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Characteristic features of One Person Company Comparison of OPC and sole proprietorship

Section 2(62) of Companies Act, 2013 defines One Person Company as:

A company which has only one person as a member.
The concept of One Person Company (here-in-after referred as OPC) is a new dimension that is introduced by the Companies Act, 2013. It basically means a company shall have only one shareholder.The Companies Act, 1956 did not have the concept of OPC and hence a company like OPC did not have corporate liability. Before the 2013 act, sole proprietorship was the concept in place if one person had to open or carry on his own corporate sector but it was different from OPC as it could not enjoy the benefits given under Companies Act.

SocietasUnius Personae is the name given to OPC’s that are included in the draft bill of European Union in 2015 to facilitate the cross border business of the Union[1]. This concept is prevalent in other countries like the US, Australia, Singapore and China (introduced in 2005).Thus it gives a corporate liability to the risky sole proprietorship format.

The government appointed a committee by name Naresh Chandra Committee in 2003 to recommend with regards to amongst other acts, the Companies Act, 2013 did not make any recommendation on OPC[2].This concept was first introduced by a committee headed by Dr. JJ Irani in 2005[3]. The committee recommended providing the corporate sector liability to the sole proprietorship firms. Section 3 of the Act states that One Person Company is a private limited company but with one member only; as a private limited should have minimum of two members.

Characteristics of One Person Company

Member of the Company

· First and foremost is that the company shall have only one member[4]. Member is defined as a shareholder or a person who agrees in writing to become a shareholder or the subscriber of MoA who has agreed to become the member of the company[5].

· The member of the company shall always be a natural person. Thus, a company, which is an artificial person, cannot incorporate OPC as a subsidiary or holding company.
· The natural person who will be the member of the company shall have to be an Indian citizen and a resident of India (a resident of India means a person who has stayed for 182 in the immediately preceding financial year[6]).

· He shall be a major because he would be the person to enter into a contract on behalf of the company and thus will be liable in breach of the contract. Indian Contract Act specifies that a person entering into a contract shall be a major.

· The member of the company shall have only one OPC in his name. The member cannot be a shareholder of more than one OPC simultaneously[7].

Directors of the company

Every company shall have directors. Minimum of two directors in case of private company and minimum of three directors in case of public company[8]. OPC shall have minimum of one director and maximum of 15 directors[9]. The member of the company shall be its first director[10] which shall also be mentioned in MoA.

Naming of OPC

Section 12 of the Companies Act, 2013 deals with naming of a company, that is, whether it is a public company or a private company, it should be mentioned wherever the name of the company is used. The same is in the case of OPC as well, that is, under the name of the company, ‘One Person Company’ should be written in brackets, whether the name is printed or affixed or engraved[11].

Nominee of the company

Company has a feature of perpetual succession. In any other company, on the demise of the member or his incapacity to act as a member, then the legal representatives of the incapacitated member shall replace and carry over the business. But, it is not in the case of OPC, as a member can have more than one legal representative, on the incapacity of the member to act, all the legal representatives cannot act as members of OPC, if such were the case, then the whole purpose of OPC is eliminated[12].

As the definition itself suggests, OPC is a company which has only one member. Thus, a nominee has to be nominated in the case of death of the existing member or incapacity of the member to carry on the business any more[13]. In such cases, the existing member shall have to nominate a person as the member of the company.This shall happen only with the written consent of the nominee according to the form INC-3 which is regarding the nominee of a one person company[14].

The nominated member can withdraw from the nominee himself. He has to communicate this to the existing member who shall then within 30 days communicate it to the company, that is, the board of directors;And the same procedure in case of change of the nominee. It shall later have to be mentioned in the memorandum[15] and shall also have to be informed to the registrar of companies.

Annual returns

Section 92 of the 2013 Act provides that annual returns shall have to be filed at the end of every financial year. Annual returns is the document which contains the record of its composition, turn over, profit, members etc in that specific financial year.This document shall have to be signed by a director and the company secretary. But, in the case of OPC, it shall have to be signed by either the company secretary or a director and not both. The report of board of director also includes a snippet of the annual returns. Then, it shall be submitted to the registrar.

Meetings
· Section 96 of the Act provides for conducting annual general meeting within the prescribed time limit. But, this is not a mandate for OPCs as they are specifically excluded from conducting general meeting after every financial year.

· Section 173(5) of the Act provides for conducting board meetings in the case of OPC, where there are more than one director, a board meeting shall have to be conducted in every six months of the calendar year and the gap between the meetings should not be less than ninety days.

· The resolution of the general meetings is deemed to be accepted or passed when it has been passed by the sole member of the company and this shall later be communicated to the company, that is, the board of directors. This resolution shall be later entered in the minutes book maintained and shall be signed by the member himself[16].

