One Person Company – A Look at the relevant Legal provisions under the Companies Act, 2013
The sections relating to One Person Company were notified on the 26th March 2013 and the rules with regard to the same have also been notified. The purpose of this Article is to enlighten readers about the legal provisions specific to a One Person Company.
Meaning of One Person Company
As per Section 2 (62) of the Companies Act, 2013 (hereinafter the Act), a One Person Company is a Private Company which has only one person as a member. It is to be noted that all the provisions relating to Private Companies would apply to a One Person Company, unless otherwise specifically excluded. The words ˜˜One Person Company™™ must be mentioned in brackets below the name of such company, wherever its name is printed, affixed or engraved. [Second proviso to Section 12(3)]
Eligibility to Incorporate a One Person Company [Rule 3 (1) of Companies (Incorporation) Rules, 2014]
Only a natural person who is an India Citizen and resident Indian(person who has stayed in India for a period of not less than one hundred and eighty two (182) days during the immediately preceding one calendar year) can incorporate a One Person Company by subscribing his name to the memorandum.
Application for Incorporation [Rule 12 of Companies (Incorporation) Rules, 2014]
Application for incorporation of a One Person Company shall be made to the registrar within whose jurisdiction the registered office of the company is proposed to be situated, in Form No.INC.2 along with the fee as provided in the Companies (Registration offices and fees) Rules, 2014 for registration of a company
Appointment of a Nominee [Rule 3(1) (b) and Rule 4 of Companies (Incorporation) Rules, 2014]
The subscriber to the memorandum shall appoint a nominee and such nominee shall be a natural person, Indian citizen and a resident Indian and the name of such nominee should be included in the memorandum and such nomination in Form No INC.2 along with the consent of such nominee obtained in Form No INC.3 and fee as provided in the Companies (Registration offices and fees) Rules, 2014 shall be filed with the Registrar at the time of incorporation of the company along with its memorandum and articles. In the event of the subscriber™s death or his incapacity to contract, the nominee mentioned in the memorandum would become the member of the company and such new member shall nominate within fifteen days of becoming member, a person who shall in the event of his death or his incapacity to contract become the member of such company, and the company shall file with the Registrar an intimation of such cessation and nomination in Form No INC.4 along with the fee as provided in the Companies (Registration offices and fees) Rules, 2014 within thirty days of the change in membership and with the prior written consent of the person so nominated in Form No.INC.3. Proviso to clause (c) of sub section (1) of Section 3of the Act states that a change in name of the member of a One Person Company shall not be deemed to be an alteration of the memorandum.
Restrictions with regard to One Person Company [Rule 3 of Companies (Incorporation) Rules, 2014]
No person can incorporate more than one One Person Company (this is a significant departure from the draft rules which allowed a person to incorporate up to five One Person Companies) or become nominee in more than one such company [sub rule (2)]
Where a member of a One Person Company becomes a member in another such Company by virtue of his being a nominee in that One Person Company, such person shall meet the eligibility criteria specified in sub rule (2) within a period of one hundred and eighty days
A minor cannot become a member or a nominee of a One Person Company or hold share with beneficial interest.
One Person Company cannot be incorporated or converted into a company under Section 8 of the Act.
One Person Company cannot carry out Non Banking Financial Investment activities including investment in securities of any body corporates.
One Person company cannot convert voluntarily into any kind of company unless two years have expired from the date of its incorporation, except threshold limit (paid up share capital) is increased beyond fifty lakh rupees or its average annual turnover during the relevant period exceeds two crore rupees.
Provisions with regard to Directors and Meetings of Board
One Person Company should have a minimum of one (1) director. [Section 149 (1) (a)].
One Person Company shall hold at least one meeting of the Board of Directors in each half of a calendar year and the gap between the two meetings shall not be less than ninety days [Section 173 (5)].
One Person Company having only one director is not required to comply with either Section 173 (meetings of board) or 174 (Quorum for meetings of Board). [Proviso to sub – section (5) of section 173].
In case of a One Person Company”(i) the resolution required to be passed at the general meetings of the company shall be deemed to have been passed if the resolution is agreed upon by the sole member and communicated to the company and entered in the minutes book maintained under section 118; (ii) such minutes book shall be signed and dated by the member; (iii) the resolution shall become effective from the date of signing such minutes by the sole member.
In case of a One Person Company” (i) where the company is having only one director, all the businesses to be transacted at the meeting of the Board shall be entered into minutes book maintained under section 118; (ii) such minutes book shall be signed and dated by the director; (iii) the resolution shall become effective from the date of signing such minutes by the director.
Financial Statement and Board™s Report[Section 134 & 137]
The financial statement of a One Person Company shall be signed by only one director for submission to the auditor for his report thereon.
The report of the Board of Directors to be attached to the financial statement means a report containing explanations or comments by the Board on every qualification, reservation or adverse remark or disclaimer made by the auditor in his report.
