Advantages and Disadvantages of One Person Company

One Person Company (OPC) this concept is new in India, it has been very popular abroad, including in Singapore, USA, even Europe. Currently, it is a grey area, and only time will tell how well this will work in India-

Company.—(1) Only a natural person who is an Indian citizen and resident in India—

(a) shall be eligible to incorporate a One Person Company;

(b) shall be a nominee for the sole member of a One Person Company

I. Features of One Person Company:

• Company may be a One Person Company (OPC) which requires only one person as a subscriber to form a company and such a company will be treated under the Act as a private company.
• A person, who registers one-person company, is not eligible to incorporate more than one one-person company
• The memorandum of OPC must indicate the name of a person (other than the subscriber), with his prior written consent in the prescribed form, who will become a member of the OPC when the subscriber dies or is incapacitated to contract.
• The nominee to the memorandum of one person company shall not be eligible to become a nominee for more than one such company.

II. Advantages of One Person Company

A One Person Company (OPC) Private Limited has many advantages as compared to Companies and Proprietorship firm.

A. COMPLIANCE BURDEN:

The One person Company includes in the definition of “Private Limited Company” given under section 2(68) of the Companies Act, 2013. Thus, an OPC will be required to comply with provisions applicable to private companies. However, OPCs have been provided with a number of exemptions and therefore have lesser compliance related burden.

B. ORGANIZED SECTOR OF PROPRIETORSHIP COMPANY:

OPC will bring the unorganized sector of proprietorship into the organized version of a private limited company. Various small and medium enterprises, doing business as sole proprietors, might enter into the corporate domain. The organized version of OPC will open the avenues for more favorable banking facilities. Proprietors always have unlimited liability. If such a proprietor does business through an OPC, then liability of the member is limited.

C. MINIMUM REQUIREMENTS:

√ Minimum 1 Shareholder

√ Minimum 1 Director

√ The director and shareholder can be same person

√ Minimum 1 Nominee

√ No Need of any Minimum Share Capital

√ Letters ‘OPC’ to be suffixed with the name of OPCs to distinguish it from other companies

D. LIMITED LIABILITY PROTECTION TO DIRECTORS AND SHAREHOLDER:

The most significant reason for shareholders to incorporate the ‘single-person company’ is certainly the desire for the limited liability.

All unfortunate events in business are not always under an entrepreneur’s control; hence it is important to secure the personal assets of the owner, if the business lands up in crises.

While doing business as a proprietorship firm, the personal assets of the proprietor can be at risk in the event of failure, but this is not the case for a One Person Private Limited Company, as the shareholder liability is limited to his shareholding. This means any loss or debts which is purely of business nature will not impact, personal savings or wealth of an entrepreneur.

If the business is unable to pay its liabilities, the individual has to pay such liabilities off in the case of sole proprietorship; and the individual is not responsible for such liabilities in the case of a one person company.

An OPC gives the advantage of limited liability to entrepreneurs whereby the liability of the member will be limited to the unpaid subscription money. This benefit is not available in case of a sole proprietorship.

“Thus OPC allows an individual to take risks without risking his/her personal assets”.

E. LEGAL STATUS AND SOCIAL RECOGNITION FOR YOUR BUSINESS

One Person Company is a Private Limited Structure; this is the most popular business structure in the world. Gives suppliers and customers a sense of confidence in business. Large organizations prefer to deal with private limited companies instead of proprietorship firms. Pvt. Ltd. business structure enjoys corporate status in society which helps the entrepreneur to attract quality workforce and helps to retain them by giving corporate designations, like directorship. These designations cannot be used by proprietorship firms.

F. ADEQUATE SAFEGUARDS:

In case of death/disability of the sole person should be provided through appointment of another individual as nominee director. On the demise of the original director, the nominee director will manage the affairs of the company till the date of transmission of shares to legal heirs of the demised member.

G. EASY TO GET LOAN FROM BANKS

Banking and financial institutions prefer to lend money to the company rather than proprietary firms. In most of the situations Banks insist the entrepreneurs to convert their firm into a Private Limited company before sanctioning funds. So it is better to register your startup as a One Person private limited rather than proprietary firm.

