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There are several processes in which a business entity can organize itself. It is purely a matter of choice for people who intend to open a business as to which form they invest in. The decision is based on the type of industry, amount of capital available, the number of people interested in the business, etc. One form of organization of one’s business is through a system of a One Person Company (to be abbreviated as OPC in the article). The concept of OPC is new and was introduced in the year 2013 only. The essential feature of an OPC, as is apparent from the name, is that consists of only one person. When the majority of the shares in a company are held by one person and he has the entire control of the management of affairs of the company in his hands, it generally is an OPC. Previously, when the concept of OPC did not exist, if a person wanted to open a business on his own, he could do so through sole proprietorship which was not very conducive as the business and the person were not considered as separate legal entities, thereby denying them such benefits that are attributed to a company by law. As a response to this, the concept of OPC was introduced where a company could consist of just one person, majorly yet it shall entail all major benefits that the law provides to the companies, mainly the feature of limited liability which is the principal attraction for companies.
An OPC is an ideal form of investment for any person who intends to open a business by himself, and wishes to keep all the effective control in his own hands, yet aspires that his business operations be covered within the corporate framework. It is extremely conducive for the increasing start-up culture in the country. It protects people with limited resources while bringing them in the ambit of corporate framework i.e. securing better rights of all related parties. For all these reasons, OPC becomes an increasingly preferred option these days. This article discusses in detail about OPCs and their special feature of limited liability in detail.
One Person Company
The term One Person Company is defined in the Companies Act, 2013 (hereinafter referred as “the Act”) under Section 2(62) to mean a company that has only one person as its member. The members, during the incorporation, are nothing but the subscribers to the Memorandum of Association (hereinafter referred as “MoA”) of a company. Therefore, in an OPC, there is only one subscriber to the MoA of the company i.e. only one shareholder as the member in such a company.
The most important feature of an OPC is that it is a company. Even though there is only one member, he enjoys all the privileges and protection which the law provides to the members of a company. OPC is a separate entity, distinct from the member. It enjoys the right to perpetual succession under a common seal. It also can sue or be sued in the name of the company i.e. it is at par with the rights and privileges enjoyed by a company with multiple members. An important aspect here is the concept of “limited liability”. The member of an OPC, who is the only member, has a limited liability which provides protection to assets and liabilities of the person. The member is not liable to repay the debts of the company beyond the sum pledged by him.
Features of One Person Company
The following are the main features of an OPC-
- As per Section 3(1)(c) of the Act, the company formed by a single person can only be a private company, which can be formed for any lawful purpose.
- OPC can only have one shareholder or member, unlike other private companies which can have multiple shareholders.
- OPC has to necessarily nominate a nominee for the company while registering the MoA with the registrar of companies. It becomes imperative because such a company has only one member and any untoward happening shall leave the company unstructured.
- The concept of perpetual succession will not come into picture if the person who has been nominated in the MoA declines to become a member of OPC on the death of the member.
- The OPCs need to have a minimum of one director, which is in contrast to public and private companies for which the requirement is 3 and 2 directors respectively. However, they may appoint a maximum of 15 directors, just like other companies.
- There is no prescribed limit for minimum paid-up share capital for OPCs as per the Act.
The above mentioned are the characteristic features of the company. The features may not be unique but are a culmination of features from different other forms. This combination of most relevant features in one group is what makes an OPC the preferential option among the corporates these days.
Only natural persons, who are citizens and residents of India, are eligible to form a One Person Company. The nominee of the company shall also be a citizen and resident. One person can only be a member or nominee of only one company at a time. Minors also are ineligible to be the members and nominees in a company. Further, a company cannot be a member of a nominee in an OPC, only a natural person can.
An OPC is formed when a person subscribes to the MoA of association of a company by fulfilling the requirements as prescribed by the Act. The MoA of the company must provide for a nominee of the company who shall become the member if the member dies or becomes incapable of entering into contractual relations. The consent of the nominee for filing of nomination shall be filed with the registrar. Such consent can be revoked by the nominee at any time by submitting an application in that regard with the registrar.
Once an One Person Company is formed and registered; it cannot be converted voluntarily into any other form for a period of two years from incorporation. Further, a company which has been formed for charitable objects cannot be converted into any other type, public or private, as per the provision of Section 8 of the Act. There is an embargo from conversion to ensure that this feature is not used to cure a temporary deficiency in company norms. This provides protection to the legislative intent behind bringing up provisions for an OPC in the Act.
