India - One Man Show: Understanding The Concept Of One Person Company.
Legal News & Analysis - Asia Pacific - India - Regulatory & Compliance
7 December, 2019
One person company (OPC) means a company formed with only one (single) person as a member, unlike the traditional manner of having at least two members.
The concept of OPC is not alien to the world. Through the years, this concept has been legally recognized in the UK (2006), USA (a.k.a Limited Liability Company in US), China (2005), Singapore (2004), Turkey (2012), UAE, Pakistan (2003).
In India, the induction of OPC was given in the Dr J.J Irani Committee report dated May 31, 2005 which promised the escalation of entrepreneurs in the market place, making their contribution in the economy widely effective. Hence, recognition of single person economic entity lightens a path for small traders, artisans and other service providers to venture into business by expanding their opportunities, limiting their liability with minimal procedural/compliances.
ADVANTAGES AND IMPORTANT LEGAL CONSIDERATIONS OF OPC
OPC is the simplest concept introduced under the Companies Act, 2013. The concept has definitely swayed its way from sole proprietorship. Hence, in India the perplexities of the two concepts seem to be interchangeable, same and even different at the same time. The understanding of the concept as a whole hence has become essential.
OPC under the Companies Act, 2013 is a separate legal entity having perpetual succession, which is required to be registered as per the provisions of the Companies Act, 2013. The liability to repay the loan availed by the OPC is limited only to the OPC, unlike, a sole proprietorship which is not a separate legal entity, thus making the sole proprietor personally liable for any loan or any credit facility availed.
Further, registration of a sole proprietorship is not required.
The very essential of an OPC is that the member and nominee have to be a resident of India, which means that they stayed in India for more than 182 days during the immediately preceding one calendar year.
The legal status of an OPC as an incorporated company gives an edge to it with respect to availing of loans from any banks as compared to a sole proprietorship. The Reserve Bank of India, by its Master Circular issued in July 2013, has provided for all Scheduled Commercial Banks (excluding regional Rural Banks) to promote financing of the priority sector, i.e., agricultural and small scale industries. OPCs have ventured into various sectors, such as construction, electricity, mining & quarrying, transport, trading, manufacturing of textiles, food, leather, just to name a few, since the loans are non depositing security with lower rate of interest in nature as provided to small scale industries.
EXEMPTIONS FOR OPC/ADVANTAGES OF OPC
An OPC is exempted from stringent legal compliances of general meeting, board meetings, quorums, voting inclusion of cash flow statements in financial statements, mandatory rotation of an auditor, except in certain circumstances, such as if there is more than one (1) director, then the Board meeting must be conducted. OPC is also exempted from transacting business via postal ballot. Further, appointment of a company secretary is also not essential for an OPC. The annual return of an OPC can be signed by its director in case no company secretary has been appointed.
Section 185 under the Companies Act, 2013 is the most discussed and researched section. Hence, an emphasis has been stressed to give clarity as to applicability of section 185 to an OPC. Notification No. G.S.R. 465(E) dated June 5, 2015 exempts a private company under section 185, if (i) no body corporate has invested any money in the share capital of an OPC; (ii) if the borrowing of a company from banks and financial institutions is less than twice its paid-up share capital or Rs.50 crore (Rs.500 million), whichever is less; and (iii) no default in repayment of such borrowings subsiding at the time of making transactions under this section.
The Companies Act, 2013 provides that if the paid-up share capital limit of the OPC exceeds the prescribed limit (currently, Rs.50 lakh (Rupees 5 million)) or turnover exceeds Rs.2 crore (Rs.20 million) in three (3) years preceding consecutive years, then the company shall lose its status as an OPC and shall be required to compulsorily convert to either to a private company or public company.
PROHIBITIONS FACED BY AN OPC
An OPC also faces prohibition of carrying any Non-Banking Financial Investments activities, converting a wholly owned subsidiary into an OPC and also issuing any kind of Employ Stock Scheme. The Companies Act, 2013 also frustrates the whole motive of the OPC by prohibiting a person to have more than one (1) OPC or become a nominee in more than one (1) OPC. This, to a large extent, defeats the whole purpose of the introduction as mentioned in the Committee Report.
Though the Government has been promoting major foreign investments in India, there are restrictions imposed on the foreign investors to incorporate an OPC, which has spread an air of despondency
The major disadvantage of an OPC is triggered from the tax perspective. The Income Tax, Act, 1961 does not recognise the concept of an OPC and has placed it in the same slab as a private company under the bracket of 30% (plus surcharges) on total income. On the contrary, sole proprietors are taxed at the rate applicable to individuals.
OPC at a superficial level seems to be simple and attractive, but yet it deals with a great deal of its imperfection like impositions and restrictions. Thus, resulting in slow progress of small entrepreneurs or rather it can be perceived that it has indirectly discouraged them to even incorporate an OPC.
To spruce the incorporation of OPC, certain reliefs and exemptions must be made available to the OPC (and its member), such as
(i) permit companies (whether Indian or foreign) to incorporate OPCs (which will operate as their wholly-owned subsidiary);
(ii) do not force conversion of OPC to a private or public company, if the turnover exceeds any limit;
(iii) permit an individual to have more than one OPC – since he/ she may want to operate different businesses under different company for prudent management, profitability and cash-flow;
(iv) provide reasonable tax slabs.
The relaxation of the provisions of Companies Act, 2013 and Income Act, 1961 shall reassure the entrepreneurs’ faith in the whole concept of OPC altogether.
Prem Rajani, Partner, Rajani Associates