Introduction
The corporate laws in India got revolutionized by The Companies Act, 2013 with the introduction of various new concepts that were non-existent previously. The introduction of the concept of One Person Company was one of the game-changers. A whole new way of starting businesses was recognized which granted flexibility that an entity like a company could offer. It also protected limited liability that was lacking in partnerships and sole proprietorships.The ability of individuals to form a company was already identified by various other countries like the USA, China, Singapore, UK and Australia before the new Companies Act 2013 was enacted.
The Companies Act, 2013 completely changed the rules of business in India by introducing a number of new concepts that were not previously available. One person and one of the new ideas introduced.
An individual company (OPC) defines a company constituted with one person (one) as a member, in contrast to the standard practice of having at least two members. It is a recognition of a one-man economic organization that paves the way for small businesses, service providers to enter the business by increasing their opportunities with corporate ownership.
Definition
In terms of section 2 (62) of the Companies Act, 2013 defines "one-person company" to mean a company having only one person as the member of the company. Because members of a company are recognized as the company’s shareholders or the subscribers to its Memorandum of Association, One Person Company (OPC) is functionally a company with only one shareholder as its member.OPCs are usually formed when the business has just one founder or promoter. Due to the many advantages that OPCs offer, entrepreneurs whose businesses are at a nascent stage give more preference to the creation of OPCs rather than sole proprietorships.
Any natural person (should not be a minor) who is an Indian citizen whether or not an Indian citizen, i.e. the NRI will be eligible to enter One Person Company and appoint an OPC nominee, India's non-resident timeline has been reduced to 120. Days.
Difference between One Person Company and Sole Proprietorships
An OPC and a sole proprietorship form of business might come across to be alike since both the forms of businesses have a single person involved who owns the business, but in reality, they are quite different from each other. The nature of the liabilities carried by both of them is the major difference between the two forms.
OPC being a separate legal entity on its own which is distinctive from its promoter has its own liabilities and assets. The promoter cannot be held liable personally to pay off the debts of the company.
Whereas, the sole proprietorship and its proprietor are the same. So, in the case of non-fulfilment of the liabilities of the business, the promoter’s assets are attached and sold by the law.
Features of a One Person Company
The general features of a One-Person Company are as follows.
Private Company
Section 3(1)(c) of the Companies Act, 2013 states that a company can be formed by a single person for any purpose recognized by the law. OPCs are further described as private companies.
Single - Member
Unlike other private companies, OPCs can have only one shareholder or member.
Nominee
The sole member of the company nominates a nominee during the registration of the company. This is a feature unique to OPCs and this distinguishes it from all other types of companies.
No Perpetual Succession
The death of the only member of the company allows the nominee to either reject or choose to become its sole member. In other kinds of companies, the concept of perpetual succession is followed.
Minimum One Director
Minimum one person needs to be the director of OPCs, which is the member in this case. There can be a maximum of 15 directors.
No Minimum Paid-up Share Capital
For OPCs, any minimum paid-up share capital has not been prescribed by the Companies Act, 2013.
Special Privileges
Many privileges and exemptions are enjoyed by the OPCs under the Companies Act that other types of companies are not entitled to.
Formation of One Person Companies
An OPC can be created by a single person by subscribing his name to the Memorandum of Association and fulfilling the other prerequisites prescribed by the Companies Act, 2013. The MoA also needs to declare all the details of a nominee who would go on to become the sole member of the company in case of death of the original member or he becomes incapable of entering any contract.
The MoA and the nominee’s consent to his nomination are to be submitted to the Registrar of Companies in addition to the application for registration. That nominee is allowed to withdraw his name at any given point of time by submitting the required application to the Registrar. The member is also entitled to cancel his nomination later.
Membership in One Person Companies
In India, only natural individuals who are the citizens and residents of the country are eligible to create an OPC. The nominees of OPCs are also guided by the same directive. Also, such a natural person is not allowed to be a member or nominee of more than one OPC at any given point of time.
One significant point is that only a natural person can become a member of an OPC which doesn’t apply in case of companies. Companies can themselves be members and own shares of the companies. Additionally, minors are prohibited by the law from becoming members or nominees of OPCs.
Conversion of One Person Company (OPCs) Into Other Companies
Regulations monitoring the formation of OPCs explicitly impede the conversion of OPCs into companies under Section 8, the ones that have philanthropic objectives. Until the expiry of two years from the date of their incorporation, OPCs can’t convert into other types of companies voluntarily.
Privileges of One Person Companies
One-Person Companies benefit from the following privileges and exemptions under the Companies Act:
OPCs don’t have to conduct annual general meetings.
