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One Person Company

The new Companies Act has created an entirely new business structure - One Person Company (OPC). An OPC has only one member and can be fully functional with a minimum of one director. An OPC will essentially have the characteristics of a private limited company, but with lesser compliance requirement.  Although, the OPC model is a new concept in India, it has been working successfully in developed nations since a long time.


Traditionally, any for-profit business form other than a sole proprietorship requires more than one member. Similarly, a private company also requires at least two members. In such situations, how did single founders or promoters start a company? There is a simple workaround which was used by founders / promoters – the company would typically issue one share to a relative of the promoter (for example, their father, mother spouse, etc.) so that the minimum requirement of two persons was satisfied. Having additional shareholders with nominal shares did not impact the business commercially.

If it is possible to effectively structure a business as a company, despite one person holding almost all the shares (barring a nominal amount of shares), what is the practical utility of a one person company?  In the absence of any other choice, some promoters included another person holding a handful of shares (or even one share) to satisfy the minimum number of shareholders. However, they still had to comply with all the procedural and governance requirements under the Companies Act, which are relatively very relaxed for an OPC (see below).
There were still other businesses which continued to run as sole proprietorships. The provision of OPC in the Companies Act is expected to cater to the much-awaited needs of solo entrepreneurs who generally face the problem of unlimited liability in the event of incurring losses while doing business as a sole proprietor (an OPC still has limited liability). OPC encourages individual establishments to grow more as an organized business with the benefit of limited liability. In case a sole proprietor fails to satisfy the obligations of the business towards outsiders, his personal assets can be used. However, in case of an OPC there is separation of personal assets from those of the business – the shareholder will only at risk of losing his capital that he invested in the business.
How does a one person company conduct business or take corporate action?

Since a company is a legal entity, its decisions need relevant internal authorizations. Typically companies may act through a director (if the director is authorized by the board), board decisions or shareholder decisions. Decisions of the board or the shareholders are taken at respective shareholder or board meetings.
Certain work or actions of the company may also be taken by specific committees of the board of directors – for example, the Compensation Committee may be closely involved in the creation of stock option policies.

How are these processes managed in the case of a one person company?
Since it has only one shareholder, a one person company is exempted from holding shareholder meetings.
Similarly, if it has only one director, it will be exempted from the requirement of holding board meetings as well. How should it pass resolutions? It must directly enter resolutions in the minutes-book, which must be signed and dated by the sole director (who may be the member himself), which will be considered to be the date of the board resolution or the decision of the OPC.

In case it has more than one director, it must hold one board meeting every 6 months (calculated from the calendar year), and the gap between the two meetings must be at least 90 days.
For example, the first meeting for the year 2015 must be held between 1st January 2013 to 30th June 2015 and the second meeting must be held between 1st July 2015 to 31st December 2015. There must be a gap of at least 90 days between two meetings – therefore, a meeting cannot be held on 1st July 2015 if the previous meeting was held on 1st May 2015, because the gap between the two is less than 90 days.
Financial Statements

Normally, financial statements must be approved by the board of directors, and signed by any of the following:
  • the chairperson of the board alone (if he is authorized by the board) or
  • two directors, of which one should be the managing director  and CEO (if the CEO is also a director), the CFO and the CS (where they are appointed).
An OPC however does not have to follow these requirements – irrespective of the number of its directors its financial statements can be signed by only one director.
Further, the financial statements have to be duly filed with the Registrar by the member of the OPC with all the necessary documents within 3 months of closure of financial year.  However, cash-flow statements are not a mandatory part of financial statements for an OPC.
The annual return of an OPC has to be signed by a Company Secretary. In his absence, it may be signed by the Director as per Section 92 of the Act.
Related party transactions in respect of an OPC

If an OPC enters into a contract with its shareholder (which is an unusual contract and not in the ordinary course of business), it must record the details of the contract into a memorandum (if the shareholder is also the sole director), or in the minutes of the next board meeting (in case there are multiple directors). Further, it shall also inform the Registrar of Companies (ROC) about the contract within 15 days from the date of approval by the board.
A one person company is not required to hold shareholder meetings.

Since it has only one shareholder, the provisions related to shareholder meetings and methods of voting, appointment of proxies, appointment of chairman are not applicable to the OPC.

