One man Company

Abstract:-

One man company is certainly a revolutionary concept which is accepted and

welcomed by many entrepreneurs. One man company is where a single man holds virtually
whole of the share capital of the company and is the sole managing director of the company.
This sole man alone enjoys controlling the whole company. The Revolutionary concept was
introduced under Companies Act,2013. One person company is a viable option for starting an
unregistered company. It was done with a view of changing the national and international
economic contribution. Such type of company though valid and legal it has loopholes which
cant be put up with as it is a one man company aspect. One of the most significant
advantages of this is the limited liability protection given to the one person holding and
managing the company. This is both a boon and bane which will be discussed further below.
Society as such as India to develop and adapt to such situation introduced herein, it might
take time. This may seem an advantageous process of developing the economic society and
fair contribution of wealth but it can never be ignored on the fact that it is still ahalf-baked
concept.

Keywords: One man, Company, Limited liability, Disadvantage, Corporate.

Research Questions:-

1. Whether the one-man company is full-fledged and a finished concept?

2. Whether the feature Limited liability is necessary for one man company and is it
advantageous?
Introduction:-

The revolutionary idea of One Man Company was brought forth in the Companies Act,2013
which was first recommended by the expert committee of Dr.JJIrani in 2005. This Act tries to
fill the lacunas and make remarkable changes in Indias Corporate regime. It also aims for
transparency in the corporate field as well as with the Government. To change the traditional
view of corporate existence and to inject a growth in the economic development both national
and international environment the concept of one man company was brought up.

To generate economic growth and employment opportunities and to encourage entrepreneurs

to contribute with simpler legal compliances, One man company was introduced. It is a
departure from the traditional members required for private limited company which is least 2
members to subscribe to the Memorandum of association and Article of Association. It also
surpasses the Public limited company which requires 7 members the least. The Company
Act,2013 has made possible what as a fact in old company law and brought one man
company to reality. The company was said that it can give 99 shares out of 100 to one person
and the 1 to the nominee. Now that it is made possible, the one man owning the company can
enjoy all the profits alone, can control and manage the company and enjoys the fruitful nature
of separate legal existence.

The first part of the article will deal with the basic concept of one man company and
following subsequent part will deal with the key issues and questions to be answered. Further
there is an analysis of One Man company and its success in the Indian Scenario and objective
discussion on whether it is a boon or a bane in this economic society of India, which will end
by suggestion for improving the one man company concept to suit the Indian Scenario.

One Man Company:-

This concept of One Man Company was introduced in the Companies Act,2013
which acted as an alternative for the sole proprietorship form of business but with more
advantageous and progressive changes to the features with legality. It basically consist of
single Natural Person. The One man company also called as One person Company can start
with minimum one shareholder and one director. The highlight of this is that the one
shareholder can be the director. As per Section 152(1) of the Act, the single member of the
One man Company is deemed to be the first and only director the company unless the
directors are duly appointed by the member. The minimum and maximum number of
directors can extend from 1 to 151 and if more than 15 directors are needed then a resolution
must be passed by One Person company in that effect.2

One Person Company (hereinafter called as OPC) has been defined under Section 2 (62) of
the Act as a company which has only one person as its member. Further, Rule 2.1 of the
Draft Rules under Companies Act, 2013 clarifies the term Personby stating that the person
as contemplated by the Act should be a natural person.3 Meaning that there OPC can be
started and obtained by the Naturally born resident of India who have at least stayed in India
for 182 days during the immediate preceding circumstance of initiating OPC.4 However that
person cannot form more than one OPC.5 An OPC cannot be converted into Company with
charitable objectives or carry out non-banking financial activities, including investment in
securities of any body corporate.6It is also to be noted that Section 3 of the Act classifies and
confers OPC the status of a private company and terms it as one man company. However
there are differentiation between Private company and One man Company in certain
characteristics.

Thus it can be concluded that OPC will consist of one member and shall be conferred with
the status and functions of Private limited Company.

The Companies Act,2013 enables OPC to be established under any of the below categories
such as:

(i) Company limited by shares7.: where the liability of the member is limited by the
unpaid amount of the shares. But by saying that it has limited liability doesnt
mean everything is limited, the members liability is limited whereas the
companys liability is unlimited.8

1
Section 149(1)(a) of Companies Act,2013
2
One Person Company act 2013, https://indiancaselaws.wordpress.com/2015/09/16/one-person-company-
under-companies-act-2013/ Last seen: 20/07/2017.
3
Companies Act,2013.
4
Rule 3.1 of Companies (incorporation) Rules,2014.
5
Rule 3.2 of Companies (incorporation) Rules,2014.
6
Section 8 of the Companies Act,2013.
7
Section 3(2) (a) of the Companies Act,2013
8
http://www.caclubindia.com/forum/company-limited-by-shares-43139.asp
 (ii) Company limited by guarantee.9the liability of its members is limited to the
amount each member has undertaken to contribute to the aspects of company in
event of it being wound up.

