India: Now Introducing – One Person Company In India

Last Updated: 16 October 2015
Article by Anupam Prasad

Majority of the provisions and the related rules under the Companies Act, 2013 have now become effective and are operational. In addition to the various forms of companies that already existed under the Companies Act, 1956 (which will eventually be superseded by the Companies Act, 2013), the Companies Act, 2013 has introduced the concept of 'One Person Company ("OPC")' in India.  Globally, there are numerous jurisdictions, such as the United Kingdom, Singapore, China and the USA that provide for an individual to form a single member company.

Under the Companies Act, 2013 ("Act") the OPC is defined as 'a company which has only person as a member'. The rules regulating the OPC are provided in the Companies (Incorporation) Rules, 2014 ("Rules"). The Rules provide that only a natural person who is an Indian citizen and resident in India shall be eligible to incorporate an OPC and shall be a nominee for the sole member of a One Person Company.

The term 'resident in India' means a person who has stayed in India for a period of not less than one hundred and eighty two days during the immediately preceding one calendar year.  Therefore, an individual who is a non-resident in India cannot incorporate an OPC in India.

The Rules further provides that, no person shall be eligible to incorporate more than one OPC or become nominee in more one such company. The other restrictions that are applicable to an OPC are – an OPC cannot be incorporated to converted into a Section 8 companies, which are companies formed with charitable objects etc., under the Act.  Further, such companies cannot undertake Non-Banking Financial Investment activities including investment in securities of any body corporate.  Also, no such company can voluntarily convert into in any kind of company unless two years have expired from the date of incorporation of the OPC, except when the threshold limit, with respect to the paid up capital, is increased beyond Rs 5,000,000 (Five million) or its average annual turnover during the relevant period exceeds Rs 20,000,000 (Twenty million) ("Threshold") .

The subscriber of memorandum of OPC shall indicate the name of another person, with its prior written consent in the prescribed form, 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 at the time of incorporation along with the Memorandum and Articles. This person may withdraw his consent by giving notice to the sole member and to the OPC. It shall be the responsibility of the sole member to nominate another person within fifteen days from the date of receipt of the withdrawal by the person.

All OPC shall have the words 'One Person Company' in brackets below the name of the OPC, wherever it is printed or affixed.

In the event of default with the Rules the OPC or any officer of the OPC shall be punishable with fine which may extend to ten thousand rupees and with a further fine which may extend to one thousand rupees for every day after the first during which such contravention continues.

In the event, an OPC crosses the prescribed Threshold, it shall cease to be an OPC and within six months from the date of exceeding the Threshold, the OPC shall be required to convert into private company or a public company and comply with all regulations applicable to such companies and also accordingly alter the articles of association and memorandum of such company, as applicable.

OPC as a legal entity will be beneficial to entrepreneurs who have been looking for an option in between a sole proprietorship form of business and a private limited company form. OPC provides opportunities to entrepreneurs to limit their liability as opposed to functioning as a sole proprietor for whom the liability is unlimited. Further, operating as an OPC will help in procuring investments from investors which prefer dealing with registered entities or also procuring finance from financial institutes. Further, an OPC structure to a large extent provides operational flexibility when compared to a private limited company. For example, for an OPC, board meetings are required to be undertaken once every half year and annual general meetings are required to be conducted by way of maintaining minutes. Further, physical meeting is not required.

While the provisions under the Act with respect to OPC are effective as on date, there is no clarity with respect to the tax rates that are applicable to an OPC; restrictions, if any, with respect to the contracts that a Director of an OPC can enter into. Further, from the plain reading of the Rules, those need further clarification, for instance, restrictions on investment in securities of any body corporate. Does it mean that, subject to the Thresholds, an OPC cannot purchase / subscribe to shares of any company (not an OPC)?

Unlike the Companies Act, 1956, wherein the private limited companies had lesser compliance in comparison to the Act, OPC is a beneficial option for entrepreneurs as an alternate option.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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