The Companies Act, 1956 mandated coming together of at least two individuals for the formation of a company. The enactment of Companies Act, 2013 has done away with the provision of the mandate of at least two individuals to form a company. The addition of One Person Company made it possible for a company to be formed by only one shareholder. The concept of One Person Company was advocated by the J.J. Irani Committee that was to review Companies Act, 1956 and suggest changes for Companies Act, 2013.
The concept of OPC is new to the Indian context; however, it is already an established practice in countries like Singapore and the United States of America. This article study deals with the way One Person Company is to be established while analyzing its existence as a separate legal entity. It tries to look at the benefits and the issues arising when a one individual’s company is given a separate legal existence.
Seperate legal personality of a Commercial Entity
A company is an association of a number of natural or juristic persons. However, a company right after being incorporated becomes a new entity that is distinctively separate from its promoters, shareholders, directors and so on. An incorporated company, therefore, is a separate legal entity that becomes a separate distinct individual in itself.[1] After being incorporated a company generates its own rights and liabilities, is capable of entering contracts, can sue, can be sued and so on.
A company when created helps a number of individuals to come together and work efficiently. It creates limited liability upon the members of the company which is one of the fundamental reasons for it becoming a popular mode of conducting business. Shareholders, directors may come and go but the separate personality of the company thrives and is not dissolved without a proper procedure of winding up.
The company acquires legal personality from the moment of the fulfilment of all formalities established by law. Thus according to the law for carrying out acts of individuals and legal trade can be associated and companies with the legal provisions. The company established in India or Pakistan becomes the legal entity of one of the countries in which it is being established, India or Pakistan.
However, in a number of judgments, the separate legal personality of the company has been ignored and individuals have been made personally liable.[2] A number of times it has been necessary to lift the corporate veil if it is found that a subsidiary company or any such entity has been formed with the sole purpose of concealing true facts and thereby perpetuate a fraud on the market and the society.[3]
The Supreme Court in a landmark judgment has held that in a number of situations and circumstances it becomes necessary to lift the corporate veil of the company to understand the real state of affairs in the actual functioning of the company.[4] In another landmark decision of the Hon’ble Supreme Court in New Horizons Ltd. v. Union of India[5], the court observed that the corporate veil may be lifted and the independence of the corporate entity disregarded, in cases where the principle of corporate personality is flagrantly opposed to convenience or in the interest of justice.
Introduction to One Person Company in India
A company, whether private or public, is an association of individuals. One of the fundamental points that describe the company is its aspect of being an association of individuals. A number of shareholders, directors, management and so on come together to establish and get into work any company. A private company has at least two individuals whereas a public company has at least seven persons coming together for the establishment.
The One Person Company differs significantly from other forms of a company in the fact that it has only one person as its member.[6] The definition of the member includes shareholders, directors, and key managerial persons and so on.[7] Thus, it can clearly be identified that a One Person Company has its director, shareholder and key managerial person and so on as only one individual entity.
In the Indian context, the concept of a One Person Company was given and introduced in the Irani Committee’s recommendations. The idea was to help small and medium scale entrepreneurs to set up a company and develop their ideas without being forced to form an association of persons. The OPC was to ease the way in which a small scale enterprise can be set up and small business ideas can be encouraged.[8]
OPC is a hybrid of sole proprietorship and company as forms of business. The minimum number of persons required to form a company is two for a private company and seven for a public company. An OPC is formed as a private company with just one person as a member. OPCs nominate another person who will take over the business in case the owner of OPC dies. An OPC can be started with a minimum paid up capital of Rs 1,000,000 and may either be a company limited by share, a company limited by guarantee, or an unlimited company.[9]
Thus, one of the fundamental differences between One Person Company and any other company is that one person company is not an association of individuals. The One Person company is not an association of individuals. In this only one person is enough to form a company, who can act as a director, shareholder and various other positions in the company.[10]
However, even in One Person Company, it is a fundamental necessity to nominate another individual. The nominated person is the one who becomes the sole owner of the company in case the first person dies. Critics argue that this provision acts contrary to the very idea of One Person Company as two individuals become necessary for OPC too. They argue that simply a private company can be established with the help of two individuals and thus the lengthy procedure and restrictions of OPC will not attract any individual.[11]
Moreover, even One Person Company is taxed as if it is a private limited company. It is therefore taxed significantly different from the way a sole proprietorship is taxed. In a sole proprietorship, the tax is on the individual and is thus different from One Person Company. In One Person Company, it is the company that owns the asset and owes liabilities and not the individual whose company it is, which is also significantly different from the sole proprietorship in the present Indian context.
Problems with the Legal Personality
As per Rule 2.1 (1) of the Draft Rules under Companies Act, 2013 only a natural person who is an Indian citizen can establish a One Person Company. Moreover, such natural person must also be a resident of India to become eligible to incorporate a One Person Company. This restricts the ownership of only individuals. As the person establishing the One Person Company must be a natural person it clearly implicates that it cannot be formed by a juristic person, a legal person or an artificial person.
Therefore, A One Person Company cannot be established by another company. It makes it impossible for a Company established under the Companies Act, 2013 to establish a One Person Company. Clearly, it is impossible for a public company to establish One Person Company as a wholly owned subsidiary. The public company cannot be the owner of the wholly owned subsidiary if the wholly owned subsidiary is a One Person Company.
Moreover, this provision also discourages foreign direct investment in India through One Person Company method. Private Companies are allowed to be established by NRIs through foreign direct investment. However, the establishment of a One Person Company by foreign companies and multinational companies is disallowed and made illegal. This provision clearly discourages the establishment of One Person Companies in India.
