One person company is a recently introduced concept in India though it is already a successful and popular form of business in UK, USA, China, Singapore, Turkey, UAE etc. In India, one person company is a strong improvement over sole proprietorship.
As per section 2(62) of the Companies Act,2013, “One person company” means a company which has one person as a member.
It gives a single promoter full control over the company while limiting his/her liability to contributions to the business. This person will be the only shareholder and director (there is nominee director, but with no power until the original director is incapable of entering into a contract).
Recent Amendments introduced vide Union budget 2021
One of the focus points in the Union budget 2021 was “startups” and the Company Incorporation Rules, 2014 was thereby amended. Let us look into the amendments and analyze the impact of the budget on one person company.
Earlier, as per Rule 3 of the Companies (Incorporation) Rules, 2014,
(i)“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.
Explanation I –
“Resident in India” means –
A person who has stayed in India for a period of not less than one hundred and eighty two days during the immediately preceding financial year.
Under the existing/amended law,
(a) in sub-rule (1),- (i) for the words, “and resident in India” the words “whether resident in India or otherwise” shall be substituted; (ii) in Explanation 1, for the words “one hundred and eighty two days” the words “one hundred and twenty days” shall be substituted;
Therefore, as per the amended law, any person whether an Indian citizen or not can form a one person company whereas previously, NRIs were not allowed to incorporate OPCs. The residency period in this case, for NRIs is also reduced to 120 days from 180 days.
Further Amendments were made with respect to conversion into a Private/ Public Company in certain cases.
In the previous law, i.e. Rule 6 of the Companies Incorporation Rules, 2014,
1) Where the paid up share capital of a One Person Company exceeds fifty lakh rupees and its average annual turnover during the relevant period exceeds two crore rupees, it shall cease to be entitled to continue as a One Person Company.
(2) Such One Person Company shall be required to convert itself, within 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 of seven members and three directors in accordance with the provisions of section 18 of the Act.
(3) The One Person Company shall alter its memorandum and articles by passing a 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.
(4) The One Person Company shall within period of sixty days from the date of applicability of sub-rule (1), 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 in sub-rule (1).
Explanation.-For the purposes of this rule,- “relevant period” means the period of immediately preceding three consecutive financial years;
(5) If One Person Company or any officer of the One Person Company contravenes the provisions of these rules, One Person Company or any officer of the One Person Company shall be punishable with fine which may extend to ten thousand rupees and with a further fine which may extend to one thousand rupees for every day after the first during which such contravention continues.
(6) A One Person company can get itself converted into a Private or Public company after increasing the minimum number of members and directors to two or minimum of seven members and two or three directors as the case may be, and by maintaining the minimum paid-up capital as per requirements of the Act for such class of company and by making due compliance of section 18 of the Act for conversion.
As per the amended provision,
(1) The One Person company shall alter its memorandum and articles by passing a 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.
(2) A One Person company may be converted into a Private or Public Company, other than a company registered under section 8 of the Act, after increasing the minimum number of members and directors to two or seven members and two or three directors, as the case may be, and maintaining the minimum paid-up capital as per the requirements of the Act for such class of company and by making due compliance of section 18 of the Act for conversion.
(3) The company shall file an application in e-Form No.INC-6 for its conversion into Private or Public Company, other than under section 8 of the Act, along with fees as provided in the Companies (Registration offices and fees) Rules, 2014 by attaching documents, namely:- (a) Altered MOA and AOA; (b) copy of resolution; (c) the list of proposed members and its directors along with consent; (d) list of creditors; and (e) the latest audited balance sheet and profit and loss account.
(4) On being satisfied that the requirements stated herein have been complied with, the Registrar shall approve the form and issue the Certificate.
As per the amended provision; the rule relating to voluntary conversion unless OPC has completed 6 months/two years from the date of incorporation is proposed to be omitted and with effect from 01.04.2021, conversion of one person company into a private or public company can be done anytime. Also, a one person company may be converted into a private or public company other than a company registered under section 8 of the Act, after increasing the minimum number of directors and members to two and minimum number of members to seven and three directors as the case may be. Further, the limitation of paid-up capital and turnover presently applicable for OPCs is done away with, so that there are no restrictions to growth of OPCs in terms of paid up capital and turnover.