This is limited in the Memorandum of Association and the usage of the word One Person
Company is necessarily to be mentioned below the name of the company wherever it is used
or engraved. The OPC can be started with a name under which activities of the company are
to be carried out under the memorandum of association and legal entity of the company can
be obtained by complying with the provisions of registration as mentioned in the Act.

Regardless of the freedom given, there are limitation to which the OPC can be incorporated
in:

Apart from the natural person, the following limitations also exist.

1. Restriction on right to transfer the shares

2. Shall have minimum paid up capital of INR 1 Lac.10
3. No prospectus to be issued for the subscription of the securities11.

No person shall incorporate more than 5 OPC and only natural and resident of India12 can be
a nominee for the sole member of OPC. An OPC should mention a nominee in the event of
death, incapacity etc.., this nominee should give a written consent and this should be filed
with the Registrar of Company at the time of incorporation along with Memorandum of
Association and Articles of Association13.

Background of OPC and its reasoning:-

The concept of OPC was brought forth in the new Companies Act,2013 mainly based on the
recommendations of the Expert committee on Company Law which was headed by JJ. Irani
in 200514. Although it is a new concept in India it has been in existence for several years now

9
Section 3(2) (b) of the companies Act,2013.
10
Section 2(68) of Companies Act,2013.
11
www.onepersoncompany.in
12
Explanation to Rule 2.1 (1) of the Draft Rules under Companies act, 2013 explains the term resident in India
as follows: The term "resident in India" means a person who has stayed in India for a period of not less than
one hundred and eighty two days (182) during the immediately preceding one financial year.
13
First Proviso, Section 3(1)( c), Companies Act,2013
14
The Government of India constituted an Expert Committee on Company Law on 2nd December, 2004 under
the chairmanship of Dr.J.J.Irani. The committee was set up to propose revisions to the Companies Act 1956
with an objective to adopt the changes taking place in the national and international best practices and hence
meet the requirements of ever-changing business models. The Committee presented its report to Government
in May 2005.
in European countries. The famous case Salomon v A Salomon & Co. Ltd..,15 put the path for
one man company as a precedent. In this case Lord Hershel remarked:

It is said that the respondent company is a one man company, and that in this respect it
differs from such companies as those to which I have alluded. But it has often happened that
a business transferred to a joint stock company has been the property of three or four persons
only, and that the other subscribers of the memorandum have been clerks or other persons
who possessed little or no interest in the concern. I am unable to see how it can be lawful for
three or four or six persons to form a company for the purpose of employing their capital in
trading with the benefit of limited liability, and not for one person to do so, provided in each
case, the requirements of the statute have been complied with and the company has been
validly constituted. How does it concern the creditor whether the capital of the company is
owned by seven persons in equal shares, with the right to equal share of the profits, or
whether it is almost entirely owned by one person, who practically takes the whole of the
profits.

The reason or the rationale behind this is given by the Expert committee:

With increasing use of information technology and computers, emergence of the service
sector, it is time that the entrepreneurial capabilities of the people are given an outlet for
participation in economic activity. Such economic activity may take place through the
creation of an economic person in the form of a company. Yet it would not be reasonable to
expect that every entrepreneur who is capable of developing his ideas and participating in
the market place should do it through an association of persons. We feel that it is possible
for individuals to operate in the economic domain and contribute effectively. To facilitate
this, the Committee recommends that the law should recognize the formation of a single
person economic entity in the form of One Person Company. Such an entity may be
provided with a simpler regime through exemptions so that the single entrepreneur is not
compelled to fritter away his time, energy and resources on procedural matters. 16

15
[1896] UKHL 1
16
Report of the Expert Committee on Company Law available
at: http://www.primedirectors.com/pdf/JJ%20Irani%20Report-MCA.pdf; last accessed on 20/07/2017.
In a May newsletter, the ministry said of OPCs, It is expected this model will encourage
small and medium enterprisesin the unorganized sector with the concept of limited liability
and open avenues for more favourable banking facilities.17

