'One Person Company' approved by the Lok Sabha; What does this mean for entrepreneurs?

Sec 2(1)(zzk) of the Companies Bill, 2009 brought in the concept of a “One Person Company [OPC]”. It is essentially a legal entity which functions on the same principle as a Company, but with only one member and one shareholder. It was an alternative for Indians, who typically operate using the risky concept of a proprietorship.

This remained dormant till this year, and yesterday, the Parliament of India legislated approving the idea. The Companies Act, 2012 passed by the Lok

Sabha provides for the concept of an OPC.So what is a one person company?

As the name suggests, it means a company which has only one person as a member and where legal and financial liability is limited to the company only and not to that person. (i.e. liability is limited).

How is it different from the existing scenario and why has it been introduced?

The reason why the old Companies Act of 1956 had made it compulsory for a Company to have a minimum of two members was so that it could be clearly separated from a sole proprietorship, a corporate structure which is categorically excluded from the Act.

However, the hypocrisy of this provision was blatant and rampant. People started forming companies by adding a nominal member/ director, allotting them one single share, which is the minimum requirement for a director as per the Act, and retaining the rest of the shares themselves. Thus a person could enjoy the status and benefits of a Company while operating and functioning like a proprietary concern for all practical purposes.

Hence, to make things clearer and more logical, an option has been created wherein a person can form a company as a one person entity.

How do I form a One-Person-Company?

Although the exact rules are not clear, the following rules have been proposed -

1. Firstly, the person is to give a separate name and legal identity to the Company, under which all the activities of the business are to be carried on.
2. This ensures that a separate legal entity is formed.
3. Secondly, the person has to nominate a name with that person’s written consent as a nominee to the OPC. This person will be the default and ad hoc member in case of the existing sole member’s death or disability. This provision will ensure perpetuity and continuity to the life of the Company. The golden rule of “members may come and go, but the Company must live on” holds good.
4. Finally, every One Person Company should bear the letters “OPC” in brackets after it’s registered name, wherever it may be printed, affixed or engraved.

So, shut down my Pvt. Ltd. and change over to a One Person Company?

Not at all. A One Person Company is still an idea in its infancy and is best for small enterprises looking at testing the waters, as an alternative to a proprietorship.

However, a Company has the following advantages:

1. Expansion of a Company is easy and possible. All you need to do is to increase the authorised capital and allot shares
2. Investment and investors prefer a Private Limited Company, since it is the only structure where it is possible to issue shares to third parties, and also have a board from which supervision is possible.

Hiring may be easier, since employees can be given incentives like Employee Stock Option Plans, which is not possible in the case of a One Person Company.