As per the previous law, Rule 7 is as under:
(1) A private company other than a company registered under section 8 of the Act having paid up share capital of fifty lakhs rupees or less and average annual turnover during the relevant period two crore rupees or less may convert itself into one person company by passing a special resolution in the general meeting.
(4) The company shall 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) The directors of the company shall give a declaration by way of 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.
In Sub rule 1-
For words, “having paid up share capital of fifty lakhs rupees or less and average annual turnover during the relevant period is two crore rupees or less” shall be omitted
(1) A private company other than a company registered under section 8 of the Act may convert itself into one person company by passing a special resolution in the general meeting.
In sub-rule (4)(i), the words“, 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” shall be omitted
(4) Form, Fees and Documents required for filing Conversion- Form- e-Form No. INC-6
Fees- As per Companies (Registration offices and fees) Rules, 2014
Documents required for Conversion-
(i) The directors of the company shall give a declaration by way of affidavit duly sworn in confirming that all members and creditors of the company have given their consent for conversion, as the case may be
(ii) List of members and creditors
(iii) Latest audited balance sheet and profit and loss account
(iv) Copy of No Objection letter of secured creditors
Rationalization of e-forms applicable for OPCs by omitting e-form INC-5 and modification of e-form INC-6 (Application for conversion from OPC to private or public company or application from Private or Public Company to OPC).
Other compliances: The provision of holding annual general meetings does not apply to one person company. One person company is required to hold one board meeting in each half of the calendar year and the time gap between two board meetings should not be less than 90 days. However, you are required to conduct statutory audits, maintain proper books of accounts, filing of business income tax returns and financial statements as per the Ministry of Corporate affairs.
The OPC, like the private limited company, has some industry specific advantages but taxes are to be paid at a flat rate of 30% on profits, the DDT applies as does MAT.
When starting a one person company, the entrepreneur has to focus on a great deal of compliances such as hunting for funds, finalizing on the brand plan, hiring employees and lot of other crucial steps and the entire process can be quite cumbersome. Fortunately, the recent amendments and reduced compliance burden helps in mitigating the early risks of entrepreneurship more palatable. An entrepreneur can now focus on ideas towards building and marketing their business. Besides, with covid disrupting businesses and leaving people jobless, it has become all the more compelling to start a business based on one’s own ideas.
The recent amendments encourage new, young and innovative business start-ups because they will not face any restriction in terms of paid up capital or turnover and would also be allowed to convert into any other type of company at any time. This amendment could also encourage the NRIs to startup in India with less compliance requirements and convert to a Private Limited Company later on. This helps entrepreneurs to test the business model and upon building a marketable product, approach angel investors, venture capitalists for funding and easily convert into a private limited company. Hence, OPCs have the flexibility of continuing with the same structure or converting if the need be.
The move to incentivize OPCs by reducing the residency limit and allowing NRIs to set up companies in form of OPC in the country is expected to provide broader investment opportunities for venture funds, while providing leverage to set up businesses in India. The removal of threshold limit for conversion of OPCs into any kind of companies and private companies into OPCs shall be of huge relief for companies going for funding without the burden of compulsorily converting themselves. It also gives them a freedom and ease of converting at a point of time which goes with the Government’s agenda of Ease of doing business and Self reliance India.
Further, OPCs have separate legal identity and existence from its shareholder. Hence, an added advantage is limited liability, wherein you are not required to risk your personal assets and your liability is limited to only the amount of shares held. This would encourage entrepreneurial persons to take the challenge of doing business without bothering about liabilities getting to the personal assets. OPCs can also open up easier bank credit facilities. Nevertheless, OPCs face prohibition of carrying any Non-Banking Financial Investment activities or issuing any employee stock options. A drawback from the taxation point of view is that, when compared to proprietorship ventures in smaller ventures, the base tax rate for a company is around 30%. However, the benefits far outweigh the risks/drawbacks associated with it.
A one person company is exempted from stringent legal compliances of general meetings, 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 director. One can just register with the ROC and get started. No need for MOUs, hiring auditors, doing bi-annual audits, board meetings, ensuring quorums, looking for partners and so on.
This step/amendment would definitely boost startups in India and also encourage solo entrepreneurs to adopt the structure of OPC who were earlier deterred by the mandatory conversion requirements and the minimum residency period in India.