This article we have listed out the main characteristics and limitations of a One Person Company under Indian law, according to the recent amendments announced by the MCA.
Despite being easy to incorporate, there are many restrictions of a one person company in India including only one shareholder, limitations in nominee shareholder, and capital threshold. One Person Company (OPC) is a business established under the Companies Act, 2013. It serves as an ideal choice for small business proprietors and entrepreneurs aiming to initiate a company with a solitary member who assumes roles as both director and shareholder. The introduction of the OPC concept aimed to promote self-employment and foster entrepreneurship in the country.
According to statistics, 34,446 OPCs have been registered in India so far, with at least 7,600 of them registered in the last 12 months. Increased use of OPC for business has resulted in sluggish revisions to the law one person company, involving reducing compliance costs and streamlining stringent constraints. This article will provide comprehensive insights into the One Person Company structure in India.
Major Elements of a One Person Company
We have highlighted some of the major elements of OPC under Indian law, which includes in the MCA notification.
Shareholder – A single shareholder is required for a One Person Company (also referred to as member). A shareholder of an OPC must meet four eligibility criteria under Indian law:
- He or she should be a natural person
- He or she should be an Indian citizen
- He or she cannot be a nominee or shareholder of more than one OPC
- And lastly, they should not be minors.
Note: Since 1 April 2021, the sole shareholder need not be a resident of India if all the necessities are met.
Nominee – An OPC’s only shareholder must select another natural person as the shareholder’s nominee, with the nominee’s approval – the objective of this condition is to allow the nominee to become the shareholder in the event of the shareholder appointing the nominee’s death or incapacitation.
Note – A nominee must meet the same eligibility conditions as a shareholder.
Director – One person company should have a minimum of one director. A shareholder who does not dwell in India for a total of 182 days in a financial year will not be qualified as a director under Indian law, and if the only shareholder does not meet this criterion, a new director who meets the residency criteria under Indian law must be chosen.
Note – This is something non-resident Indians should keep in mind if they want to form an OPC.
Capital requirements – There is no min capital requisite to establish one person company and the need that an OPC be changed into a public or private company when its paid-up capital surpasses ₹I5,000,000 or its annual turnover exceeds ₹20,000,000 is no longer in effect as of a April 2021.
Restricted business activities – An OPC is prohibited from engaging in two sorts of business operations: first, ‘Non-Banking Financial Investment’ activities, such as investing in a body corporate’s securities. Despite the fact that the phrase ‘Non-Banking Financial Investment’ is not defined in Indian company law, it is widely understood to apply to any activity that a Non-Banking Financial Company can engage in and second, an OPC cannot be formed as or converted into a company related to charity under the Section 8 (c) ,2013
Conversion – If a one person company wish or want to change its company into public or private limited company, it can be done anytime provided by its meeting Indian law’s minimum need for the number of directors and shareholders, as well as the given technical necessities – the limitation on volunteer changes only after two years from the date of establishment, or beyond certain thresholds for annual turnover and paid-up capital, is no longer in effect.
It simply indicates that the sole shareholder doesn’t have to wait two years, or for the annual turnover to surpass ₹20,000,000, or for the first put in share capital to exceed ₹5,000,000 before changing the One Person Company to a public or private limited company, as of 1 April 2021. As a result, the process for converting an OPC to a private or public limited partnership is also generally cost-effective.
Taxation – A One Person Company is taxed in the same way as any other domestic corporation.
Incorporation and dissolution – The process and timetable for forming an OPC are comparable to those for forming any other sort of share-capital Company, but with simpler charter paperwork. However, because the price of incorporating a company with share capital in India is mainly determined by the authorised number of directors, share capital, and the area in which it is incorporated. incorporating an One Person Company with a share capital of more than ₹1,600,000 saves a significant amount of money or else incorporating an One Person Company is just as expensive as incorporating any other type of company with share capital.
