One Person Company: Full Step By Step Overview
[Updated: Oct 2015]
One person company is a new concept in India which has been introduced by the companies act 2013. In the old Companies act 1956 a minimum of two directors and shareholders were required to form a private limited company. However in case of a One person company, only 1 person is required who can be a shareholder as well as the Director. Hence the name, One Person Company.
The concept opens up spectacular possibilities for sole proprietors and entrepreneur who can take the the advantages of Limited liability and corporatization but were held back in doing so because of the requirements of finding a second director or second shareholder.
A small note on what is meant by limited liability
The biggest difference between a sole proprietor and a One Person Company would be that in case of a One Person Company, your liability in case the business fails, is limited to only the business assets. In case of a proprietorship, the liability is unlimited and the creditors of your business can even take hold of your home and personal assets like your house, personal bank accounts, jewellery etc which can be used to settle the business liabilities.
Concepts Behind One Person Company
This is the fundamental concept of a One Person Company. In fact, One Person Company is defined in the Companies Act as a Company which has only one member. A single shareholder holds 100 percent shareholding.
The thing to be kept in mind is that the Company Incorporation Rules provide that only a natural person who is a resident of india and also a citizen of india can form a one person company. It means that other legal entities like companies or societies or other corporate entities cannot form a one person company.
Further it also means that Non resident Indians or Foreign citizens can not form a One person company. Further the rules also specify that a person can be a shareholder in only one one person company at any given time. It simply means an individual cannot have two different one person companies in his name.
2. One Director
The other important point is that a One Person Company may have only one director. But at the same time there is no bar on more number of directors. However, as per the Act, the total number of directors shall not be more than 15.
As per the Companies Act, if nothing is mentioned in the incorporation document, it would be assumed the sole shareholder shall also be the sole director in the one person company and which shall be practically the case in most One Person Companies incorporated.
This is a very important concept where the person forming the One Person Company has to nominate a Nominee with his written consent who, in the event of death or inability to contract of the owner of the One Person Company, shall come forward and take over the reins of the one person company.
Please note that the requirements of being a resident Indian and citizen of India also apply to the nominee. Further if the person so nominated becomes the member of such a One Person Company and is already a member of another One Person Company, at the same time, by virtue of rules has to decide within 6 months which one person company he has to continue. One more thing, the member can change the nominee at any point of time.
On the death of the sole member, the nominee shall be the person recognized by the company as having title to all the shares of the member. Such nominee shall be entitled to the same dividends and other rights and liabilities to which such sole member of the company was entitled or liable.
On becoming member, such nominee shall nominate any other person with the prior written consent of such person who, shall in the event of the death of the member, become the member of the company
Since nothing has been specified as such by the finance ministry, it is assumed that the rates of taxation applicable for a private limited company shall apply to a One Person Company. Net profits, which are calculated by deducting all allowable expenses from the turnover of sales, shall be taxable at the rate of 30 percentage + education cess.
5. Freedom from compliance
One Person Company also gets freedom from complying with many requirements as normally applicable to other private limited Companies. Certain sections like Section 96, 98 and sections 100 to 111 are not applicable for a One Person Company. Some of these are mentioned below:
– 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.
– For the purposes of holding board meetings, in case of a OPC which has only One director, it shall be sufficient compliance if all resolutions required to be passed by such a company at a board meeting are entered in a minute book – signed and dated by the member and such date shall be deemed to have the date of the board meeting for all the purposes under Companies Act, 2013.
– No requirement of preparing cash Flow in the annual financial statements
– Annual returns can be signed by the Director himself instead of A Company Secretary
6. Related Party Transactions
Where One Person Company enters into a contract with the sole owner of the company who is also the director of the company, the company shall, unless the contract is in writing, ensure that the terms of the contract or offer are contained in a memorandum are recorded in the minutes of the first meeting of the Board of Directors of the company held next after entering into contract.
Further, the company shall inform the Registrar about every contract entered into by the company and recorded in the minutes of the meeting of its Board of Directors under sub-section (1) within a period of fifteen days of the date of approval by the Board.
This clause shall be very much in vogue since the business of the One Person Company may use many assets of the owner and may pay compensation for that. Examples may be rent paid for using property or machinery or Furniture owned by the Owner. It may pay interest on loans taken from the owner. It may pay salaries to the Owner. All these contracts are covered under the section.
7. Process of One Person Company Incorporation:
The process of incorporation of a one person company is a very simple one.
First the sole shareholder shall get a Director Identification Number (DIN) as well as a digital signature certificate.
Then he should apply for the name of the company
After that he should get the consent of the nominee in the prescribed forms.
Then he shall file the consent along with the final incorporation forms with the Memorandum and Articles and other required documents
After that he shall receive the final incorporation certificate from the register of companies. Now he can commence business under the name.
Please note that that the words ‘‘One Person Company’’ shall be mentioned in brackets below the name of such company, wherever its name is printed, affixed or engraved.
8. Conversion from one person company to Pvt Ltd and vice versa
It is provided in the Act that when a One Person Company reaches a paid up Capital of 50 lakh rupees or more or when the average turnover of the company which is Rs. 2 Crores or more for a period of 3 years, then the company shall be converted into a private limited company after making the necessary changes in the memorandum of association and articles of association and shall comply with all the requirements of a private limited company.
Conversion of a private limited company into a one person company- A private limited company which does not have a paid up capital of more than Rs. 50 lakhs or where the average annual turnover for the past 3 years is less than Rs. 2 Crores can convert itself into a One Person Company and enjoy the benefits as such.
This is a concept that is expected to give big impetus to Corporatization in the country. The only care to be taken is that there should be no regulatory mess ups like the ones which hampered the growth of Limited Liability Partnerships in this country. Otherwise the rules framed so far with respect to One Person Company have been very sensible.
[box type=”shadow” ]Disclaimer: The author CA. Bhavesh Savla is a practicing Chartered Accountant based at Mumbai. Please contact him at firstname.lastname@example.org or visit www.cabks.in in case of any further queries about One Person Company. Please note that this write-up is intended to give a general overview and under no circumstances, can be taken as actionable professional advice. No liability rests or exists or is created against the author for any action taken by anyone on the basis of this article.[/box]