ONE PERSON COMPANY: CONCEPT, ISSUES AND SUGGESTIONS

1
Dr. Vipan Kumar

Introduction

2
One Person Company (OPC) is a company which has only one person as a member. The
​
Companies Act, 2013 enables formation of OPC by providing that a company may be formed by
one person by subscribing his name to the memorandum and complying with the provisions of
3
this Act. The OPC is a newly added business structure in the already existing family of sole
proprietorships, partnerships, limited liability partnerships etc. etc. Historically speaking, there
was no statutory recognition of structures like OPC, however, in practice, their existence cannot
4
be ruled out. The cases involving wholly owned subsidiaries and ​Salomon v. ​Salomon speak a
volume about the existence of companies where only one entity or individual have nearly the
complete control over the company. This control is much more than a simple majority or special
majority control which is almost near to the control of a single member over OPC. The OPC in
Indian scenario has many issues and challenges. This article deals with legal framework of OPC
and the issues which have arisen in respect to OPC. Lastly, some suggestions have been made to
make the structure of OPC effective and efficient.

History Of OPC

5
The roots of OPC can be traced in the report submitted by J J Irani Committee. This committee
highlighted that with the emergence of service sector and increasing use of information
technology and computers the entrepreneurial capabilities of people should be given a vent for

1
Assistant Professor of Law, Rajiv Gandhi National University of Law, Punjab.
​ 2
Section 2(62) of ​Companies Act, 2013.
​ 3
Section 3(1) (c) of ​Companies Act, 2013.
4
[1897] A.C. 22.
5
Para 6 in Chapter III of ​Report by J​ J Irani Expert Committee on Company Law dated 31 May 2005.

Electronic copy available at: https://ssrn.com/abstract=2877002

 6
participation in economic activities. Thus, the concept was recognized in Companies Bill, 2009
which came after the submission of report by JJ Irani Committee. The Companies Bill, 2009 was
later considered as Companies Bill, 2011. This bill became Companies Act, 2013 after it was
passed by the Parliament. The concept of OPC was given statutory recognition by this Act of
7
2013.

Procedural Aspects Involved in Incorporation of OPC

The OPC being a specific kind of private company can be incorporated as OPC limited by shares
or OPC limited by guarantee or unlimited OPC. The procedural aspect of incorporating OPC is
somewhat similar to incorporation of any other private company except the concepts which are
highlighted hereafter.

The Companies (Incorporation) Rules, 2014 lays down various rules relating to incorporation of
OPC. It lays down that only a natural person, that too, citizen of India and resident of India shall
8
be able to incorporate OPC by subscribing his name to memorandum of association. The
resident in India is a person who has stayed in India for not less than one hundred and eighty two
days in the preceding calendar year. The OPC like any other company carries the characteristic
of perpetual succession, that is, members may come members may go but the company goes on
forever. This feature is present in OPC despite of the fact that there is only one member as
Companies (Incorporation) Rules, 2014 lays down provision for nomination by single member
constituting OPC. The person who is nominated becomes member if in case there is death or
incapacity of the original member. The nominee must be an Indian individual and is required to
give written consent of his nomination. Such consent is required to be filed with the registrar of
9
companies.

​ 6
T. V. Narayanaswamy, “One Person Company - A Legal Fiction”, ​Chartered Secretary, August 2014, pp. 36-38, at
p. 37.
7
Gazette of India, 30 August 2013.
8
Rule 3 of ​Companies (Incorporation) Rules, 2014.
9
Rule 4 of ​Companies (Incorporation) Rules, 2014.

Electronic copy available at: https://ssrn.com/abstract=2877002

The rules permit nomination by the person concerned after serving notice on sole member and
OPC. The sole member is then required to nominate another nominee within fifteen days of the
notice. In cases where nominee becomes member after death or incapacity of the original
member, he is required to nominate another person and intimate of registrar of companies of
such event.

The other formalities which are required to be fulfilled by OPC in the process of incorporation
are having minimum paid capital of rupees one lakh; having registered office; possessing
common seal; inclusion of words ‘OPC’ in the name of such company; and printing of
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company’s name at registered office, letter heads and official documents.

Exemptions, Restrictions and Compliances for OPC

OPC possesses unique exemptions, restrictions and compliance requirements as there is only one
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member in the company. The resolutions are passed by the sole member and communicated to
OPC. They are entered in minute book, signed and dated by the sole member. There is no
requirement of special resolution or simple resolution like other private or public companies.
12
There is no provision for annual general meeting in OPC.

