What is One Person Company?
The concept of One Person Company (OPC) is introduced by the Companies Act, 2013. The notion gave boost and flexibility to start a business in a new way while providing protection of limited liability that sole proprietorship or partnership lack.
Definition of One Person Company
Section 2 (62) of the Companies Act, 2013 defines One Person Company as “ a company that has only one person as to its member.” Furthermore, an OPC is a company that has only one member as a subscriber to the memorandum.
OPC’s are beneficial or are created when there is only one founder/promoter of the business. Entrepreneurs whose business are at early stages prefer to create OPCs instead of sole proprietorships as OPC comes with several advantages as compared to a sole proprietorship.
Features of One Person Company
- Separate Legal Entity: OPC is incorporated under the Companies Act, 2013, providing it a status as a separate legal entity.
- Private Company: Section 3 (1) (c) of the Companies Act, 2013, a single person can form a company for any lawful purposes as OPC and such company is a private company.
- Single Member
- The minimum number of Directors: An OPC to have minimum one person as Director.
- No minimum paid-up capital: The Act does not provide for any minimum requirement of paid-up capital unlike other forms of companies.
- Nominee: A unique feature of OPCs that separates it from other kinds of companies is that the sole member of the company has to mention a nominee while registering the company.
- No perpetual succession: Since there is only one member in an OPC, his death will result in the nominee choosing or rejecting to become its sole member. This does not happen in other companies as they follow the concept of perpetual succession.
- Special privileges: OPCs enjoy several privileges and exemptions under the Companies Act that other kinds of companies do not possess.
How One Person Company is different from Sole Proprietorship
Sole proprietorship is a much-known form of business as compared with OPC. They both seem to be similar but there is a difference between both of them.
An important difference is a liability that they carry. OPC being a separate legal entity distinguished from its promoter, it has its own assets and liabilities, whereas, in Sole Proprietorship, the proprietor and proprietorship are considered to be one.
In case of OPC the promoter is not personally made liable to repay the debts of the OPC whereas in case of proprietorship the law allows attachment and sale of promoter’s own assets for the fulfilment of business debts.
What is the difference between One Person Company, Limited Liability Partnership and a Private Limited Company?
|Sr No||Particulars||Limited Liability Partnership||One Person Company||Private Limited Company|
|1.||Governing Law||LLP is governed under the “Limited Liability Partnership Act, 2008”||OPC is governed by “The Companies Act, 2013”||Governed by “The Companies Act, 2013”|
|2.||Number of partners/Directors||Minimum 2 partners and maximum any number of partners||Minimum 1 Director and maximum of 15 Directors||Minimum 2 Directors and a maximum of 15 Directors|
|3.||Number of Members||Minimum 2 partners||Only 1 Member||Minimum 2 members and a maximum of 200|
|4.||Audit Requirements||An audit is mandatory if turnover exceeds Rs. 40 Lacs or Capital contributions exceeds Rs. 25 Lacs||An audit is mandatory irrespective of turnover or capital||An audit is mandatory irrespective of turnover or capital|
|5.||Liability of partners||Limited to capital contribution||Limited to share capital of the company||Limited to share capital of the company|
|6.||FDI||Allowed subject to FDI guidelines||Not allowed||Allowed subject to FDI guidelines|
|7.||Meetings||As per LLP agreement||Minimum 2 Board Meetings are mandatory. AGM not applicable.||Minimum 4 Board Meetings in a financial year and not more than 120 days shall elapse between 2 Board meetings. AGM is mandatory|
|8.||Conversion||No specific criteria for conversion||Mandatory conversion into Private Limited company, if the turnover of the OPC exceeds Rs. 2 Crore or capital contribution exceeds Rs. 50 Lacs||Allowed|
|9.||External sources of funds||Easy to raise||Difficult to raise funds||Easy to raise|
|10.||Ideal For||Businesses which are service-oriented and having low turnover||Proprietors looking for limited liability and 100% control over business||Businesses which have high turnover and need external sources of funding|
Advantages of having One Person Company
The Companies Act, 2013 provides exemptions and privileges to OPC.
- OPC may hold 2 Board Meetings in each half of the calendar year with a minimum gap of 90 days between two meetings.
- Annual Return can be signed by a single Director or company a company secretary alone where there is one.
- The Financial statements of the OPC need not have Cash Flow Statements.
- OPC is not required to give a report on internal financial controls with reference to financial statements and the operating effectiveness of such controls in an audit report.
- Section 96(1) of the Companies Act, 2013 exempts OPC from holding the Annual General Meeting.
- The condition of rotation of auditor as provided under Section 139(2) of the Act, does not apply to OPC.
- The provisions of Section 98 and Section 100 to Section 111 relating to the holding of general meetings shall not apply to OPC.
- OPC has an exemption from the applicability of Secretarial Standards i.e. SS-1 and SS-2.
