Sole Trading (Single person Company)10/03/2020
The Companies Act, 2013 completely revolutionized corporate laws in India by introducing several new concepts that did not exist previously. On such game-changer was the introduction of One Person Company concept. This led to the recognition of a completely new way of starting businesses that accorded flexibility which a company form of entity can offer, while also providing the protection of limited liability which sole proprietorship or partnerships lacked.
Several other countries had already recognized the ability of individuals forming a company before the enactment of the new Companies Act in 2013. These included the likes of China, Singapore, UK, Australia, and the USA.
Section 2(62) of Companies Act defines a one person company as a company that has only one person as its member. Furthermore, members of a company are nothing but subscribers to its memorandum of association, or its shareholders. So, an OPC is effectively a company that has only one shareholder as its member.
Such companies are generally created when there is only one founder/promoter for the business. Entrepreneurs whose businesses lie in early stages prefer to create OPCs instead of sole proprietorship business because of the several advantages that OPCs offer.
Difference between OPCs and Sole Proprietorships
A sole proprietorship form of business might seem very similar to one person companies because they both involve a single person owning the business, but there actually exist some differences between them.
The main difference between the two is the nature of liabilities they carry. Since an OPC is a separate legal entity distinguished from its promoter, it has its own assets and liabilities. The promoter is not personally liable to repay the debts of the company.
On the other hand, sole proprietorships and their proprietors are the same persons. So, the law allows attachment and sale of promoter’s own assets in case of non-fulfilment of the business’ liabilities.
Features of a One Person Company
Here are some general features of a one-person company:
- Private company: Section 3(1)(c) of the Companies Act says that a single person can form a company for any lawful purpose. It further describes OPCs as private companies.
- Single member: OPCs can have only one member or shareholder, unlike other private companies.
- Nominee: A unique feature of OPCs that separates it from other kinds of companies is that the sole member of the company has to mention a nominee while registering the company.
- No perpetual succession: Since there is only one member in an OPC, his death will result in the nominee choosing or rejecting to become its sole member. This does not happen in other companies as they follow the concept of perpetual succession.
- Minimum one director: OPCs need to have minimum one person (the member) as director. They can have a maximum of 15 directors.
- No minimum paid-up share capital: Companies Act, 2013 has not prescribed any amount as minimum paid-up capital for OPCs.
- Special privileges: OPCs enjoy several privileges and exemptions under the Companies Act that other kinds of companies do not possess.
Formation of One Person Companies
A single person can form an OPC by subscribing his name to the memorandum of association and fulfilling other requirements prescribed by the Companies Act, 2013. Such memorandum must state details of a nominee who shall become the company’s sole member in case the original member dies or becomes incapable of entering into contractual relations.
This memorandum and the nominee’s consent to his nomination should be filed to the Registrar of Companies along with an application of registration. Such nominee can withdraw his name at any point of time by submission of requisite applications to the Registrar. His nomination can also later be cancelled by the member.
Membership in One Person Companies
Only natural persons who are Indian citizens and residents are eligible to form a one person company in India. The same condition applies to nominees of OPCs. Further, such a natural person cannot be a member or nominee of more than one OPC at any point of time.
It is important to note that only natural persons can become members of OPCs. This does not happen in the case of companies wherein companies themselves can own shares and be members. Further, the law prohibits minors from being members or nominees of OPCs.
Conversion of OPCs into other Companies
Rules regulating the formation of one person companies expressly restrict the conversion of OPCs into Section 8 companies, i.e. companies that have charitable objectives. OPCs also cannot voluntarily convert into other kinds of companies until the expiry of two years from the date of their incorporation.
Privileges of One Person Companies
OPC enjoy the following privileges and exemptions under the Companies Act:
- They do not have to hold annual general meetings.
- Their financial statements need not include cash flow statements.
- A company secretary is not required to sign annual returns; directors can also do so.
- Provisions relating to independent directors do not apply to them.
- Their articles can provide for additional grounds for vacation of a director’s office.
- Several provisions relating to meetings and quorum do not apply to them.
- They can pay more remuneration to directors than compared to other companies.