One Person Company- a mixed bag

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Updated Considering Draft Rules on 03.01.2014

The Companies Act, 2013 defines ‘One Person Company’ or OPC as a company formed for any lawful purpose with only one person as its member. One person company is a private company with one person subscribing to the Memorandum and complying with the requirements of the legislation in respect of registration. The Act provides that the words ‘One Person Company’ shall be mentioned in brackets below the name of such company, wherever its name is printed, affixed or engraved.

The Memorandum of OPC is required to indicate the name of another person, with his prior written consent, who shall, in the event of the subscriber‘s death or his incapacity to contract, become the member of the company. The written consent of such person, who is a nominee of the member, shall also be filed with the Registrar at the time of incorporation along with the Memorandum and Articles. The nominee may withdraw his consent in a manner that as may be prescribed, the new Act also provides the member, the freedom to change the nominee at any time by giving notice in a manner as may be prescribed. The member of OPC is required to inform the company of change, if any, in the details nominee by indicating it in the Memorandum or otherwise within the time and in such manner as may be prescribed. The company is required to inform the Registrar of any such change. The member who is an individual shall be deemed to be the first director of the company until a director is duly appointed by the member.

IMPACT AND ANALYSIS

The concept of One Person Company is new in the Indian law and was quite sought after by the industry.
It provides entrepreneurs an opportunity to set up a company without adding family as members of the company just to fulfill the requirement of minimum two members.
It provides an opportunity to proprietorships, particularly in the SME sector, to organize themselves as a private limited company and thus limit their liability to the share capital invested in the company.
Structured as an OPC instead of a proprietorship, the entrepreneur can have better access to banking finance.
There is no provision in the new Act for converting an existing private limited company registered under the Companies Act 1956 or any previous company law into a one person company.
Physical presence of directors and member of the OPC is not compulsory for meetings of the board or members. The flexibility to participate through virtual presence will help increase operational efficiencies.
Conversion of SME into OPC will help the government capture quality data about the sector and form policies accordingly.
Since foreign companies prefer to do business with registered entities such as private or public limited company, the introduction of OPC will help increase international trade with India.

CHALLENGES
If supporting legislations do not recognize OPC as an entity, the entity as a form may see some regulatory and compliance hurdle for the time they are not amended which might dent the initial euphoria .

GLOBAL PRACTICE
USA, many European countries and Singapore are among nations that allow the entrepreneurs to structure their business as One Person Company. China too allows creation of OPCs.

SALIENT FEATURES OF THE NEW LAW
‘One Person Company’ is defined as a company that has only one person as member. Such company may be formed for any lawful purpose as a private company by subscribing the name of one person to a memorandum and complying with the requirements of the law in respect of registration. The draft rules prescribe that the person eligible for incorporating OPC and a nominee thereof shall be a natural person who is an Indian citizen and resident in India. The term Resident in India has been also been defined in the Rules.

The memorandum of OPC shall indicate the name of another person, with his prior written consent in the draft Form No. 2.2, who shall, in the event of the subscriber‘s death or incapacity to contract become the member of the company. The written consent of such person shall also be filed with the Registrar of Companies (“Registrar”) at the time of incorporation along with the Memorandum and Articles.

The nominee may withdraw his consent to act as such by giving notice to the sole member and to the One Person Company. In such condition as per the draft rules, some. other person shall be nominated by the sole member within 15 days of the receipt of notice of withdrawal and intimate the same to the company. The company shall, within 30 days of that receipt, file with the Registrar, a notice of such withdrawal and intimation of name of another person appointed as such.. The name of such other person may be changed by the member at any time by giving notice.

The name of an OPC shall have the words “One Person Company” mentioned in brackets below the name of such company, wherever its name is printed, affixed or engraved.

In case of an OPC, any business that is usually required to be transacted through an ordinary or special resolution at an annual general meeting or other general meeting of a company, shall be done by passing a resolution that is communicated by the member to the company and entered in the minutes book required to be maintained under law.

The report of the board of directors to be attached to the financial statement of an OPC shall mean a report containing explanations or comments by the board on every qualification, reservation or adverse remark or disclaimer made by the auditor in his report.