Cash flow statements need not be included in their financial statements.
Directors could sign the annual returns too; a company secretary is not mandatorily required.
Provisions in regard to the independent directors are not applied to OPCs.
Directors can take home more remuneration as compared to other companies.
Solved Example on One Person Company
Q1: Does an OPC follow the principle of perpetual succession?
Ans: No, it does not. An OPC can reach its end with the death of its sole member.
Q2: OPC was recognized under the Companies Act, 1956. TRUE or FALSE?
Ans: FALSE. The concept of OPCs was introduced by the Companies Act, 2013.
FAQs on What Is a One Person Company?
1. What is a One Person Company (OPC) as per the Companies Act, 2013?
A One Person Company (OPC) is defined under Section 2(62) of the Companies Act, 2013, as a company that has only one person as its member. It is a type of private company that allows a solo entrepreneur to operate a corporate entity with limited liability, a feature not available in a sole proprietorship.
2. What are the key features of a One Person Company?
The main features of an OPC are:
- Single Member: The company is owned and managed by a single individual.
- Separate Legal Entity: An OPC is legally distinct from its owner. The company's liabilities and assets are its own.
- Limited Liability: The owner's personal assets are protected, and their liability is limited to their investment in the company.
- Nominee Appointment: A nominee must be appointed during incorporation to take over in case of the member's death or incapacity.
- Minimum One Director: An OPC must have at least one director, who can be the sole member themselves. The maximum can be up to 15 directors.
3. How does the concept of a 'separate legal entity' in an OPC protect the owner's personal assets?
The 'separate legal entity' principle means the law views the company and its owner as two distinct entities. Because the OPC is its own legal person, it can own property, incur debts, and enter into contracts in its own name. Consequently, any business debts belong to the company, not the owner. This creates a protective wall, ensuring that if the business fails, creditors can only claim the company's assets, not the owner's personal property like their house or savings.
4. What are the main benefits of establishing an OPC compared to a sole proprietorship?
The primary advantage of an OPC over a sole proprietorship is limited liability. In a sole proprietorship, the owner and the business are the same, meaning the owner is personally responsible for all business debts. In an OPC, the owner's liability is limited. Other benefits of an OPC include having a separate legal status which increases business credibility, easier access to loans, and a clear succession path through the nominee.
5. Why doesn't a One Person Company have perpetual succession like other companies?
Perpetual succession means a company's existence is uninterrupted by the death or exit of its members. An OPC lacks true perpetual succession because its existence is tied to a single individual. While the appointment of a nominee ensures a smooth transfer of ownership and prevents the company from dissolving immediately upon the member's death, the original structure ceases to exist. The nominee must choose to become the new member, effectively reconstituting the company's membership, which is fundamentally different from the seamless share transfers in a multi-member company.
6. Who is eligible to form a One Person Company in India?
To form an OPC in India, a person must be a natural person (not a corporation), an Indian citizen, and a resident of India. For this purpose, a resident is defined as someone who has stayed in India for at least 120 days in the preceding financial year. Minors are not eligible to become members or nominees of an OPC.
7. In what business scenarios would forming an OPC be more advantageous than a Private Limited Company?
An OPC is more advantageous for solo entrepreneurs, freelancers, and consultants who want the benefits of a corporate structure without the complexities of a multi-owner setup. It is ideal for businesses that do not need to raise equity funding from multiple investors. The key advantages are lower compliance requirements (e.g., no need for an Annual General Meeting) and simpler decision-making. A Private Limited Company is better suited for startups with multiple co-founders or those planning to raise venture capital, as it allows for multiple shareholders.
8. What is the role of a nominee in an OPC?
The nominee in an OPC acts as a successor. The sole member must designate a nominee in the Memorandum of Association, who, upon the death or incapacity of the original member, becomes entitled to all shares and liabilities of the company. The nominee's prior written consent is mandatory for their appointment, ensuring a plan for business continuity.
9. Can an OPC be converted into another type of company? What are the rules?
Yes, an OPC can be converted into a Private or Public company. However, according to the Companies Act, 2013, it cannot voluntarily convert until two years have passed from its date of incorporation. Conversion becomes mandatory if its paid-up share capital exceeds ₹50 lakh or its average annual turnover for three consecutive years exceeds ₹2 crore. Furthermore, an OPC cannot be formed as or converted into a Section 8 company (a non-profit charitable organisation).
10. Are there any specific naming requirements for an OPC?
Yes, there is a specific naming rule for a One Person Company. As per Section 3(1)(c) of the Companies Act, 2013, the words "(One Person Company)" must be mentioned in brackets below the name of the company, wherever it is printed, affixed, or engraved.