Features of OPC:-

a. OPCs are similar to that of a registered corporate with separate legal existence and it
is run by individuals.
b. OPC is incorporated by one person.18
c. One member is required at any point of time and if that single member wishes to
appoint a director, the director or directors upto 15 is allowed19.
d. Is incorporated as a Private Limited Company.20 Unless excluded by the Act.
e. OPC is limited by shares or is limited by guarantee.21
f. One person cannot incorporate more than one OPC or become a nominee in more than
one OPC.
g. One person Company need not hold Annual General Meeting every year 22 and OPC is
deemed to have complied with Section.17323 if atleast one board meeting has been
conducted in each half a calendar year and the gap between two such meetings s not
less than 90 days.24
h. Financial statement of OPC is approved by the Board of Directors and it needs to
signed only by one board of director and that can be submitted to the auditor. It is to
be noted here that cash flow statement25 need not submitted as part of the financial
statement.26
i. The company shall have minimum of one director and maximum of 15 directors.27

17
Deepak Patel2014, Why One-Person Firms Are Popular [2016] Business Standard, <http://www.business-
standard.com/article/opinion/why-one-person-firms-are-popular-114102600651_1.html>last accessed
20/07/2017
18
Section 3(1) of Companies Act,2013.
19
Supra Note.1
20
Section 2(68) of Companies Act,2013.
21
Section 4 of Companies Act,2013;
https://www.icsi.edu/Docs/Webmodules/ONE%20PERSON%20COMPANY.pdf accessed:21/07/2017.
22
Sec 96(1) of Companies Act,2013
23
Meetings of Boards.
24
Sec173(5) of Companies Act,2013.
25
Cash flow statement is a financial statement that shows how changes in balance sheet accounts and how
income affect cash and cash equivalents and break the analysis down to operating, investing and financial
activities.
26
Sec. 2 (40) of companies Act,2013.
27
Section 149(1) (a) (b) of the Companies Act,2013.
 j. Member/shareholder of OPC acts as a director until a director is appointed by the
company. It is of necessary that both the shareholder and director of OPC should be
the same.
k. The memorandum of Association shall have the name and address of the one person
forming the company along with the nominees name with prior consent, who in event
of the death of the shareholder shall become the member of the company. The written
consent is to be filed with the registrar at the time of Incorporation.28
l. One person company shall inform the registrar the contract entered every time and the
minutes recorded of the meeting within 15 days from the date of approval from the
Board of Directors. 29

Differentiation between OPC and Sole proprietorship- An analysis:-30

The concept of OPC is a company which is incorporated by a single person with limited
liability and it has the existences of separate legal entity whereas in case of Sole
proprietorship it is be accounted for that even though it is run by a single member, it has no
separate legal existence and the liability of a sole proprietor is unlimited, i.e.., it extends to
the personal assets of the member.

The table following will show the differentiation between OPC and sole proprietorship31.

OPC Sole Proprietorship

Limited Liability: Unlimited Liability:
The liability of the shareholder will be The liability of the sole proprietor is
limited to the unpaid amount of unlimited. The liability will extend to the
shares/unpaid subscription money in his personal assets of the sole proprietor, even
name. The liability doesnt extend to his the personal properties of the members of
personal assets. such entity can be charged for discharge of
such debt.
Separate Legal Entity: Not a Separate legal entity:
The company is separate from its members. A sole proprietor does not have a separate

28
Sec.4(1)(f) of Companies Act,2013.
29
Section 193(2) of Companies Act,2013.
30
Supra Note.2; Supra Note:21
31
Vatsala Singh, India: One Person Company-A concept of new age business ownership, Last accessed:
20/07/2017.
It can sue or be sued. It can enter a contract legal entity from its members. Whatever the
on its own. They are two different entities business incurs, sole proprietor will be
for all purpose. involved.

Tax Bracket: Tax Bracket:

OPC is put in the same bracket of taxation It is taxed separately according to the
as other private companies. According to business carried on by the sole proprietor.
Income TA,1961 a private limited company different tax rates are applicable for
is under the bracket of 30% on total income different income slabs.
with an additional surcharge of 5% if the
income exceeds 10 million with an addition
to 3% of education cess.
Succession: Succession:
In case of OPC there is a nominee Sole proprietorship is an entity whose
designated by the member. The nominee existence depends on the life of its members
will be a natural born, citizen and resident and in the event of death or any other
of India. The nominee shall in the event of contingency may lead to the dissolution of
death of the member become a member of such an entity and anything done to
the company and will be responsible for the perpetually succeed can only be done
running of the company. through a will which may or may not be
challenged in the Courts.
Complex legal requirement: Simple Legal requirements:
The incorporation of the company requires It need not register itself and give adherence
various procedural formalities to be done. to procedural complexities. It can function
without interference of any legal
requirement.
Compliance: No complicated compliance:
OPC must file annual returns like that of a Only auditing of accounts is required under
normal company and would also get its the provisions of Section 44 AB of the
accounts audited in same manner. Income Tax Act,1961 once its turnover
crosses the certain threshold.
Critical analysis of OPC:-

It is necessary to understand the advantages and drawbacks of OPC to

understand and make an analysis of whether the One Person Company is full fledged concept
or still unfinished and the position of limited liability and its drawbacks.