The Draft Rules provide that the One Person Company shall cease to act as such if its paid up share capital exceeds Rs 50 lakhs or its average annual turnover during the relevant period exceeds Rs 2 crore and within 6 months of such increase One Person Company shall be required to convert itself into either a private company with minimum of 2 members and 2 directors or a public company with minimum of 7 members and 3 directors in accordance with the provisions of the Act and alter its articles and memorandum to incorporate necessary changes.

OPC under the existing Law there is no provisions in the Companies Act, 1956 on One Person Company.
Below is a detailed comparison between the following

Company VS LLP VS One Person Company

Category	Company as per the Companies Act 1956	LLP as per the LLP Act of 2008	One person company as per The Companies Act 2013
Prevailing Law	The Companies Act, 1956	The Limited Liability Partnership Act, 2008 and various Rules made there under	The Companies Act, 2013
Registration	Registration with Registrar of Companies required	Registration with Registrar of LLP required	Registration with Registrar of Companies required
Distinct entity	Is a separate legal entity under The Companies Act, 1956	Is a separate legal entity under The Limited Liability Partnership Act, 2008	Would be a separate legal entity
Name of Entity	Name to contain 'Limited' in case of public company or 'Private Limited' in case of private company as suffix.	Name to contain 'Limited Liability Partnership' or 'LLP' as suffix.	Name to contain 'Private Limited' as suffix and also use the word “One Person Company” under its name.
Cost of Formation	Minimum statutory fee for incorporation of a private company is Rs.6,000 and minimum statutory fee for incorporation of public company is Rs. 19,000	Minimum cost of forming an LLP is Rs. 800 only	Yet to be prescribed
Perpetual Succession	It has perpetual succession and members may come and go	It has perpetual succession and partners may come and go	It has perpetual succession and member may appoint a nominee at the time of formation, who will be owner of such company after his death
Charter Document	Memorandum and Article of Association defines the scope of a company’s operation	LLP Agreement defines the scope of operation and rights and duties of the partners vis-à-vis LLP	Memorandum and Article of Association will be the charter documents
Common Seal	It denotes the signature of the company and every company shall have its own common seal	It denotes the signature and an LLP may have its own common seal, depending on the terms of the Agreement	It denotes the signature of the company and every company shall have its own common seal
Formalities of Incorporation	Various e-forms along with the Memorandum & Articles of Association are to be filed with Registrar of Companies with prescribed fees	Various e-forms and the LLP Agreement are to be filed with the Registrar of LLP along with the prescribed fee	Similar to Company though e-forms are yet to be notified
Legal Proceedings	A company is a legal entity that can sue and be sued	A LLP is a legal entity that can sue and be sued	An OPC will be a legal entity that can sue and be sued
Foreign Participation	Foreign nationals can be a member in a company	Foreign nationals can be a partner in a LLP	Foreign nationals can be a member in a company; however one of resident director has to be appointed
Number of Members	2 to 50 members in case of private company and minimum 7 members in case of public company	Minimum 2 partners and no limit on maximum number of partners	Only 1 member
Ownership of Assets	A company, independent of its members, has ownership of assets	An LLP, independent of the partners, has ownership of assets	A company, independent of the members, has ownership of assets
Rights / Duties / obligation of the Partners / Managing Partners / Directors	Rights / duties / obligation of the directors are governed by the Articles of Association and resolution passed by shareholders or directors	Rights / duties / obligation of the partners are governed by the LLP Agreement	Rights / duties / obligation of the directors are governed by the Articles of Association and resolution passed by shareholders or directors
Liability of Partners/Members	Generally limited to the amount required to be paid up on each share	Limited, to the extent their contribution towards the LLP, except in case of intentional fraud or wrongful act of omission or commission by the partner	Generally limited to the amount required to be paid up on each share
Tax Liability	Income of the company is taxed at a flat rate of 30% plus cess/surcharge as applicable	Income of the LLP is taxed at a flat rate of 30% plus education cess as applicable	Tax rate not yet notified
Principal/Agent Relationship	Directors act as agents of the company and not of the members	Partners act as agents of the LLP and not of the other partners	Directors act as agents of the company and not of the member
Transfer / Inheritance of Rights	Ownership is easily transferable	Regulations relating to transfer are governed by the LLP Agreement	Ownership can be transferred by appointing a nominee, who can be changed anytime by the member