- In the case of OPC, Financial Statements signed by one Director are presented to the auditor for his report thereon.
- Exemption from the applicability of Companies (Auditors Report) Order, 2020.
- Lesser penalties for OPC under Section 446B of the Companies Act, 2013
Disadvantages of OPC
The appointment of the nominee is compulsory
The main feature of the OPC is that it must have only one person as a member. Therefore, the Act makes it mandatory to appoint another person (natural person) as a nominee, so that in case of death of a subscriber, he shall become a member of the OPC.
A company/body corporate cannot be a member of the OPC
Only a natural person who is an Indian citizen and resident in India shall be eligible to act as a member and nominee of an OPC.
Foreign Direct Investment is not allowed
As per the provisions of the Act, a natural person who is a citizen and resident in India can be a member of the OPC. Hence OPC cannot receive FDI.
Taxed at 30% base rate
OPC is not treated differently than a private limited company as far as tax is concerned and is taxed at a flat 30 % on total income. Whereas, sole proprietors are taxed at the rate applicable to individuals.
As per the provisions of the Companies Act, if the turnover of the OPC exceeds Rs. 2 Crore or capital contribution exceeds Rs. 50 lakhs, it shall mandatorily convert itself into a private limited company.
Mandatory Audit requirements
Unlike LLP, there is no threshold for Audit requirements in case of OPC, as OPC is treated as a private limited company. Therefore appointment of Statutory Auditor and Statutory Audit is compulsory.
Difficult to raise external sources of funds
Even though OPC is a separate legal entity, there is limited scope for raising external sources of funds.
A person cannot have more than one (1) OPC or become a nominee in more than one (1) OPC
Condition for Mandatory conversion of OPC into Public or Private Limited
In case the paid up share capital of an OPC exceeds Rs. 50 Lacs or its average annual turnover of immediately preceding three consecutive financial years exceeds Rs. 2 Crores, then it loses its status as OPC and has to mandatorily convert itself into a private or public company.
OPC shall file Form INC-5 within 60 days of exceeding such limits to intimate ROC regarding the same and file Form INC-6 for conversion of an OPC into private or public company.
Mandatory Compliances for One person company
Annual Compliances under Companies Act, 2013, Income Tax Act 1961 and other applicable Laws
Post incorporation, an OPC is required to have its stationery such as common seal, round rubber stamp, letterheads etc. Below are some mandatory compliances which One Person Company should take care of:
Holding Board Meetings - Section 173 (5) of the Companies Act, 2013
Where the company has 2 two or more Directors:
At Least one Board Meeting must be held in each half of the calendar year
The Gap between 2 board meetings should not be less than 90 days.
Where a company has only a single Director on Board, then the resolution entered in the minute book signed and dated, such date shall be considered to be the date of the Board Meeting.
The provisions related to the quorum of the meeting (Section 174) shall not apply, where the OPC has a single Director.
**Holding of Annual General Meetings - Section 96 (1) of the Companies Act, 2013
One Person Company is not required to hold an Annual General Meeting.
Appointment of Statutory Auditor - Section 139 (1) of the Companies Act, 2013
An OPC shall appoint Statutory Auditor at its first Annual General Meeting and such auditor shall hold office from the conclusion of the first AGM till the conclusion of sixth AGM.
The signing of Financial Statements, Board’s Report and Annual Return in case of One Person Company
The Financial statements, i.e. Balance Sheet, Profit and loss statement and notes thereon, and Directors’ Report shall be signed by one Director and presented to the Auditor for their report thereon.
Annual Return shall be signed by the company secretary, or where there is no company secretary, by the director of the company.
Filing of Financial Statements and Annual Return with ROC
The Financial Statements in Form AOC-4 shall be filed within 180 days from the closure of the financial year (Section 137 (1))
Annual Return in Form MGT-7 within 60 from the date of the AGM or from the date on which the general meeting should have been held (Section 92 (4)).
Therefore, due dates for filing Forms with ROC are:
1. Form AOC-4 - 27th September every year
2. Form MGT-7 - 28th November every year
Below are the documents required for Annual Filing of OPC:
1. Financial Statements along with notes duly signed by a Director and Auditor
2. Auditors Report
3. Directors’ Report
4. Extract of Annual Return in Form MGT-9
5. List of shareholders
Income Tax Return of the OPC
The income tax return (ITR) shall be filed with the Income Tax Department before September 30.
Other filings related to GST, Profession Tax, TDS etc.
Other filings such as GST returns, TDS returns, Professional Tax etc should comply within the due dates for respective returns.
The concept OPC introduced under the Companies Act, 2013 is simple and attractive to small entrepreneurs, yet deals with the restrictions and imperfections. The package of OPC comes with various exemptions, but over the period of time they seem to be not beneficial for the growth of small businesses.
There is a need to review the relaxations and exemptions available under the Companies Act and Income Tax Act to promote the One Person Companies and its growth in India.
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