Advantages:-

1. Separate legal existence:-

Just like companies, OPC will have a separate legal existence i.e.., the company is
separate from its shareholders/Directors. A company is considered as a legal &
artificial person having perpetual succession and a common seal. It creates a separate
and distinct legal persona independent of its members. It is concluded that OPC
becomes a body which is equivalent to that of a company, this was first emphasised in
Salomon v. A Salomon & Co Ltd.32 In the words of Palmer:
The benefits following from incorporation can hardly be exaggerated. It is because
of incorporation that the owner of the business ceases to trade in his own person. The
company carries on the business, the liabilities are the companys liabilities and the
owner is under no liability for anything the company does, although as principal
shareholder, he is allowed to take full advantage of the profits which the company
makes.33

Further in T.R. Pratt v. E.D. Sasoon& Co. Ltd34, the Bombay High Court has held that,

Under the law, an incorporated company is a different entity, and although the entire share
maybe practically controlled by one person, in law a company is a distinct entity35

2. Limited Liability:

As mentioned before, OPC will function same as that of Private

36
Companies This advantage limits the liabilities of the entrepreneurs to the extent of
unpaid amount of share. By limiting the liabilities of the single shareholders this
concept extends a protective cover and encourage their participation in the economy.37

32
Supra note.15
33
Palmers Private Companies,42nd Edition 1961, Page:13.
34
AIR 1965 Bom 62
35
Ibid
36
Sec.3 of Companies Act,2013.
37
Report of the Expert Committee on Company Law available
at: http://www.primedirectors.com/pdf/JJ%20Irani%20Report-MCA.pdf; last accessed on 21/07/2017
 3. Perpetual succession:-

The component of Perpetual succession makes its simpler for

entrepreneurs to raise their capitals for business. The Director of the company must
mandatorily nominate a successor to be the sole member in case of his death and He
shall act as the new Director and take over the business.
Members may come and go but the company can go on forever38
4. Compliance:-
One Person Company has been given various exemptions and it has a lesser
compliance related burden than that of a company. Not many procedural formalities
are required. It makes free and convenient form of incorporating a business.

Disadvantage:-

1. Tax obligation:
Even though it is a specialised form of a company it will be treated as the
same as that of Private Limited Company in case of Tax payments.

Tax usually falls under the following heads for a company:

Corporate tax 30%

Minimum alternate tax 8.5%

Dividend distribution tax 15%

It will be taxed more heavily than sole proprietorship even though OPC may be
exempt from some or all of the above. The area where the issue arises is when the
entrepreneurs prefer sole proprietorship over OPC as they may not be able to afford
such heavy levy of taxes.
Since in sole proprietorship there is no separate legal entity and there is free discretion
to choose the business and the tax is on Income slab basis, will not be a burden as
there are limits set up by the Income Tax Act for different types of income earning
business. The tax to be paid is the income tax in association with the profits of the
business.
As a result there are chances of winding up soon after its inception.

38
Gower, Principles of Modern Company Law, 76 (3rd Edn., 1969)
 2. Fraud:-
Frauds committed in OPC has been going on for ages. The lack of balance in interests
and powers in OPC makes it simpler and easier to commit fraud for personal benefit.
As seen above it is said that one man can set up upto five OPCs, this paves way for
fraud as they can avoid liabilities and transfer the property belonging to one company
to another quickly as the control is with one person.39
3. Suitable only for small business:-
If OPCs paid up capital has increased the limit of 50 Lakh rupees or
the average annual turnover has increased 2 crores rupees then OPC has to
compulsorily convert itself to private or public limited company within a period of 6
months from the date of breach. OPC cannot be converted until 2 years is over from
the date of incorporation.40 Section 8 is not for profit making companies.
4. NRIs are not allowed to incorporate OPC:-
As per Rule 2.1 (1) of the Draft Rules under Companies Act, 2013 only a natural
person who is an Indian citizen and resident in India shall be eligible to incorporate a
One Person Company. This provision seems to be an irony, as the entire objective
behind introducing the concept of One Person Company was to boost economic
growth of the country by promoting entrepreneurship.This concept though encourages
small entrepreneurs but on the other hand, discourages foreign direct investment by
disallowing foreign companies and multinational companies to incorporate their
subsidiaries in India as a One Person Company.

