455(1) a OPC can also become a dormant or an inactive company after fulfillment of the compliances under the companies Act.

  1. Except a few minor procedural concessions the provisions of accounts section 128, audit section 139, etc. are also applicable to the OPC.

  1. Certain business like that of finance may face problems if sought to be carried in a company form. Thus, an individual engaged in business of landing or investments may need prior registration from Reserve Bank of India and minimum net contribution of own funds of Rs. 2crores.

  1. As per section 185 the provision of loan to directors are applicable to the Companies Act.

  1. Similarly, the section 188 of related party transactions is also applicable to OPC.

  1. The provisions of small companies u/s. 2(85) may could be applicable to the concept of OPC.

  1. A person cannot incorporate more than One Person Company or become a nominee in more than One Person Company. But he can be a member of One Person Company and nominee of another One Person Company. Where a member of One Person Company becomes a member of other OPC by virtue of his nomination in the 2nd OPC, he shall opt out of either one within a period of 180 days.

  1. A minor cannot become a member or nominee of OPC or holds shares with beneficial interest.

  1. An OPC cannot be incorporated or converted into a company u/s. 8 of the Act, which is the erst while section 25 companies or not for profit companies.

  1. An OPC cannot carryout NBFC activities including investment in securities of anybody corporate.  

  1. Section 2(40) excludes the cash flow statement from the definition of financial statement in case of an OPC.

  1. The board report of the OPC need not contain the detailed disclosures as are enumerates in section 134(3) but should contain explanations or comments on every qualification, reservation or adverse remark made by the auditor in his report.

  1. As per 3rd proviso to section 137(1) gives leeway to an OPC to file its financial statements along with other documents that are required to be filed/attached with it, with the ROC within 180 days from the closure of the financial year (no AGM prescribed.).

  1. The financial year of an OPC will be of the period starting from the 1st April and ending on the 31st March as also prescribed for other companies.

  1. The seven punishment sections from 447 to 453 are applicable to the OPC.

  1. A company by definition denotes the coming together of more than one person.  Consequently, an OPC something quite difficult to fathom. It is an oxymoron-a contradiction in terms. The new Act has helped create a new form of business organization 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.

  1. 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 organizational model which gives him enough freedom to undertake a business venture without having to bother about the attendant risks which in 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 organization 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.

  1. As per section 122(3) for the purposes of section 114, any business which is required to be transacted at an annual general meeting or other general meeting of a company by means of an ordinary or special resolution, it shall be sufficient if, in case of One Person Company, the resolution is communicated by the member to the company and entered in the minutes book required to be maintained u/s. 118 and signed and dated by the member and such date shall be deemed to be the date of the meeting for all the purposes under this Act.

  1. Section 193 is important regarding related party contracts by  OPC, it says-
  • Where One Person Company limited by shares or by guarantee enters in to a contract with the sole member of the company who is also director of the company, the company shall, unless the contract is in writing, ensure that the terms of the contract or offer are contained in a memorandum or are recorded in the minutes of the first meeting of the Board of Directors of the company held next after entering into contract: Provided that nothing in this sub-section shall apply to contracts entered into by the company in the ordinary meeting where the contract is approved.
  • The company shall inform the Registrar about every contract entered in to by the company and recorded in the minutes of the meeting of its Board of directors under sub section (1) within a period of fifteen days of the date of approval by the Board of Directors.

  1.      In the case of One Person Company-
  • The resolution required to be passed at the general meetings of the company shall be deemed to have been passed if the resolution is agreed upon by the sole member and communicated to the company and entered in the minutes book maintained u/s. 118.
  • Such minute’s book shall be signed and dated by the member.
  • The resolution shall become effective from the date of signing such minutes by the sole member.

  1. The concept of OPC shall boost corporate culture in India and more so in smaller towns where a large number of business entities are sole proprietorship firms or partnership firms. While it will promote entrepreneurship, it will also redefine how small businesses could be professionalized and more efficiently managed. With OPCs, compliance levels will also go up and it will bring in greater transparency in the business dealings. It is hoped that there will be positive change in the business spectrum all over.

  1. However, beyond a few procedural concessions, and avoidance of the need of second share holder/director, it is not clear what substantial benefits are available. The relatively long/complicated procedure for formation, maintenance and dissolution of a company remain without any major relief. The requirement of finding a second share holder/director is generally not found cumbersome in India where a friend, relative or staff member can easily act as such.

  1. Conversion of existing proprietary businesses can create complexities of tax. There is an existing provision in the Income Tax Act, 1961 (section 47(xiv)) which should help in availing relief from capital gains, even if originally it was not framed with an OPC in mind. However, other tax issues may remain. The concern of deemed dividends u/s. 2(22)(e), the question of allowability of remuneration to proprietor, etc. are some other challenges an OPC may face. The other challenge will be of stamp duty on transfer of the business to the OPC.

  1. Strangely, it is not clear how an OPC may go the next logical step of becoming a non-OPC when it wants to introduce more shareholders. Ideally, a simple amendment of its memorandum and articles should have sufficed. However, there are no specific provisions enabling this. The question therefore is whether an OPC is doomed to remain a one shareholder company during its existence?

  1. All in all, it seems that despite the initial enthusiasm that this concept received, it seems that in practice, this by itself is not likely to encourage sole proprietors to convert into a company in large numbers.

  1. Apart from the above all almost all the provisions of new companies Act 2013 which are applicable to private ltd. company are also equally applicable to OPC otherwise than mentioned above.

  1. The rules under companies Act are under framing and implementation procedure. Those are also going to effect or affect the OPC.

  1. After all OPC is an artificial judicial person created from a separate act therefore it could have it different pros and cons.