The board of directors in OPC must be constituted with at least one resident director. The
resident director is a person who has stayed in India for one hundred and eighty two or more
days. The provisions relating to woman director and independent director do not apply to OPC.
However, OPC is free to have a woman director or independent director. The directors of OPC
must satisfy provisions relating to qualification of directors. The duties of directors in OPC are
similar to any other company. The provisions relating to additional director and alternative
director apply to OPC as well. The calculation for number of directorships includes directorships

10
Section 7 of the ​Companies Act, 2014.
11
Narendra Singh, “One Person Company: Perquisite, Exemptions And Restrictions”, ​Chartered Secretary, August
2014, pp. 49-52.
12
Section 96 of the ​Companies Act, 2014.
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in OPC.

The OPC is expected to have one meeting of the board in six months or twice in a year. The gap
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between two board meetings should not be less than ninety days. The resolution in board
meeting may be passed by single director. The resolution must be entered in minute book, signed
and dated by single director. The provisions relating to annual return apply to OPC. There shall
15
be sufficient compliance if annual return is signed by a company secretary or director of OPC.

16
The OPC is required to satisfy certain conditions for unwritten contracts with its sole owner.
The terms of an unwritten contract must either be contained in the memorandum of company or
should be recorded in the minute book of the board meeting taking place after such unwritten
contract. The contracts which are in written format or contracts which are entered into by the
company in ordinary course of business are excluded from these requirements. The company is
required to inform the registrar of companies about every contract which has entered into by the
company and recorded in the minutes of board meeting. This information must be furnished
within fifteen days of passing of resolution in board meeting.

There are certain specific restrictions relating to membership or nominee in OPC. Only a natural
person is permitted to be member or nominee in OPC. However, the natural person is not
permitted to be nominee or member in more than one OPC. A minor below the age of eighteen is
restrained from becoming member or nominee in OPC.

In addition to the above mentioned exemptions, restrictions and compliances OPC has some
operational restrictions. OPC cannot be incorporated as section 8 company. Section 8 companies
are the companies formed with charitable or other prescribed purposes. OPC is allowed to have
maximum turnover of rupees two crores. The capital of OPC cannot exceed rupees fifty lakhs.
The violation of these limits compels conversion of OPC into other kinds of companies like

13
Chapter XI of the ​Companies Act, 2014.
14
Section 173 of the ​Companies Act, 2014.
15
Section 92 of the ​Companies Act, 2014.
16
Section 193 of the ​Companies Act, 2014.
private or public company. OPC is not permitted to voluntarily convert itself into other kind of
companies before the expiry of two years from the date of incorporation. The conversion of OPC
into other forms has been further elaborated in next section of this article.

Conversion of OPC and Conversion into OPC

The provisions on conversion can be discussed under two heads. Firstly, OPC may be converted
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into other kinds of companies like private and public companies. Secondly, other kinds of
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companies may be converted into OPC. The OPC can be converted into other kinds of
companies on voluntary or mandatory basis. The mandatory basis of converting OPC arises
when certain specified conditions exists. They are highlighted as follows:

(i) The share capital of OPC exceeds rupees fifty lakhs; or

(ii) The average annual turnover of the relevant period exceeds rupees two crores. Relevant
period means the period of immediately preceding three consecutive financial years.

OPC is required to convert itself into either private or public company within six months of such
event on mandatory basis. Any officer or OPC contravening this provision can be punished with
prescribed fine. OPC is allowed to convert on voluntary basis if a period of two years has elapsed
from the date of its incorporation. There are no other restrictions on conversion of OPC on
voluntary basis.

Once OPC gets converted into private limited or public limited company it has to appoint the
requisite number of directors (2 or 3 as the case may be) and raise its capital to minimum paid up
capital as prescribed in private and public limited companies. The conversion of OPC has to
19
fulfill all other requirements as prescribed by the ​Companies Act, 2013.

17
Rule 6 of the ​Companies (Incorporation) Rules, 2014.
18
Rule 7 of the ​Companies (Incorporation) Rules, 2014.
19
Section 18 of the ​Companies Act, 2014.
A private limited company other than section 8 companies can also be converted into OPC. The
basic requirements which must be fulfilled for such conversion are:

(i) A no objection certificate in writing must be obtained by the private limited company
from its members and creditors;
(ii) A special resolution must be passed in the general meeting after no objection certificate is
obtained;
(iii) The requisite documents must be filed with the registrar of companies to initiate the
process of conversion.