H. COMPLETE CONTROL OF THE COMPANY WITH THE SINGLE OWNER

This leads to fast decision making and execution. Yet he/she can appoint as many as 15 directors in the OPC for administrative functions, without giving any share to them.

I. EASY TO MANAGE:

♦ No requirement to hold annual or Extra Ordinary General Meetings:Only the resolution shall be communicated by the member of the company and entered in the minutes book and signed and dated by the member and such date shall be deemed to be the date of meeting.

♦ Board Meeting:A One Person Company may conduct 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.

♦ Quorum:The provisions of Section 174 (Quorum for meetings of Board) will not apply to One Person Company in which there is only one director on its Board of Directors.

♦ Minutes:Where the company is having only one director, all the businesses to be at the transacted meeting of the Board shall be entered into minutes book maintained under section 118. No need to hold Board Meeting in this case.

J. FILLING WITH ROC:

• Very few ROC filing is to be filed with the Registrar of Companies (ROC).
• Mandatory rotation of auditor after expiry of maximum term is not applicable.
• The provisions of Section 98 and Sections 100 to 111 (both inclusive), relating to holding of general meetings, shall not apply to a One Person Company.

K. PERPETUAL SUCCESSION:

An OPC being an incorporated entity will also have the feature of perpetual succession and will make it easier for entrepreneurs to raise capital for business. The OPC is an artificial entity distinct from its owner. Creditors should therefore be warned that their claims against the business cannot be pressed against the owner.

L. TAX FLEXIBILITY AND SAVINGS

In an OPC, it is possible for a company to make a valid contract with its shareholder or directors. This means as a director you can receive remuneration, as a lessor you can receive rent, as a creditor you can lend money to your own company and earn interest. Directors’ remuneration, rent and interest are deductible expenses which reduces the profitability of the Company and ultimately brings down taxable income of your business.

III. Disadvantages of One Person Company

A. MEMBERS:

> One-person Company can have Minimum or Maximum no. of 1 Member.

> A minor shall not be eligible to become a member or nominee of the One Person Company or can hold share with beneficial interest.

> Only a natural person who is an Indian citizen and resident in India shall be eligible to incorporate a One Person Company and shall be a nominee for the sole member of a One Person Company.

B. SUITABLE ONLY FOR SMALL BUSINESS:

OPC is suitable only for small business. OPC can have maximum Paid up share capital of Rs.50 Lakhs or Turnover of Rs.2 Crores. Otherwise OPC need to be converted into Private Ltd Company.

C. BUSINESS ACTIVITIES:

> One Person Company cannot carry out Non – Banking Financial Investment activities including investment in securities of anybody corporates.

> One Person Company cannot be incorporated or converted into a company under Section 8 of the Act.

D. PERPETUAL SUCCESSION:

This is Very concept of a separate legal entity being created for a perpetual succession that is continuation of the company even after the death or retirement of a member is also challenged. Because the nominee whose name has been mentioned in the memorandum of association will become the member of the company in the event of death of the existing member.

However it is doubtful that it would do any good for the company because the person is not being a member of the company and also not involved in the day to day operation of the company, would not be able to succeed the business after the death of the member.

Though the Act extends slew of exemptions to a One Person company in terms of conducting AGM, EGM, Quorum of meetings, restriction on voting rights or filing its financial statements, yet the incorporation of such a company requires lots of paper work as compared to a sole proprietorship. These procedural complexities with respect to incorporation of One Person Company might make this concept less attractive for sole entrepreneurs

E. SPARATION OF OWNER AND CONTROL:

This is one of the characteristics of the company, which is seriously challenged by the new Companies Act ,2013, where the line between the ownership and control is blurred.

Which might result in unethical business practices.

F. OTHER DISADVANTAGES:

> A person shall not be eligible to incorporate more than a One Person Company or become nominee in more than one such company.

> NRIs not allowed incorporating One Person Company.

> Requirement to appoint a nominee for incorporating a One Person Company:

(Author – CS Divesh Goyal, ACS is a Company Secretary in Practice from Delhi and can be contacted at [email protected])

(Republished with Amendments)