Moreover, to change the legal personality, that is to transform a One Person Company to Private or Public Limited Company, the following conditions need to be met:
1. “The OPC must have been in existence for a minimum of two years; or
2. It must have a paid-up share capital which has increased beyond Rs. 50,00,000/- (rupees fifty lakh); or
3. Its average turnover must have exceeded Rs. 2,00,00,000/.”[12]
This makes it tougher to first establish a One Person Company and then choose to transform it. This is also one of the fundamental issues in one person company’s legal personality and such provision shall only act contrary to the intention of the legislature to popularize this mode of formation of a new company
Findings & Recommendations
1. The restrictions with respect to the formation of a company only by a natural person should be done away with. A legal person and an artificial person should also be allowed to form one person company.
2. In respect to what is stated above, a body corporate, a company established under companies act, should be allowed to incorporate and establish a One Person Company as its wholly owned subsidiary.
3. Thirdly, A One Person Company is not allowed to be incorporated by foreign individuals or Non-Resident Indians. If the legislature wants growth of this idea then incorporation of One Person Company should also be allowed by foreign individuals as well as NRIs as it will also help to promote foreign investment in the country.
4. The Income Tax Act, 1961 should tax One Person Company differently from the way it is being done now, which is taxed as a private company. This makes it difficult for OPC as it has to comply with the rates of corporate tax as well as dividend distribution tax. A differential taxation method would help in encouraging more people to adopt this mode of entrepreneurship and leave the idea of sole proprietorship.
5. The compliance requirements should be more relaxed for one Person Company. It is not practical to expect for an individual acting in his own capacity might find it hard to manage a business as well as comply with the various requirements of the MCA (statutory audit, submit annual and IT returns, etc)
Frequently Asked Questions(FAQ’S)
1. Can an NRI form OPC? why, why not?
No, no other persons than an Indian citizen or a Resident in India can register a one person company anywhere in India. This means, a non-resident Indian (NRI), or a foreign national, cannot set up an OPC in India
2. Is FDI allowed for OPC?
No, FDI into a one person company in India is restricted
3. How to convert an OPC into Pvt/Public Ltd co.?
Both in the cases of the voluntary conversion and the mandatory conversion, the concerned OPC is strictly required to follow the rules, provisions, and regulations provided in the Companies Act of 2013 under its Section 18, and in Rule 7(4) of the Companies (Incorporation) Rules of 2014. Roughly, in addition to meeting the statutory requirements of the desired form of company, the OPC has to make certain necessary changes in its MOA and AOA to suit the targeted type of company. Here it should be noted that, for conversion into a private limited company, the interested OPC is required to have at least two directors and two shareholders. On the other hand, for conversion into a public limited company, the OPC needs to have at least seven shareholders and three directors. For voluntary or mandatory conversion of an OPC into a private limited company or a public limited company, the Application Form used will be Form INC-6.
In the case of the voluntary conversion, the OPC is required to submit the Form INC-6 along with the MGT-14 (containing the passing of a Special Resolution in the General Meeting in support of the proposed private limited or public limited company), to the concerned ROC within 30 Days of such a resolution. On the other hand, in case of the compulsory conversion, the OPC is required to file the Form INC-6 within Six Months counted from the date of exceeding any of the two threshold limits.
4. When comes the need for changing OPC into Public/Pvt co. ?
As per the Companies (Incorporation) Rules, 2014, a One Person Company has to change itself compulsorily into a private limited company or a public limited company, if, at any point of time, its paid-up capital exceeds INR 50 Lac OR its average annual turnover of three immediately preceding consecutive financial years becomes more than INR 2 Crore. Under any of these conditions, the OPC is necessarily required to inform the relevant ROC through Form INC-5, within 60 Days of the exceeding threshold limits. Here, it may also be noted that an OPC cannot voluntarily change itself into any type of company, within two years of its incorporation, except under any of these two cases of exceeding the threshold limit
5. What documents are required for OPC registration in India?
- DIN, DSC, and PAN Card of the Director and Shareholder
- Photographs of Director and Shareholder
- ID Proof and Address Proof of Director and Shareholder
- Address Proof of the location/registered office of the OPC
- And, other necessary documents
Edited by – Sakshi Agarwal
Approved & Published – Sakshi Raje
Reference
[1] Solomon v Solomon & Company Ltd [UKHL 1, AC 22].
[2] Life Insurance Corporation of India v. Escorts Ltd. & Ors [1986 AIR 1370].
[3] Delhi Development Authority v. Skipper Constructions Co. (P) Ltd (1996) 4 SCC 622
[4] Subhra Mukherjee v. Bharat Coking Coal (2000) 3 SCC 312
[5] (1995) 1 SCC 478
[6] The Companies Act, 2013, Gazette of India, pt. III sec. 4 (Aug. 30, 2013), § 2(62).
[7] The Companies Act, 2013, Gazette of India, pt. III sec. 4 (Aug. 30, 2013), § 2(55).
[8] IRANI COMMITTEE REPORT ON COMPANY LAW, 2005. (May. 31, 2005) ¶ 9.
[9] Avtar Singh, Companies Act 2013.
[10] M. Bina Celine Dorathy, ONE PERSON COMPANY (OPC) – THE NEW BUSINESS FORMAT FOR SMALL RETAILERS IN INDIA, Management, Vol. 20, 2015, 1, pp. 173-181.
[11] The Companies Act, 2013, Gazette of India, sec. 3 (Aug. 30, 2013).
[12] https://blog.ipleaders.in/disadvantages-one-person-company-India/