The ​Companies Act, 2013 nowhere prohibits public limited company from conversion into OPC.
However, some authors believe that a public limited company cannot be converted into OPC for
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obvious reasons. It may be noted that when any private or public limited company has to
convert itself into OPC then its total capital should not exceed fifty lakhs and the average
turnover during relevant period should not exceed two crores.

Advantages and Disadvantages of OPC

Broadly speaking, OPC like any other company has a separate legal entity, perpetual succession
21
and limited liability. The sole proprietorship business which provides similar control as that of
OPC lacks all these features. The private limited or public limited company which provides
similar features requires numerous formalities and procedural requirements to be fulfilled.
Therefore, OPC vehicle is most appropriate for small entrepreneurs like weavers, traders,
artisans etc. etc. which want to retain control and enjoy benefits like limited liability.

The owners of OPC enjoy greater flexibility and quick decision making process as compared to
traditional business vehicles e.g. if any business entity wants to enter into a joint venture with

20
K. C. Goel, “One Person Company - A Mixed Blessing”, ​Chartered Secretary, August, 2014, pp. 44-48, at p. 47.
21
Delep Goswami and Anirrud Goswami, “One Person Company – Boon In Pursuit Of Professional Excellence”,
Chartered Secretary, August 2014, pp. 32-35, at p. 33.
OPC then it is just required to lock the deal with sole member of OPC and venture shall begin.
The problem of divergent opinions and dead lock in management of a company is difficult to
occur in case of OPC.

22
K. C. Goel has highlighted that there is a tax benefit available to OPC due to the differential
rate of surcharge on domestic companies as compared to other categories of assessee like
individual, HUF, AOP etc. etc. The surcharge rate on domestic companies including OPC for
income ranging between one crore to ten crores is five percent. The other assessee lying between
the same income brackets are subjected to surcharge at rate of ten percent. He has further
clarified that the indifference point of total income for tax liability purpose is Rs. 128.33 lakhs
including surcharge and cess. However, beyond this total income limit of Rs. 128.33 lakhs the
tax liability would be lower for a domestic company compared with individuals, AOP, BOI,
HUF and artificial juridical persons.

Tax liability cannot be judged only on the basis of surcharge. OPC is subjected to a flat rate of
taxation i.e. 30.9 percent. There is no benefit of slab rate which can be availed by an individual
having sole proprietorship business. The concept of deemed dividend and dividend distribution
tax are also applicable to OPC which may add to the tax liability. The transaction of sole member
of OPC taking loan from OPC when it has distributable profits may be subjected provisions of
deemed dividend. The profits distributed by OPC to its sole member shall also be liable to
dividend distribution tax at rate of 16.995 percent. This tax shall be in addition to 30.9 percent
paid by the OPC on income it has earned.

When OPC is compared with sole proprietorship it has to follow various procedural formalities
like compulsory audit regardless of the turnover, filing of annual return, maintenance of minute
book for meetings etc. etc. The financial statements of OPC are required to be filed within one
hundred and eighty days from the close of financial year with registrar in addition to the income
tax department. It has a regulator in form of registrar of companies which may compel it to

22
K. C. Goel, 2014, at p. 48.
follow certain specified procedures.

International Perspective of OPC

The concept of OPC may be new to India not else ware. OPC is already in existence in other
countries like United Kingdom, Hong Kong, Delaware, China etc. etc. The popular name of OPC
in other parts of the world is single shareholder company. The ​Companies Act, 2006 of United
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Kingdom permits formation of OPC. It provides that a limited company can be formed under
this Act with only one member. The name and address of such member is required to be entered
into register of members with a statement that the company has only one member. There are no
specific restrictions, exemptions or provisions for OPC. The guiding principle for regulating
OPC is contained in section 38. It provides that any enactment or rule or law applicable to
companies formed by two or members shall apply to OPC with necessary modifications.

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The concept of OPC in China was introduced in 2006. The features of OPC in China are
somewhat similar to India with some variations. An individual in China cannot set up more than
one OPC. OPC is not required to hold general meetings. However, the member is required to
enter the decisions taken in minute book. OPC must have a minimum paid capital of RMB one
lakh. The two interesting features of OPC as existent in China are: firstly, OPC can be formed
even by an artificial legal person; and Secondly, the benefit of separate property shall not be
available if the sole member fails to distinguish between own property and company’s property.