Benefits of an One Person Company
The OPCs enjoy many benefits under the Act:
- They are not bound to hold annual general meetings as in case of all other companies.
- The financial statements of the OPC need not include cash flow statements.
- There is no requirement for a company secretary to sign annual returns of an OPC. It can sufficiently be done by the director himself.
- There is no requirement to have an independent director for the OPCs.
- The provisions for quorum of meetings are also not applicable in the OPCs.
- It is easier for an OPC to gather its funding. It can raise funds through venture capitals, financial institutions, angel investors, etc. It, therefore, becomes an equivalent to a private company for the matter of investment.
- Since there is only one person who is making the decisions, controlling the affairs and managing the business, the decisions are taken speedily. The process becomes more flexible and beneficial to all stakeholders.
- An OPC gets the benefits of tax deductions just like other companies. One major benefit of an OPC in comparison with a sole proprietorship is the tax benefit that an OPC gets but a sole proprietorship doesn’t.
- Furthermore, as it gets the tag of a company, it automatically gains the trust and prestige associated with it.
Limited Liability in A One Person Company
The evolution of one-person company is based on combining two types of business objects, the concept of sole proprietorship in the limited liability form. The concept of limited liability and sole proprietorship are firstly explained for the ease of understanding the exact character of an OPC.
- LIMITED LIABILITY- As the term apparently states, it means that the financial liability of the investor is limited to the extent of the fixed amount that he has invested in the company. In other words, an individual cannot be made personally liable for the debts, losses or liabilities of a company. The matter of liability generally comes up during the winding up of the company. In case of a Limited Liability Company, the liability of an investor shall only be up until the realization of the amount unpaid by him on the pre-agreed contribution for the shares of the company. It is in contrast to the liability of sole proprietors and general partnerships where the liability of the office bearers is unlimited i.e. their personal assets may be attached for the losses and debts of the company. This becomes beneficial when the company starts incurring massive losses, irrespective of the liability on the company, the shareholders can only be asked to pay only the amount unpaid on the value of shares held by them. This provides protection to the personal assets of the person investing in a company. This privilege has majorly contributed to the growth of investments in companies.
This is in contrast to the concept of unlimited liability which refers to a business model where the obligations of the member, financial and legal, are unlimited. It means that the members (sole proprietor, partners or the shareholders) make themselves personally liable for the losses of the business. If there is any liability which cannot be relieved by the business, personal assets of members can be used for relieving such liability. Here, the owners of the business are fully liable for all business actions, jointly and severally. It is a private form of organization and an unlimited liability company cannot be public in nature. Here, the entity is not taxed separately thereby having one benefit.
The credibility of an unlimited liability company is on a greater level, which seems like one of the major highs of the model but it is generally not conducive for occasional investors. The reduced risk factor in the limited liability concept is a reason for its tremendous growth in the recent past.
- SOLE PROPRIETORSHIP- It is the simplest form of existence for a business entity. It has a single owner. The person just needs to get a social security number or the necessary permit/license, if any before commencing the business. It is economical and preferred for small businesses. Since there is only one person conducting the business, the law makes no distinction between the individual and the business.A sole proprietor operates the form of an organization which includes a single business entity. In this medium, the business and the individual running it are one and the same legal persons.
It exists in contrast to various other forms of business formations. One example is a partnership, which comes into existence with an agreement between two or more people to operate business collectively on the terms and conditions as agreed via the agreement. It is also a cost-friendly method and convenient for capital generation as more than one person can contribute to capital generation. Even here, the business has no separate existence of its own. Every member is responsible for the losses and liabilities of the company jointly and severally to the extent of full realization. Another example is a company, which shall come into existence if a corporation registers itself under the law. As a company is considered as a separate entity under the law, the members are protected from personal liability beyond the amount of capital paid by them. The ownership here is transferrable like a movable property through stock exchanges.
