What is meant by One Person Company?

In a bid to enhance ease of doing business, Finance Minister Nirmala Sitharaman in her Union Budget 2021-22 speech announced measures to ease norms on setting up One Person Company (OPC), allowing OPCs to grow without any restrictions on paid-up capital and turnover. 

What is One Person Company?

As per Section 2(62) of the Companies Act, 2013, One Person Company is a company that comprises a single person as a shareholder and can be contrasted with private companies. The members of a company are nothing but subscribers to its Memorandum of Association (MoA), or its shareholders. These companies get all the benefits of a private company such as they to have access to credits, bank loans, limited liability, legal protection, etc.

It is to be noted that private companies comprise a minimum of two members. Apart from One Person Company mode, an individual can get into the business through a sole proprietorship mode too. 

As per Ministry of Corporate Affairs, there were 34,235 One Person Companies out of a total number of about 1.3 million active companies in India, as of 31 December 2020. 

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Features of One Person Company

1- An individual can form a company for any lawful purpose. As per the Companies Act, 2013, OPCs are private companies. 

2- While registering the company as OPC, an individual is required to mention a nominee. 

3- In case of the death of the owner of OPC, the nominee has the right to choose or reject to become the sole owner of the company. 

4- OPCs can have a maximum of 15 directors. 

Benefits of One Person Company

1- In the case of One Person Company, the person and his company are considered as separate legal entities. 

2- The owner of the company is not liable to repay the debts of the company. 

3- OPCs can raise equity funding and are eligible for government schemes. 

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Background

In the year 2005, J.J. Irani Committee submitted its report on Company Law. The report pointed out the need for a framework for small companies, and their contribution to the economy. It further stated that because of their size they couldn't be burdened with the same level of compliance requirements as large public-listed enterprises. 

The report stated that it would not be reasonable to expect that every entrepreneur who is capable of developing his ideas and participating in the marketplace should do it through an association of persons. 

Furthermore, it noted that such entities 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. 

Based on these recommendations, the concept of One Person Company was introduced in the Companies Act, 2013. However, the aforementioned Act holds some restrictions on the rules governing One Person Company which have been relaxed in the Union Budget 2021-22. 

Measures in Union Budget 2021-22 

Finance Minister Nirmala Sitharaman stated that the government will incentivise the incorporation of OPCs by allowing them to grow without any restrictions. 

1- One Person Companies will be allowed to convert into any type of company at any time, subject to the minimum requirements as prescribed in the Companies Act, 2013. 

The Budget 2021-22 increased threshold for paid-up capital to not more than Rs. 2 crores from earlier Rs. 50 lakhs and turnover to not exceed Rs. 20 crores from earlier Rs. 2 crores. 

It is to be noted that as per previous rules, if the paid-up capital or turnover exceeds the aforementioned limits in three years, then the entity will lose its OPC status, and would be required to convert to either a private or public company.

2- The residency limit for Indian citizens to set up a One Person Company is now reduced to 120 days from earlier 182 days.

3- The measure also allows Non-Resident Indians (NRIs) to incorporate One Person Companies in India. 

As per the Companies Act, 2013, to enjoy the benefits of a One Person Company, a person has to be a naturally born Indian as well as a resident of India.  

As per Finance Minister Nirmala Sitharaman, the move is expected to benefit more than 200,000 companies and the proposed changes will come into effect from 1 April 2021. 

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