Conversion of OPC to private or public company

The conversion of OPC can be done in two ways:
(i) Compulsory conversion: under this category, if OPC exceeds the paid-up share capital of 50 lakhs rupees and if the annual turnoverof the company for three consecutive years exceeds 2 crores rupees, then it shall become either public or private company. This has to be done within six months of the company exceeds its threshold[17].

(ii) Voluntary conversion: if the company is to be converted voluntarily, it cannot be done so until two years have been passed from the date of incorporation of the company, apart from satisfying the conditions mentioned in the category of compulsory conversion of the company.
In either of the categories, the conversion has to be done according to Section 18 of the Act.

OPC and Tax law

Income-tax Act, 1961 hasn’t recognized OPC as a company to levy taxes on it but considers it as a private company and the taxes levied are similar to that of a private company. OPC is chargeable at the rate of 30% flat. If the turn over exceeds 1 crores, then the company is liable to pay surcharge at the rate of 5%. MAT (Minimum Alternate Tax) and DDT (Dividend Distribution Tax) are also applicable on OPC. MAT is the minimum tax that is payable by the company on books profit whether or not the tax on income has been paid or not. DDT is the tax imposed on the domestic that pay dividends to their investors. It is levied by the Government of India.
OPCs shall also comply with many other regulations like TDS regulations, GST regulations, PF and ESI regulations. OPCs shall also have their accounts audited when the turnover of the company exceeds 2crores rupees. OPCs shall also file income tax returns for every financial year before 30th September of that financial year to the Income Tax Department.

Non-applicability of provisions for OPC
Section 122 provides that few provisions like section 98, section 100 to 111 and few more are not applicable to OPCs. The tribunal cannot call a meeting of OPC on its own[18]. OPC shall not call for extra-ordinary general meeting as in the case of other companies, which means notice of meeting need not have to be given to the company[19]. Since, the company has only one member, quorum of the meetings[20], electing the chairman of the meeting[21], proxies during the meeting[22], the member cannot exercise a vote on his own share[23], voting by electronic media or by showing hands or postal ballot are also not applicable to OPC[24]. Thus, a resolution among the membersof the company cannot be passed[25].

Financial Statement
Section 134 of the Act deals with filing of financial statements. Financial statement is defined in Section 2(40) of the Act as a statement to include balance sheet, changes in equity, cash flow statements, profit and loss account and an explanatory note for these statements. But, in the case of OPC, the financial statement shall not include cash flow statement. According to Section 134, the financial statement shall have to be attached with the report from the Board of directors. In case of OPC, the report of the directors attached to the financial statements shall be considered as explanations or comments given by the directors on the financial statement of the company. This shall be filed with Registrar of the companies within 180 days from the closure of the financial year with necessary documents[26]

Thus, these are few features of One Person Company which makes it different from any other company and benefits the person who wants to invest his own capital in the company without fund raising for the company. These features make the company to have its own advantages when a person wants to start OPC. Thus, with the increase of sole proprietorship before Companies Act, 2013, legislation incorporated the concept of OPC in the 2013 act and gave a corporate liability to such companies. Thus, they have their own separate legal entity and have those features that come along separate legal entity.

OPC and Sole Proprietorship
Sole proprietorship is a concept where in a single person carries on a business or firm in the form of sole proprietor. The business is unregistered and it is carried on from generation to generation. Other features of the same shall be looked into with comparison.

Registration of the business
OPC is a private limited company and has to be registered by following the procedure as given under the Companies Act, 2013 and Companies Incorporation Rules, 2014. As soon as a company is registered and incorporated, it becomes a separate legal entity with limited liability.

Whereas, in the case of sole proprietorship, registration of the firm in not mandatory. Thus, it is not a separate legal entity and does not fall with the ambit of company law and hence not recognized and secured. Since, it does not have a separate legal entity, the liability is unlimited.

Limited and Unlimited Liability
As seen above, OPC has limited liability on its shareholder. This means, in case of loss, the shareholder is liable to pay the limited amount that he is liable for and the remaining loss shall be borne by the company. Thus, OPC is a company limited by shares.

Whereas, in the case of sole proprietorship, the owner and the business are one and the same. Thus, the owner shall have unlimited liability when losses are incurred. The owner or the sole proprietor of the firm shall have to borne the entire losses and will not be able to shift it on the shoulders of others.

Succession
OPC is a single member company which has been discussed throughout the article. Nomination of a member to OPC is one of the salient features of the company. As already seen in Section 3 of the Companies act, 2013 a nominee shall have to be appointed by the sole member of the company when the existing member becomes incapacitated. Thus, the nomination of the member carries on the root of OPC, that is, a single member company.