The provisions from which OPCs are exempted are listed down below:
(a) Section 98: Power of Tribunal to call meetings of members, etc.
(b) Section 100: Calling of extraordinary general meeting
(c) Section 101: Notice of meeting
(d) Section 102: Statement to be annexed to notice
(e) Section 103: Quorum for meetings
(f) Section 104: Chairman of meetings
(g) Section 105: Proxies
(h) Section 106: Restriction on voting rights
(i) Section 107: Voting by show of hands
(j) Section 108: Voting through electronic means
(k) Section 109: Demand for poll
(l) Section 110: Postal ballot
(m) Section 111: Circulation of members’ resolution
Disadvantages of an OPC structure

An OPC can have the following disadvantages: 
  1. An investor may be uncomfortable to invest in the company because he does not have the opportunity to become a member of the company, unless it converts. Theoretically, it is possible for an investor to obtain a seat at the board of directors (since an OPC can have anywhere between 1 – 15 directors), and safeguard his investment by suitably amending the articles of association. However, since the structure is new and untested, investors may hesitate to invest in OPCs and instead require promoters to convert into a private company. This may be achieved by including the conversion into a private limited company as a ‘condition precedent’ to the investment transaction.
  2. Limitations with respect to administration of employee incentives – Companies look to compensate advisors and employees by offering equity in a number of ways. For example, advisors are typically issued sweat equity for their services. Similarly, employee stock option plans (ESOPs) are a powerful way of incentivising employees. Since an OPC cannot have more than one shareholder (who is typically going to be the promoter), it will not be possible to issue sweat equity (since these are shares) or administer ESOP plans (because shares cannot be issued if an option is exercised). Stock option plans may be implementable if the OPC has a plan to convert into a private limited company.
  3. An OPC is taxed in the same way as any other company – hence, it is taxed on income as well as distribution of profits. It does not have the tax advantages of an LLP, which is only taxed on income and not on distribution of profits (see the chapter comparing an LLP with a company for more details on this).
Points to remember before incorporating an OPC
1) An OPC can be established as a private limited company:
a) Company capital of one lakh rupees, or,
b) a company limited by guarantee
2) An OPC may be formed only by a natural person who is an Indian citizen and resident of India and above the age of 18. That essentially means that any public company or a private company or a foreigner cannot incorporate an OPC.
3) To incorporate an OPC, the person must be a resident of India, i.e., he must be residing in India for not less than one hundred and eighty two days in the preceding financial year. An Indian citizen who is abroad for various reasons and does not satisfy the criterion of being a ‘resident’ cannot start an OPC.
4) An individual cannot start more than one OPC.  If one individual wants to commence multiple businesses, he will have to park them in the same OPC or park one of the businesses into another business entity,
5)   The Memorandum of Association of the OPC must mandatorily name a person as a nominee who holds the authority to run the business in the event of subscriber’s death.
6) An OPC cannot carry on business of non-banking financial investment activities.
Is it possible for the shareholder to exit from the OPC?

There is no express provision prohibiting transfer of shares of an OPC.  An OPC is akin to a private limited company. Shares of a private limited company can be transferred if permitted by the memorandum, so long as there are restrictions imposed on the transfer (if no restrictions are imposed on transferability then the company becomes akin to a public company).
Theoretically, it is possible for the member to sell his share to another member (assuming the memorandum has a process that allows transfers). Typically, private companies require incoming shareholders to sign a deed of accession which states that they agree to the terms of the new memorandum. 
At a practical level, exits may be difficult because the buyer typically requires the promoter to be involved with the business. As a promoter, the shareholder will have to completely exit from the company – since by definition, one member holds all the shares (or nothing) in an OPC.
One way to get around this problem could be to engage the outgoing member as an employee during a transition period.
Appointment of a nominee is mandatory

1) A person who is already a member of another OPC can be a nominee for another OPC, but if he becomes a member of the other OPC as well due to death or incapacity of its original member, he will have to choose and leave the membership of one of the companies within a period of 180 days.

2)  The nominee may withdraw his consent at any point in time by giving a notice in writing to the sole member and the OPC .  In that case, it is the responsibility of the sole member to nominate another person within 15 days of receipt of the notice, in Form no INC 3.

3)  The OPC has to intimate such alteration of withdrawal of consent of the nominee as well as the nomination of the new person within thirty days of receipt of the withdrawal notice to the Registrar of Companies in Form No INC 4.

4)   If the sole member of the OPC becomes incapable to contract due to death, the nominee gets the authority to run the company. Further, the new member has to nominate another person as the nominee with his prior written consent that has to be filed with the Registrar of Companies.


Note that a nominee for an OPC is very different from the nominee of a bank account – in case of death of the holder of a bank account, the bank’s responsibility will be limited to transfer control of the account to the nominee. The successors (or the beneficiary under a will, where applicable) of the owner will have to claim their share from the nominee. In case of an OPC, the nominee becomes the member of the OPC - all the rights, responsibilities and economic benefits are transferred to the nominee. While there is no court decision on this, it appears to be fairly clear that this principle excludes the applicability of succession laws.


