Abstract
The enactment of One Person Company (OPC) under the Companies Act, 2013 was an important step in Indian corporate laws, as it provided an entrepreneur with an opportunity to create a corporation with limited liability and a separate legal entity. The concept of OPC is a middle way for the entrepreneur between the sole proprietorship and a private limited company, thus stimulating entrepreneurs to formalize their business with the help of a company while complying with less complex rules. The article considers the statutory regime of OPC, namely the legislative provisions of the Companies Act, 2013 and Companies (Incorporation) Rules, 2014. Moreover, the article discusses the requirements of eligibility for the creation of such a company, the procedure of incorporation using the SPICe+ tool, the benefits of compliance exemptions, and the legal regulation of the conversion. Furthermore, the article considers the amendments of 2021 to the law on OPC and analyzes how they improve the conditions for entrepreneurship and increase the ease of doing business in India. Even though these changes make the regime of the OPC more flexible and attractive for entrepreneurs, some drawbacks are still present.
Keywords
One Person Company (OPC); Companies Act, 2013; Corporate Law; SPICe+ Incorporation; Limited Liability; Entrepreneurship; Companies (Incorporation) Rules, 2014; Ease of Doing Business; 2021 Amendment; Corporate Governance.
Introduction
Prior to the Companies Act, 2013, the Indian company law had provided that there should be a minimum of two members for incorporation of a company, thereby making it necessary that a single individual cannot reap the benefits of incorporation. The Companies Act, 2013 introduced the concept of ‘One Person Company’ (OPC) under Section 2(62).[1] The OPC is a company that has a single member and possesses all the advantages of being a sole proprietorship firm and also enjoys an independent legal personality along with limited liability. It is the concept which aims to encourage individuals to form their own business entities. The present article analyses the legal framework, eligibility requirements, and the step-wise process of formation along with analyzing the recent changes in 2021 to the concept of OPC.
Background and Development of the Law
Prior to the passage of the Companies Act, 2013, an entrepreneur in India had the option to engage in business either as a sole proprietor or a partnership with another person. While being a sole proprietor gave complete control over the business, it lacked the advantage of being a separate legal entity or limited liability. This was the main reason why many small entrepreneurs chose not to register their businesses as a company.
Understanding this problem, the J.J. Irani Committee in 2005 proposed the formation of the single member company.[2] The Committee noted that permitting a single person to register a company will lead to formalization of the business and will ensure that the issues of corporate governance and limited liability are addressed.
The concept of the single member company was already recognized in many other countries including the United Kingdom, Singapore, United States, and China with reforms in Company Law of 2005. Based on this international practice, the Companies Act, 2013 enacted the One Person Company (OPC).
Statutory Framework
The statutory framework that governs a One Person Company (OPC) consists of the Companies Act, 2013, and the Companies (Incorporation) Rules, 2014. According to Section 2(62), an OPC is defined as a company that consists of only one member. Under Section 3(1)(c), the law allows the formation of a company with just one member, which provides for an exception to the statutory rule of multiple members.[3] Section 4(1)(a) states that there must be the inclusion of the words “One Person Company” or “OPC” in the name of the company.[4] Rule 3 of the Companies (Incorporation) Rules, 2014 provides for the conditions for incorporation of the OPC, and who can incorporate such companies.[5] Rule 4 states that the sole member shall appoint some other eligible individual who will become the member in case of the death or disability of the sole member.[6]
Despite being a specialized entity with some unique features, OPC is not a separate class of company. Legally speaking, an OPC is classified as a type of private company with some statutory exceptions.
Criteria for Inclusion
- Individual: It is necessary that the individual incorporates an OPC; corporations like companies and LLPs cannot form an OPC.
- Citizen of India: The individual should be a citizen of India.
- NRI eligibility (post 2021): Post the Companies (Incorporation) Second Amendment Rules, 2021, Non-Resident Indians (NRIs) can also incorporate an OPC.
- 120 day residency criteria: The criterion of residency reduced from 182 days to 120 days for the immediately preceding financial year.[7]
- One OPC criterion: At any given point of time, a person can incorporate only one OPC.
- No nominees: A person cannot be nominee in more than one OPC at any given time.
- Cannot form Section 8 companies: A company cannot be formed or converted into a company under Section 8 of Companies Act, 2013.
- Does not have NBFC activities: An OPC cannot carry out NBFI activities, i.e., investment in the securities of any body corporate.