Limited liability-Critically analysed:-

Limited liability even though it is a greatest advantage, it has

disadvantages of its own, this feature of one shareholder will not attract any creditors or
banks to give loans to the company as it would be disadvantageous for them. Till now there is
no regulation by the legislation for regulating the limited liability of the shareholder. The
main and critical focus is on the point that the OPC consists of only one shareholder whose
liability is limited to the extent of unpaid share amount and the rest of the liability can be
recovered from the company that the single shareholder holds. It is no way less than liability
incurred personally. As the work is done by only one shareholder and on his wish he may
39
Per Lord Jenkins in Pepper v. Litton, 308 US 295 (1939)
40
Section 8 of the Act.
appoint a director, the liability of the company will make that one shareholder of the
company liable. He has face all the losses faced by the company even though his liability is
limited.

The shareholder works for the company, on the company not able to settle the liability the
assets of the company will be sold to face the creditors and settle the liability. His profits will
go for the company itself. In case of company itself going to loss and bankrupt, the question
of how the liability can be settled off arises. Even though limited liability is one of the
attributes that attract the entrepreneurs to form a company and contribute economically to the
Indian society and gain profits and benefits that a company do. The share Capital required to
incorporate the same is huge which in default will have to be turned as Private Limited
company. The entrepreneurs will be off the liability but the company will be responsible to
settle off the debts which is one or more the same as the single shareholder settling the debts.

The Companies Act,2013says that for the purposes the OPC shall be considered as
a Private Limited Company. To convert itself to a company it should have a paid up capital of
Rs.50,00,000 which is too much for a single entrepreneur and its turnover must be more than
Rs.2,00,00,000. The chance is very less for a single man to earn it within two years as it must
really be a recognised and well appreciated OPC in that case. In case of Bankruptcy, where
the Liabilities is more than that of assets and the debtor is under stake to pay to the creditors
but only to an extent of his unpaid amount the remaining by the company. The companyin
case of no assets left, after going to liquidation, only the realisable amount will be acquired
by the creditors. The creditors of OPC will get a lesser amount than that of a company when
the loan given is in abundance.

Limited liability a distinctive and special feature of OPC even though advantageous to
entrepreneurs in certain ways, has to either changed to Unlimited liability or have to
regulated and coded as it affects many creditors and loan granters who give loan trusting the
single member. The single members liability wont be enough to settle of the debts as they
are limited and the company when bankrupt, only realisable amount will be got. Which is
very grave and disadvantageous in nature.
Suggestions:-

The OPC seems half baked with certain loops in them. There are certain
disadvantageous as mentioned above which are to be filled and corrected to move forward
with the objectives effectively without any ambiguity:

1. Income tax Act,1961 should impose different tax treatment by recognising OPC to
encourage more entrepreneurs to contribute economically and to come forward to
incorporate.
2. Procedural complexities may be reduced as it would discourage the entrepreneurs to
go through many formalities for incorporation.
3. Recognising how OPC can transfer to Private limited company on default of the
condition, like that company should be given that opportunity to transfer itself to OPC
if it falls short of the minimum number of member requirement under the Act.
4. Foreigner and NRIs should also be eligible to incorporate OPC, the Bar to this limit
should be removed from only citizens and residents incorporating.
5. The necessity for OPC to be natural person should be made flexible to permit the
Legal personas also. There shouldnt be any distinction.
6. Limited liability should be properly coded to protect the interest of the creditors.
Bankruptcy will dissolve the companys assets, but If the company is low of assets
and everything is sold, the issue arises. Limited liability and liquidation should be
properly coded to as to settle the debts in a right way.

Conclusion:-

OPC is great advantage to the entrepreneurs, they can easily invest their amount and earn big.
The decision regarding management can be taken faster than that of the company as OPC has
only one member who is the sole decider. It is still a unfamiliar concept in India, even though
OPC help in secure and safer platform for the traders and entrepreneurs. The greatest and
special advantage of it being the limited liability feature. It protects the entrepreneur from
liability unlike the sole proprietorship, who has unlimited liability. It maybe the greatest
feature but it has its disadvantages also. Creditors and banks wont come forward to fund the
company as they are at stake and the risk is high when there is only one member present
whose liability is unlimited. This feature until regulated wont be of a big advantage. It is not
perpetual in existence it is prone to closure. It has been criticised on the ground that it is
unnecessary to bring OPC when we already have a concept of Limited liability Partnership
under Limited liability Partnership Act,2008. A safe and secure concept if regulated properly
will be big incentive for the entrepreneurs as they will have the same status as that of a
company with Legal entity and so on. If implemented and regulated properly, it will boost
the economic growth of our country and the status and employment of our entrepreneurs.