A One Person Company shall file a copy of the financial statements duly adopted by its member, along with all the documents which are required to be attached to such financial statements, within one hundred eighty days from the closure of the financial year. [Section 137].
Contract by One Person Company[Section 193]
Where a One Person Company limited by shares or guarantee enters into a contract with the sole member of the company who also happens to be the director of the company, shall ensure that the terms of the contract or offer are contained in the memorandum or are recorded in the minutes of the first meeting of the Board of Directors of the company held next after entering into contract, unless the contract is in writing. This requirement, however, will not apply to contracts entered into by the company in the ordinary course of its business. A one person company is required to inform the registrar about every such contract within a period of 15 days of the date of approval by the Board of Directors.
Various Exemptions available to a One Person Company
One Person Company is exempted from holding Annual General meeting.[Section 96(1)]
One Person Company is not required to prepare a cash flow statement as a part of financial statement.[Section 2(40)]
In case a One Person Company does not have a company secretary, the annual return can be signed by the director of the company. [Proviso to Section 92(1)]
Section 122 of the Act states that the provisions of the following sections shall not apply to a One Person Company-
Section 98: Power of Tribunal to call meetings of members, etc.
Section 100: Calling of extraordinary general meeting
Section 101: Notice of meeting
Section 102: Statement to be annexed to notice
Section 103: Quorum for meetings
Section 104: Chairman of meetings
Section 105: Proxies
Section 106: Restriction on voting rights
Section 107: Voting by show of hands
Section 108: Voting through electronic means
Section 109: Demand for poll
Section 110: Postal ballot
Section 111: Circulation of members™ resolution
Mandatory Conversion of One Person Company into Private Company or Public Company in certain cases [Rule 6 of Companies (Incorporation) Rules, 2014]
A One Person Company shall convert itself into a private company when eitherits paid up capital exceeds Rupees Fifty Lakhs or its average turnover during the immediately preceding three years exceeds Rupees Two Crores
A One Person Company breaching either of the above thresholds shall within a period of 60 days from such breach give a notice to the Registrar in Form No.INC.5 informing that it has ceased to be a One Person Company and that it is now required to convert itself into a private company or a public company by virtue of its paid up share capital or average annual turnover, having exceeded the threshold limit laid down. Thereupon, it shall take steps to convert into a Private company within a period of six months of the date on which its paid up share capital is increased beyond fifty lakh rupees or the last day of the relevant period during which its average annual turnover exceeds two crore rupees as the case may be, into either a private company with minimum of two members and two directors or a public company with at least seven members and three directors in accordance with the provisions of section 18 of the Act. The Articles and Memorandum of such a company shall be appropriately amended by passing a special resolution in accordance with sub section (3) of section 122 of the Act to give effect to the conversion and to make necessary changes incidental thereto.
Conversion of Private Company into One Person Company[Rule 7 of Companies (Incorporation) Rules, 2014]
A Private Company other than a Section 8 company (Not for Profit Company) having paid up share capital of fifty lakhs rupees or less or average annual turnover during the relevant period is two crore rupees or less may convert itself into one person company by passing a special resolution in the general meeting. The Company shall obtain a no objection certificate from members and creditors before passing such a special resolution. A copy of such special resolution shall be filed with the RoC in Form No. MGT.14 within thirty (30) days of passing the same.
The next step for the company is to file an application in Form No.INC.6 for its conversion into One Person Company along with fees as provided in in the Companies (Registration offices and fees) Rules, 2014, by attaching the following documents, namely:-
(i) Declaration by directors by way of an affidavit duly sworn in confirming that all members and creditors of the company have given their consent for conversion, the paid up share capital company is fifty lakhs rupees or less or average annual turnover is less than two crores rupees, as the case may be;
(ii) the list of members and list of creditors;
(iii) the latest Audited Balance Sheet and the Profit and Loss Account; and
(iv) the copy of No Objection letter of secured creditors.
Observation and conclusion:
While the benefits of Incorporating a One Person Company (hereinafter OPC) seem obvious in that they offer the advantage of limited liability, there are too many restrictions in nature of limiting the number of OPC a person can incorporate to one and the restriction on voluntary conversion into any kind of company before the expiry of two years. The provisions relating to mandatory conversion of an OPC into a private or public company for exceeding the threshold mentioned in Rule 6 of Companies (Incorporation) Rules, 2014 seems particularly harsh. An OPC as a business structure doesn™t seem efficient from tax perspective as an OPC would be treated as a company and be subject to a higher rate of tax compared to a Sole Proprietorship. Since an OPC is a company, there would be an incidence of tax (dividend distribution tax) while distribution of dividend. It would be premature to comment on the success or failure of this new business model just yet, as it is yet to be put to test. It remains to be seen if OPC would become popular business model for entrepreneurs wanting to go it alone.