Registration Process of an OPC Through SPICe+
1. Acquisition of Digital Signature Certificate (DSC)
A digital signature certificate is to be obtained by the proposed director from a certifying authority authorized for this purpose. It is important to have a DSC because all the papers related to incorporation are filed electronically with the Ministry of Corporate Affairs (MCA).[8]
2. Name Reservation Through SPICe+ Part A
The application of name reservation must be made by the applicant through SPICe+ Part A of the MCA portal. The proposed name should be unique and compliant with Companies Act, 2013 and Companies (Incorporation) Rules, 2014 and should contain the suffix “(OPC) Private Limited”.[9]
3. Filing SPICe+ Part B For Incorporation
Once the name is reserved successfully, the applicant has to fill out SPICe+ Part B which includes information regarding registered office of the company, capital structure, subscriber, and director of the company.[10]
4. Submit Forms Linked to Each Other
Linked forms need to be submitted along with the application for OPC, including SPICe-MOA (INC-33) for the Memorandum of Association, SPICe-AOA (INC-34) for the Articles of Association, and AGILE-PRO-S (INC-35) for GST (if any), EPFO, ESIC, Professional Tax (if any), bank account opening, Shops and Establishment registration (if any).[11]
5. Submission of the Form INC-3
The sole member needs to nominate another eligible individual who becomes the member in case of the death of incapacity of the existing member. The consent of the nominee has to be provided in Form INC-3.[12]
6. Issuance of the Certificate of Incorporation
Upon completion of the process of verification of the application and supporting documents, the Registrar of Companies (RoC) issues the Certificate of Incorporation, which means that OPC comes into existence, and CIN is assigned.[13]
7. Post Incorporation Requirements
Post incorporation, the company gets the PAN and TAN with the help of the integrated registration process. The company needs to have a bank account opened.[14]
Compliance Reliefs Offered to an OPC (One Person Company)
There are various reliefs available to an OPC from the requirements of the Companies Act, 2013 as given below:
- No AGM Requirement: No requirement of conducting an Annual General Meeting arises in the case of an OPC since it has only one member.[15]
- No Cash Flow Statement: No requirement for a Cash Flow Statement to be made in the financial statements of the company.[16]
- Director Signature: In case where there is only one director, the annual return and other statutory documents can be signed by that sole director.[17]
- Appointment of Independent Directors: No need for independent director provisions.[18]
Critical Evaluation of the 2021 Amendment
One of the major developments in the law relating to OPCs is the liberalisation of the regime by the Companies (Incorporation) Second Amendment Rules, 2021. Under the amendment, Non-Resident Indians (NRIs) are eligible to form OPCs, and the residency period required has been reduced from 182 days to 120 days. The amendment also abolished the requirement to compulsorily convert the OPC depending upon its paid-up share capital and turnover, which means that an OPC will be able to carry on its operations in the same form irrespective of its size.
Undoubtedly, these amendments have made the OPC regime more flexible and appealing, especially for individual entrepreneurs and NRIs. But there are certain disadvantages associated with it. For example, an OPC cannot list its securities on any stock exchange, which makes it inappropriate for firms that wish to make themselves publicly known. Another issue is that most of the incentives and tax benefits provided under the Startup India Scheme are more convenient for companies incorporated in other forms since these firms allow multiple stakeholders to come in the picture.
Conversion of OPC
The Companies (Incorporation) Rules, 2014, which were amended in 2021, have now made the process of conversion of an OPC much easier. Rule 6 allows an OPC to get converted voluntarily into a private limited or a public limited company at any point of time without having to wait for the completion of the two-year lock-in period as previously required.[19] This provision helps entrepreneurs to reorganize the corporate form of the business as per the need of their expanding business and additional membership or capital needs. An OPC, however, cannot be converted into a company incorporated under Section 8 of the Companies Act, 2013.[20]
Limitations and Critique
Despite the advantages provided by the One Person Company (OPC), there are some inherent drawbacks to this form of organization. Due to the fact that in most cases the owner functions as the director, there is not much independence in the decision making process, which may lead to a lack of governance. Internal control, which might become an issue during the company growth, is not present in this type of business formation. However, it should be noted that countries like the UK allow for single-person companies due to more efficient corporate governance and disclosure systems.[21]
Conclusion
One Person Company (OPC), as the name suggests, is a company where one person owns the majority share. OPC can be seen as a crucial link between a sole proprietorship and a company since it offers limited liability, separate legal existence, and easier compliance procedures. The legal changes in 2021 have made the concept of OPC even stronger through incorporation and conversion. There are some disadvantages of an OPC which include its incapability to raise money and governance issues.
References
[1] Companies Act 2013, s 2(62).
[2] Ministry of Company Affairs, Report of the Expert Committee on Company Law ( JJ Irani Committee Report, 2005).
[3] Companies Act 2013, s 3(1)(c).
[4] Companies Act 2013, s 4(1)(a).
[5] Companies (Incorporation) Rules 2014, r 3.
[6] Companies (Incorporation) Rules 2014, r 4.
[7] Companies (Incorporation) Second Amendment Rules 2021.
[8] Companies (Incorporation) Rules 2014.
[9] Ministry of Corporate Affairs, SPICe + (Simplified Proforma for Incorporating Company Electronically Plus).
[10] Companies Act 2013, s 7.
[11] Companies (Incorporation) Rules 2014, Forms INC-33, INC-34 and INC-35.
[12] Companies (Incorporation) Rules 2014, Form INC-3.
[13] Companies Act 2013, s 7(2).
[14] Income-tax 1961; Companies (Incorporation) Rules 2014.
[15] Companies Act 2013, s 96(1) proviso.
[16] Companies Act 2013, s 2(40).
[17] Companies Act 2013, s 92.
[18] Companies Act 2013, s 149(4).
[19] Companies (Incorporation) Rules 2014, r 6.
[20] Companies Act 2013, s 8.
[21] Paul L Davies and Sarah Worthington, Gower’s Principles of Modern Company Law (11th edn, Sweet & Maxwell 2021).