Differences between an OPC and sole proprietorship
Here’s a quick ready reckoner:
  1. An OPC has a separate legal status as provided by the Companies Act, 2013 although it is operated by only one person. On the other hand, a sole proprietorship is not treated as separate from the personal status of the proprietor.
  2. An OPC has the benefit of limited liability, unlike a sole proprietorship.
  3. An OPC requires a minimum of INR 1 lakh paid-up capital, whereas there is no minimum capital requirement for starting a proprietorship business.
  4. In case of an OPC corporate income tax (at 30 percent plus surcharge) will be payable, regardless of income-tax slabs, while in case of sole proprietorship the proprietor will have to pay income tax as per the personal income tax slab rates. This can cause significant savings for a proprietor. For example, income of INR 300,000 will be taxed at INR 90,000 if corporate income tax rate is applied. However, if the personal income tax slab is INR 2,00,000 and the tax rate between income of INR 2,00,000 to 5,00,000 is 10 percent (the tax rate escalates progressively), tax of INR 10,000 will only be payable (i.e. 10 percent of (INR 3,00,000 – INR 2,00,000), which is a significant saving.
  5. An OPC must meet the minimum compliances required under the Companies Act, 2013 however, there is no such requirement for a sole-proprietorship.
  6. There can be practical issues with respect to succession to a sole proprietorship business (e.g. in case of death of the proprietor) is possible through execution of a will by the proprietor; however in case of an OPC the member can nominate a nominee who will succeed the business in case of death of the member.
  7. An OPC will be required to conduct an audit in all cases under the Companies Act, whereas a sole proprietorship will only be required to conduct an audit under the Income Tax Act if turnover in a particular year exceeds INR 1 crore (or in case of a professional, if total revenues exceed INR 25 lakhs).
Conversion of OPC into a public company or private company
The policy behind allowing OPCs is to encourage the growth of small businesses – once the business attains a certain size (the Companies Act 2013 provides certain thresholds which trigger the requirement to convert), it is expected to convert into a private or public company within a time limit (see below). Voluntary conversion of OPC into a public or a private company is possible only after 2 years of its incorporation.
The thresholds are as below:
  • If the paid up share capital of an OPC exceeds INR 50 lakh or
  • the average annual turnover exceeds INR 2 crore during previous three consecutive financial years.
The maximum time limit for conversion once the above thresholds are triggered is within 6 months of:
i)  the date on which it’s paid up shares exceeds INR 50 lakh or
ii) last day of the third financial year, when its average annual turnover exceeds INR 2 crores.

 [T1]Special procedure allowed under Section 122 (3)
 [T2]Both sole member and OPC
 [T3]Checked corrected
Annex 1: Steps for conversion of an OPC into a private or public limited company
Note: Increase the number of members to 2 for conversion into a private company and 7 members for a public company. Similarly, the number of directors must be increased to 2 for conversion into a private company and 3 members for a public company.
  1. The decision to convert an OPC into a private limited company may be recorded in the minutes book.
  2. The memorandum and articles of association need to be amended in the following manner:
  • The expression ‘One Person Company’ at the end of the name of the company need to be substituted with ‘Private Limited’ or ‘Limited’.
  • For a private limited company, capital clause needs to be altered if the authorized capital is proposed to be increased. For a public company, alteration is mandatory if the authorized capital is less than INR 5,00,000 (OPC can be started with INR 1,00,000 authorized capital). The alteration must increase authorized capital to INR 5,00,000.
  • Objects clause can be modified in case the objectives of the converted business will be different or additional objectives need to be added.
  • The subscribers clause needs to altered to accommodate new members as signatories to the memorandum.
  1. The OPC has to notify to the Registrar in Form No. INC 5 within 30 days that it has ceased to be an OPC and has to convert itself into a private or public company as its paid up share capital and average annual turnover has crossed the threshold limit.
  2. The Registrar will issue a fresh certificate of incorporation.
Annex 2: Steps involved in incorporation of an OPC

Step 1: The sole member must obtain a Director Identification Number (DIN) along with a digital signature certificate.
Step 2:  An application must be made to the Registrar of Companies for reservation of name of the company in Form No INC 1. 
Step 3: Application for incorporation has to be filed in Form No INC 2. (Please note that the form number is different for other companies).
Step 4: The name of the nominee should be inserted only after obtaining his written consent in Form no INC 3 along with requisite fee.
Step 5: The MoA and Articles of Association of the OPC have to be filed with the Registrar of Companies. The MoA must mention the name of the nominee of the OPC and the nomination in Form No INC 2.
Note: The word “One Person Company” must be written in brackets after the name of the company.
Step 6: The Director(s) of the OPC must file their details, interest in other firms or bodies and their consent to act as the director in Form No. DIR 12.
Step 7: The Certificate of Incorporation will be issued by the Registrar in Form No. INC11.
Step 8: The Director must file a declaration in Form No. INC 21 along with requisite fee and shall be verified by a Company Secretary or a Chartered Accountant or a Cost Accountant in practice.
Step 9: The OPC must file Form No INC 22 (for verification of registered office) along which will state necessary proof of ownership/lease/rent of the office before commencement of business.

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