The company law of Singapore permits formation of OPC. The concept of OPC was introduced
by ​Companies (Amendment) Act, 2004 in Singapore. Singapore law permits sole member of OPC
to be a natural or artificial person. However, this law requires that director of all companies must
be a national of Singapore.

23
Section 123 of ​Companies Act, 2006 (United Kingdom).
24
Vinod Kothari and Nivedita Shankar, “One Person Companies: Indian Law In A Global Perspective”, ​Chartered
Secretary, August 2014, pp. 18-22, at p. 20.
The ​Limited Liability Company Act of Delaware permits incorporation of OPC with some
striking features. The sole member of OPC is permitted to execute limited liability company
agreement on his own. Such agreement is not permitted to be questioned on grounds that there is
only one party to the agreement. The sole owner of OPC has been given an option to treat OPC
as transparent entity for tax matters. The sole owner can reflect the income of OPC in his own
return. Delaware permits non living legal persons to incorporate OPC.

Comparison between OPC and Other Business Vehicles

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T. Ramappa has seriously doubted the need for having an additional business vehicle of OPC.
He alleges that there was no indication as to why it was determined that it was necessary to
provide for OPC. Be it as it may, a comparative analysis between OPC and other business
vehicles may be useful in throwing some light over the relevancy and need of OPC. The
comparison is made here under:

Sole Proprietorship One Person Company Limited Liability Private and

Partnership Public Companies
1. Legislative and Regulatory Framework
-No regulatory -Registrar of companies -Registrar of -Registrar of
authority -Covered by Companies companies companies
-No specific Act, 2013 -Limited Liability -Companies Act,
legislation Partnership Act, 2013
2008
2. Structural Differences
-Management and -Ownership and -Ownership and -Complete
Ownership vests in management may be management is in separation of
same hands separated. Sole owner may hands of partners ownership and
appoint other directors management
3. Incorporation
-Not an incorporated -Incorporated and -Incorporated and -Incorporated and
entity - No registration is required registration is registration is
registration is required required required
4. Nature of Liability
-Unlimited liability -May be limited or -Liability is limited -May be limited or
unlimited unlimited

25
T. Ramappa, “Why A One Person Company”, ​Chartered Secretary, August 2014, pp. 28-31, at p. 29.
5. Separate Legal Entity
-No separate legal -Sole owner is different -Separate legal -Separate legal
entity from OPC entity is there entity is there
6. Taxation
-Benefit of slab rates -Flat rate is applicable -Tax treatment is -Flat rate is
is there -Dividend distribution tax similar to applicable
-No applicability of applies partnership firms -Dividend
dividend distribution distribution tax
tax applies
7. Procedural Formalities
-Procedure is simple -Procedure is complex -Procedure is -Most complex
-No annual meetings, than sole proprietor complex than sole procedure has to be
annual return, board -Meetings may not be proprietor adopted
meetings etc. mandatory but recording
of minutes is required

It may be observed from the above comparison that each form of business vehicle has its own
pros and cons. Sole proprietorship provides benefit of flexibility, complete control and lower tax
burden however lacks separate legal entity and limited liability. Limited liability partnership
provides benefit of separate legal entity and limited liability however lacks in terms of control
and flexibility. Private companies other than OPC and public companies are liable to follow
complex procedure and very well regulated. However, they have benefit of separate legal entity,
limited liability and professional management. OPC is somewhat lying in between the traditional
forms of business vehicles. It possesses features of both company and sole proprietorship as it
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has separate legal entity, limited liability and still control of single person is retained.

Issues Regarding OPC

OPC is a new addition to the family of business vehicles. It is yet to stand by the test of time.
However, there are some prima facie issues which have been raised by various authors. These
issues are worth discussing till they are finally settled in practice or through judicial intervention
or legislative amendment. These issues are as follows:

26
Akarshika Goel, “One Person Company (OPC) – New Opportunity To Start A Venture”, ​Chartered Secretary,
August 2014, pp. 39-43.
 Role of Company Secretaries

The annual return of OPC may be signed by a company secretary or a director. This raises an
issue regarding role of company secretaries in OPC. OPC has a restricted structure as its annual
turnover cannot go beyond two crores and capital investment cannot exceed fifty lakhs. This
limited structure cannot support a company secretary in full time employment. However, the
practicing company secretaries can play a constructive role in OPC by providing business
27
consultancy and assistance in administration.