  1. An OPC is required to give a legal identity by specifying a name under which the activities of the business could be carried out.

  1. Acceptance of One Person Company: I the Indian business environment the joint stock forms of organization or registered organization rules the market and are given high credibility that attracts easier capital availability and high growth, in the other hand One Person Company will be compared on the same ground as that of sole proprietor because of its characteristics.

  1. Limited Liability: The most beautiful characteristics of the company form of organization is limited liability. In the concept of OPC, If the limited liability concept is taken seriously, it will be dangerous for investors to invest the fund because it may lead to fraudulent business practices on the other hand if the court comes in between and asks for lifting of corporate veil then it would be useless to form the one person company.

  1. In simple, it is just a characteristic attached to sole proprietorship business by registering it in order to search for better market, economic and management opportunities in spite of many disadvantages.

  1. OPC-the differentiating parameters from proprietorships:
  •  The following are some of the differentiating features of an OPC compared to a proprietorship organization:
  • OPC is a separate legal entity different from the owner whereas, in the case of proprietorship organization both these merge into one. There is only one identity and that is that of the owner himself.
  • 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.
  • 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.
  • OPC will need to adhere to strict legal compliances but that is not the case with sole proprietorship.
  • OPC will have a separate identity for tax purposes different from the owner which is not the case with sole proprietorship form of organization.
  • Debt-not the sole responsibility of the owner.
  • Debt- Sole responsibility of the owner.
  • Finance-credit record of the company.
  • Finance-credit history of the owner.
  • Legal requirements-will need to register itself as such.
  • Legal requirements-will not have to draw up paper declaring its status.
  • Separate tax.
  • Tax paid by the owner.

  1. As per section 122 following sections are not applicable to OPC
  • As per 98 calling of general meeting
  • As per section 100 calling of extraordinary general meeting.
  • As per section 101 Notice of Meeting.
  • As per section 102 statement to be annexed to notice.
  • As per section 103 quorum for meetings
  • As per section 104 chairman of meetings
  • As per section 105 proxies
  • As per section 106 restriction on voting rights.
  • As per section 107 voting by show of hands.
  • As per section 108 voting through electronic means
  • As per section 109 demand for poll
  • As per section 110 postal ballot
  • As per section 111 circulation of members resolution.

  1. The provision of section 2(22)(e) of deemed dividend is harmful to OPC like other companies. However, are not applicable to individual.

  1. However, it is beneficial to a small individual entrepreneur only up to a limit that the entire ownership and decision making remain with him. He can use other funds instead of placing others in to his ownership and calculate limited risk up to his contribution in OPC.

  1. Approval of the tribunal is required to convert a public limited company in to a private ltd. company or OPC. Presently from ROC.

  1. Due date of filing forms for OPC

Sr. No.

Nature of Forms

Form No.

Due date of filing

1

Application for reservation of name

Form No. INC.1

NA

2

Application for Incorporation

Form No. INC.2

60 days

3

Nominee-Consent form

Form No. INC. 3

15 days

4

Change in member/nominee

Form No. INC.4

30 days

5

Intimation of exceeding threshold-ie., Ceased to be PC

Form No. INC.5

60 days

6

OPC-Application for conversion

Form No. INC.6

NA

6

Filing of special resolution

Form No. MGT. 14

30 days

7

Application for DIN

Form No. DIR 3

NA

8

Verification of DIN

Form No. DIR 4

NA

  1. Procedure/steps in Incorporation of one person company

Step No.

Steps

Time Frame (Working Days)

1

Preliminary Documentation

  • Discussion between BMC Team & Promoters
  • Ascertaining document requirement and availability
  • Preparation of signing documents by BMC
  • Signing of the incorporation documents by promoter
  • Purchasing the stamp papers and notarization of the documents by the promoters.
  • Sending the signed/notarized document by promoters to BMC.

5

(Varies by the response time taken by the promoters)

2

DIN (Director Identification Number)

Getting DIN for all the directors

1

3

DSC (Digital Signature Certificate)

Getting DSC for all the Directors

1

4

Preparation of main object & search name availability

  • Preparation of main object by BMC
  • The promoters have to provide at least 4-6 names in the order to priority
  • To make an online search of availability of names as desired by the promoters
  • Confirmation of the draft main object & the final name

3

(Varies by the response time taken by the promoters)

5

Application for Name Availability

Filing of INC 1 with the concerned ROC

5

6

Incorporation Process:

  • After ROC’s approval for name of the company, filing all the incorporation documents with the ROC
  • Online uploading of e-forms
  • Payment of registration fees
  • Receiving incorporation certificate

5

7

Application for commencement of business certificate

  • Providing proof of subscription money/capital paid by subscriber/shareholders to company
  • Online uploading of e-form
  • Receiving commencement certificate form ROC

Upon bringing capital in to company

(Anytime within 6 months of incorporation)

  1. OPC Company is like a One Man Army. The compliance burden is very less and the liability of the members is very limited is an added advantage. OPC is expected to benefit people who are into self -employment and many small scale sectors. It is a remarkable feature of the Companies Act, 2013. “OPC would boost the confidence of small entrepreneurs”.

                Friends, the OPC concept is a new to we Indians. The real effect or affect of this format of company can only be judged by practical experience of oneself. It will come in the future. Therefore, it is very much better for one person to see his business commitments, spread and empire and then only he has to decide, whether, where and how to adopt this concept of one person company.

  1. Disclaimer: This article has been written for the general interest of our clients and professional colleagues and is subject to change. It is not intended to be exhaustive or a substitute for legal advice. We cannot assume legal liability for any errors or omissions. Specific advice must be sought before taking any action pursuant to this article.

 

        

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