Whereas, in the case of sole proprietorship, on the death or incapacity of the sole proprietor, succession of the business is carried on through an execution of will, as this business is considered as family business. If the sole proprietor has passed it to more than one person, then it shall no longer be a sole proprietorship. Thus, the business loses its agenda of sole proprietorship.

Taxation

Income tax Act, 1961 does not have taxing regulations for OPC as OPC is introduced in the year 2013. Thus, OPC is taxed as a private limited company. The taxation rates are already seen in the salient features of OPC.
Whereas, in the case of sole proprietorship, the firm is considered as income or profit of the sole proprietor as it is carried on by a person and it does not have legal status to it. Thus, it is taxed accordingly and does not have separate provisions for the same under tax law.

Conversion
Conversion of OPC into a private or public limited company is not a hideous process. It can be done in two ways: they are compulsory conversion and voluntary conversion. The company should also exceed the minimum paid-up share capital and average annual turnover.

Whereas, in the case of sole proprietorship, conversion of the firm into any forms of a company is very difficult as the whole structure of the firm will have to be changed to that of a company. MoA and AoA have to be filed. The firm will have to bring in new members and directors and many other formalities. Thus, the process is very hideous.

Thus, the comparison between OPCs and sole proprietorship indicates that carrying on a business in the form of OPC is always secured, with fewer risks involved as compared to that of sole proprietorship which comes with a lot of risks and unnecessary burden on the sole proprietorship. The Companies Act, 2013 has given legal status to that of OPCs in order to encourage secured limited liability sole proprietorship. Thus, One Person Company is more secured and advantageous when compared to the sole proprietorship firms.

Conclusion
Prior to the Companies Act, 2013, a company with minimum 2 members and 2 directors was supposed to be formed. Thus, One Person Company was not recognized in the 1956 Act. But, 2013 Act has given it OPCs a separate legal entity and other facilities which accompany separate legal entity. Other privileges like limited liability, separate property, perpetual succession, capacity to sue and be sues as an artificial person and few fundamental rights like Article 14 of the Constitution of India, 1950 as well.

Everything has its own criticisms as well. OPCs are criticized to be the possible way to tax evasion. As we have seen in the case of Sir DinshawManekjee Petit Case[27], in which Dinshaw was the maximum shareholder of the four companies and the main purpose for which the companies were incorporated was for tax evasion. In the case of OPCs, since there shall be only one shareholder, he shall invest in the company to evade tax and simultaneously earn profits from the company. There has to be a constant check on this aspect of OPCs.

In respect of OPC which is a completely new concept that is introduced by the Companies Act, 2013 is interlinked with other legislation like tax laws, GST regulations, Contract Act and many others. OPCs are private limited companies and also with single membership. In order to OPCs being recognized as single member company and not clubbed with other private limited companies, certain amendments have to be made to other legislations which are interlinked. Thus, OPCs are benefiting the Indian Society with their enormous remarkable features.

End-Notes
[1]T. P. Ghosh, Article, SocietasUnius Personae One Person Company movement in India to accelerate for business expansion, [2016] 133 SCL 77 (Article).
[2]T. N. Pandey, Article, One Person Company – The new concept under the Companies Bill, 2012 (as passed by Lok Sabha) whether necessary?,[2013] 118 SCL 59 (Article).
[3]J.J Irani, Report of Expert Committee on Company Law, 31-5-2005.
[4] Section 2(62) of the Companies Act, 2013.
[5] Section 2(55) of the Companies Act, 2013.
[6] Rule 3 of the Companies Incorporation Rules, 2014.
[7]Ibid.
[8] Section 149 of the Companies Act, 2013.
[9]Ibid
[10] Section 152 of the Companies act, 2013.
[11] Section 12 of the Companies Act, 2013.
[12] R. Saluja, One Person Company (2014).
[13] Section 3 of the Companies act, 2013.
[14] Companies Incorporation Rules, 2014.
[15] Section 4 of the Companies Act, 2013.
[16]Section 122(3) of the Companies Act, 2013; Table-F, Articles of association of a company limited by shares, given in the Companies Act, 2013.
[17] Rule 6 of Companies Incorporation Rules, 2014.
[18] Section 98 of the Companies Act, 2013.
[19] Sections 100 and 101 of the Companies Act, 2013.
[20] Section 103 of the Companies Act, 2013.
[21] Section 104 of the Companies Act, 2013.
[22] Section 105 of the Companies Act, 2013.
[23] Section 106 of the Companies Act, 2013.
[24] Sections 107, 108 and 110 of the Companies Act, 2013 respectively.
[25] Section 111 of the Companies Act, 2013.
[26] Section 137 of the Companies act, 2013.
[27] AIR 1972 Bom 371.

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