Transfer of Share / Partnership rights in case of death	In case of death of a member, shares are transmitted to the legal heirs	In case of death of a partner, the legal heirs have the right to get the refund of the capital contribution plus share in accumulated profits, if any. Legal heirs will not become partners	In case of death of a member or in case of incapacity to contract, shares will be transmitted to the nominee
Director Identification Number(DIN)	Each director is required to have a Director Identification Number before being appointed as a director of any company	Each designated partners is required to have a DPIN before being appointed as designated partner of LLP	Each director is required to have a Director Identification Number before being appointed as a director of any company
Dissolution	Voluntary or by order of National Company Law Tribunal	Voluntary or by order of National Company Law Tribunal	Voluntary or by order of National Company Law Tribunal
Transferability of Interest	A member can freely transfer his interest	A partner can transfer his interest subject to the LLP Agreement	Member can freely transfer his interest to a nominee
Admission as partner / member	A person can become member by buying shares of a company	A person can be admitted as a partner as per the LLP Agreement	No new members allowed
Cessation as partner / member	A member/ shareholder can cease to be a member by selling his shares	A person can cease to be a partner as per the LLP Agreement or in absence of the same by giving 30 days prior notice to the LLP	Cessation only by way of transferring the shares to nominee
Requirement of Managerial Personnel for day to day administration	Directors are appointed to manage the business and other statutory compliances on behalf of the members	Designated partners are responsible for managing day to day business and other statutory compliances	Directors are appointed to manage the business and other statutory compliances on behalf of the members
Statutory Meetings	Board meetings once a quarter and annual general meetings are required to conducted	No provision regarding holding of any meeting	Board meetings once every half year and annual general meetings are required to be conducted by way of maintaining minutes. Physical meeting is not required
Maintenance of Minutes	The proceedings of meeting of the board of directors/ shareholders are required to be recorded in minutes	A LLP by agreement may decide to record the proceedings of meetings of the partners/designated partners	The proceedings of meeting of the board of directors are required to be recorded in minutes
Voting Rights	Voting rights are decided as per the number of shares held by the member	Voting rights shall be as decided as per the terms of LLP Agreement	One Person who is the member will have 100% voting rights
Remuneration of Managerial Personnel for day to day administration	Company can pay remuneration to its directors subject to law	Remuneration to partner will depend upon LLP Agreement	Company can pay remuneration to its directors subject to law
Contracts with Partners/Director	Restrictions on board regarding some specified contracts, in which directors are interested	Partners are free to enter into any contract	Restrictions on board regarding some specified contracts, in which directors are interested except where director is also a member
Maintenance of Statutory Records	Required to maintain books of accounts, statutory registers, minutes etc	Required to maintain books of accounts	Required to maintain books of accounts, statutory registers, minutes etc
Annual Filing	Annual financial statement and annual return are to be filed with the Registrar of Companies every year	Annual statement of accounts and Solvency & annual return is required to be filed with Registrar of LLP every year	Annual financial statement and annual return are required to be filed with the Registrar of Companies every year
Share Certificate	Share Certificates are proof of ownership of shares held by the members in the company	The ownership of the partners in the firm is evidenced by LLP Agreement	Share Certificates are proof of ownership of shares held
Audit of accounts	Companies are required to get their accounts audited annually as per the provisions of the Companies Act, 1956,	All LLP except for those having turnover less than Rs.40 lakh or Rs.25 lakh contribution in any financial year are required to get their accounts audited annually as per the provisions of LLP Act 2008.	Such companies will be required to get their accounts audited
Applicability of Accounting Standards.	Companies have to mandatorily comply with accounting standards	The necessary rules regarding application of accounting standards are not yet issued	Companies to mandatorily comply with accounting standards and principles. No Cash Flow statement required
Compromise/ arrangements/ merger/ amalgamation	Companies can enter into compromise/ arrangements/ merger/ amalgamation	LLP’s can enter into compromise/ arrangements/ merger/ amalgamation	Company can enter into compromise / arrangements /merger/ amalgamation

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