Restrictions of a One Person Company
Raising Funds Through Loans or Non-convertible Debentures
As one Person Company can own only one shareholder, money cannot be raised up through the issuance of convertible debentures or shares until it changes to a public or private limited company. One person’s company must restrict itself to raise funds through loans or non-convertible debentures. The same approach applies to the issuing of equity shares and employee stock options – there may be some structuring choices for employee stock options that need forced OPC conversion, but these options should be carefully considered.
Reduced Penalties
One person company can now have the advantage of reduced penalties under Indian law, according to a recent modification , penalties for any non-compliance cannot surpass half of the stipulated penalty, up to a max of ₹200,000 for the One Person Company and ₹100,000 for the default officer .The maximum capital is not applicable to all non-compliances; rather, it only applies when one-half of the suggested penalty for a non-compliance reaches ₹100,000 for the officer and ₹200,000 for the one person company in default.
Perpetual Succession and Limited Liability
A one-person company is a legal entity that is treated as a separate legal entity under the law, comparable to a limited liability partnership or a traditional corporation, and the lone shareholder’s liability is limited to the membership fee paid by that shareholder.
Reduced Compliances
Depending on the number of directors (only two board meetings with a 90-day break between them are allowed) and other general compliances, there may be less or no board meetings. Compared to other companies under Indian law, OPCs enjoy some, but not extensive, relaxations – key relaxations include exemption from holding annual general meetings, and fewer or no board meetings depending on the number of directors (only two board meetings with a 90-day gap between them are allowed).
No requisite for statutory auditor rotation, exemption from planning a cash flow statement as part of the business statements, and auditors’ discretion to not specify whether or not there are adequate internal financial controls with reference to the one person company financial statements, and also the operating effectiveness of such controls.
Conclusion
We would say, one person company is a perfect choice for sole proprietors, since it provides them with the fundamental benefit of limiting their responsibility. And also, with the recent, start-ups, particularly those with single founders (and without co-founders) or with shoestring budgets (with necessary contractual protection), can consider incorporating an OPC and focusing on the business or the idea, until they find a co-founder or operations scale up and intend to raise funds, at which time they can convert the one person company into a private limited company. In any event, reach out to the experts at Vakilsearch for advice on the best course of action for you and your business needs.
Frequently Asked Questions
What are the limitations of a one person company?
The main drawback of a One Person Company stems from its sole proprietorship structure. Unlike conventional companies with multiple shareholders, OPCs are solely owned by one individual. This limitation may impede the company's capacity to raise funds via equity shares, thereby restricting its growth prospects.
What is the capital restriction for OPC?
The One Person Company (OPC) will forfeit its status if its paid-up capital surpasses ₹50 lakhs or if its average annual turnover exceeds ₹2 crores over the three immediately preceding consecutive years. Additionally, minors are prohibited from being members or nominees of the OPC or holding shares with beneficial interest.
What is the minimum paid-up capital in OPC?
The minimum authorised capital for establishing an OPC is ₹1 lakh, with no mandatory minimum paid-up capital requirement. This makes it easier to incorporate compared to other company forms.
What is a disadvantage of OPC?
The OPC can only have one member at any given time, and additional members or shareholders cannot be added to raise more capital. Therefore, as the business expands and grows, additional members cannot be included.
Which business activities Cannot be undertaken by OPC?
The One Person Company (OPC) is not permitted to engage in Non-Banking Financial Investment activities, such as investing in securities of other corporations. Additionally, it cannot be transformed into a company with charitable objectives as outlined in Section 8 of the Companies Act, 2013.
Which sections are not applicable to one person company?
The regulations outlined in Section 98 and Sections 100 through 111, which pertain to conducting general meetings, do not pertain to a One Person Company. A One Person Company is required to have at least one director.
What are the rules for OPC companies?
It should only have one member at any given time and can only have one director. The member and nominee must be individuals who are Indian citizens and residents of India.
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