The evolution of an OPC is a combination of limited liability form and the sole proprietorship mode of operation. An OPC provides the benefits of both of them as the control of the company is held by one person efficiently. In an OPC, one person holds majority shares in a company which makes it a sole proprietorship in essence. To fulfill the statutory requirements in regards to shareholders and directors, a few shares and some lesser important positions are given to other people who also are the family member or close aides of the principal shareholder. Thereby, a company is formed in the legal terminology whereas, in effect, it is a sole proprietary as one person retains the exclusive control over the entire organisation. The specific aspect which differentiates it from a sole proprietor from an OPC is the privilege of limited liability that the OPC holds.
Not only an OPC can have limited liability but it is one of the intrinsic features of an OPC. It is a characteristic which distinguishes it from other types of business entities and makes it unique and preferred option.
Benefits of A Limited Liability Company
The concept of limited liability is gaining significance throughout the corporate systems due to multiple causes. The following are a few of them-
- The companies and the Limited Liability Companies allow an investor to protect one’s personal assets. They enjoy protection against liability from losses of the company or its debts. Therefore, their assets are safe from recovery in case of the company going into losses.
- Even otherwise, the personal liability of any shareholder or an office bearer is extremely restricted. For example, if a company gets into a legal scuffle, the member and officers are protected from being personally involved in their personal capacity in most cases.
- It enjoys a separate legal status differentiated from its members and shareholders. It can sue and be sued in its own name; it is capable of owning and transferring property and funds, etc.
- It has better credibility and faith for customers and the money lenders as their payments and rights are secured through law. It is also an assumption that a company has long term business plans whereas a sole proprietorship or partnership generally is less reliable.
- It also registers your business. This assures that no other person can register a same or a deceptively similar name for his business.
- It is beneficial from the viewpoint of tax purposes as well. The companies are allowed more deductions from their profits while calculating the taxable income than any other entity.
- It becomes easy for a Limited Liability Company to raise capital for the business. Since a Limited Liability Company is more reliable, it becomes easier for the company to raise funds through various means.
- It does not die with the death of the owner, rather has a perpetual existence under a common seal, of the company.
- The shares of a company are considered as movable property as per the law and can be transferred from one person to another.
- The laws for Companies and Limited Liability Companies are stringent and more comprehensive. It, therefore, provides for an opportunity of transparency in working, good governance internally thus benefitting all the stakeholders.
Impact in India
The concept of OPC is not very old in the Indian corporate scenario. The law for the establishment of an OPC was brought only in the year 2013 with the Act as has been already mentioned. Therefore, the process is still new and will take time to grow and prosper in the Indian set-up.
In a country like India where small businesses like weavers, artisans, traders, shopkeepers, etc. are the ones who actually run the economy. Our economy is sustained by these midlevel entrepreneurs, because of which, the future of OPC seems bright in a setup like India.
For investors from foreign, the concept of OPC is more suitable as they will have to deal with one person only, in this case, which makes it easier than having to deal with a company with multiple shareholders. Also, the process of investment gets easier in this system as it cuts down on the formalities when an investment is proposed in an OPC.
With time, the OPCs are expected to grow in India with the rise of entrepreneur and start-up culture. The set-up of the new business models like a start-up is more suitable in the form of OPCs. It provides convenience for a person wishing to start a specialized business in the service sector. For the facts mentioned above, OPCs have been successful in the country till today and better results are expected with the coming time.
OPC is a business model, which has been established recently. It is similar to various other models on different aspects but has certain characteristics which make it unique. Such features also make it the preferred mode of investment for people after it was recently brought into the Indian Corporate scenario in the year 2013. This model is preferred over other business models because of various reasons. Like, an OPC is similar to a sole proprietorship. Both have similar advantages, but, to the disadvantage of sole proprietorship, it entails unlimited liability whereas in an OPC the liability is limited. The concept allows a single person to establish a company which provides a platform to multiple entrepreneurs to establish a company of their own. An OPC does not have to go through the technicalities of a company in general, yet it can entail the best advantage of a company, which makes it the most preferred choice. It will promote the inclusion of small businesses within the corporate walls. In a country like India, with minimal regulations on non-organised businesses, exploitation of labour at its peak and highway for tax evasion, it becomes imperative to bring as many areas under the garb of organised business as possible. It reduces the chances of frauds, misrepresentation, and deficiency in the services as well. The special feature of an OPC i.e. the limited liability clause is a reason why new investors are diverting their resources in this set-up. In very little time, OPCs have become significant in the Indian economy which is tremendous and a praiseworthy growth.
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