Contracts with OPC

Unwritten contracts by sole owners with OPC require certain procedural formalities. Written
contracts and contracts in ordinary course of business are exempted from these formalities. The
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term ‘ordinary course of business’ is a vague concept. It has not been defined under the
Companies Act, 2013. Therefore, it is up to the judiciary to interpret this term.

The Act is silent on regulation of contracts with third parties. The third parties dealing with OPC
may be left on their own to conduct due diligence for such contract. Due diligence would be
extremely difficult in case OPC particularly when it has various exemptions from holding annual
general meeting, board meetings etc. The third party may also be not willing to spend time in this
process.

Liaison with ROC and General Public

OPC may have only one director who is the sole owner. Such director may be out of India or
unavailable at registered office for a great part of the year. This situation can surely cause
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problem when OPC has to deal with public queries or queries from registrar of companies. In

27
V. Balachandran and Sudheendra Putty, “An Overview Of The Law And Practice Pertaining To One Person
Company (OPC) Under The Companies Act, 2013”, ​Chartered Secretary, August 2014, pp. 23-27, at p. 27.
28
T. Ramappa, 2014, at p. 29.
29
T. Ramappa, 2014, at p. 30.
other kinds of company there are two or more directors including one managing director either of
whom is available to take up queries from general public or registrar of companies.

Nomination of Sole Owner

The company law envisages a chain of nominations. Article 27 of Table F of Schedule I provides
that in case of death of sole owner, his nomination shall take his place. Nomination shall be
entitled to all shares, right and liabilities there on. He shall be liable to pay any unpaid amount on
the shares. The nomination shall further nominate one person when he himself becomes member
in OPC. Nominated persons are also allowed to withdraw their consent. The issue arising in this
chain of nominations is that the system of nomination is not a stable arrangement. Firstly, the
nominated person is not required to disclose reasons for withdrawing his consent. Secondly, the
commitment of nominated person to pay for unpaid amount of shares on becoming member
remains a big question. Lastly, the Act has created this system of nominations however failed in
regulating this system properly.

Artificial Legal Persons as Member of OPC

OPC allows only natural persons to be a sole owner. In contrast, countries like Delaware, China
and Singapore allow even artificial legal persons to be member of OPC. Therefore, Indian
scenario does not permit incorporation and statutory recognition of wholly owned subsidiaries in
shape of OPC. The existence of wholly owned subsidiaries cannot be ruled out. Such companies
are created as private companies by owning all but one share in such company. These companies
would have got statutory recognition if Indian Act permitted artificial persons to form OPC.

Other Issues

There are some other issues relating to OPC which can be summarized in following points.
These issues also raise serious concern over the structure of OPC.
(i) One person one company rule does not go well with the legal community. The main
purpose of company law is to separate the entities. One fails to find a reason for
restricting a natural person to create one OPC.
(ii) The turnover limit is very small. It would have been at least ten times the capital
employed. Moreover, a similar turnover limit and capital limit should not be there for all
kinds of companies.
(iii) The foreign direct investment shall be a serious concern. OPC structure will not be a
viable structure for foreign investors who want control along with lasting interest in
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Indian entity as director has to be a resident person.
(iv) Lifting of corporate veil shall pose another threat as the courts may be tempted to invoke
this rule easily despite of the fact that OPC cannot be treated as alter ego of sole owner.

Conclusion and Suggestions

The structure of OPC is in its infancy. It suffers from various defects and issues. On positive
note, it provides various exemptions privileges to a sole owner which were originally available to
companies alone. It has perpetual succession, separate legal entity and limited liability. It is
desirable and strongly recommended that the legislature, government and judiciary should work
in full coherence so that OPC becomes an efficient business vehicle.

At this point some suggestions may be apt to improvise the current situation. A strong
arrangement in place of nomination may be provided for investor protection. The limits relating
to turnover and capital investment may be removed. A suitable tax mechanism may be provided
in the ​Income Tax Act, 1961 so that sole owner can afford tax burden. Artificial legal persons
should be allowed to incorporate OPC which shall provide statutory recognition to wholly owned
subsidiaries. The one person one company rule may be dropped. Sole owners may be allowed to
incorporate more than one OPC. Suitable amendments may be made in other Acts so that

30
K. S. Ravichandran, “One Person Company - Need For Granting Exemptions And Removing Limitations”,
Chartered Secretary, August 2014, pp. 12-17, at p. 13.
professionals like company secretaries can do profession through OPC. Lastly, a provision to
mention name of alternative person who can satisfy the queries of general public and registrar
may be provided in case sole owner remains absent from registered office of the company.