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Is One Person Company Really Incentivised

Is One Person Company Really Incentivised

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Is One Person Company Really Incentivised

One Person Company (OPC) is a company with only one person as a “member,” as defined in section 2 of the Companies Act, 2013 (the “Companies Act”). The company’s owner, or member, has received the most attention. The OPC must also choose a nominee for the company’s lone member. A minimum of one director must be present in the OPC, however the OPC may have up to fifteen directors. This is so because an OPC is only required to have a minimal number of directors under the legislation.

Dr. JJ Irani’s recommendations

With increasing use of computers and information technology, as well as the emergence of the service sector, it is time to give the entrepreneurial capabilities of the people an outlet for participation in economic activity, is what was said by Chairman of the Expert Committee who is Dr. JJ Irani, on Company Law. The establishment of an economic person in the form of a business could facilitate this type of economic activity. However, it would not be logical to anticipate that every businessperson who is capable of creating his ideas and engaging in the market will do so via a group of people. We believe that it is possible for people to participate effectively in the economic world.

To make this easier, the Committee suggests that the legislation recognise the creation of a “One Person Company,” which is a single person’s economic entity. So that the sole proprietor is not forced to waste his time, energy, and resources on formalities, such a business may be granted a simpler regime through exemptions. Through the report’s suggestion, OPC was first introduced to company legislation. The following characteristics were recommended for OPC:

(i) OPC or the One Person Company can beincorporated and registered as a private company;

(ii) OPC may have at least one director;

(iii) Adequate safeguards in event of death or disability of the sole member; and

(iv) “OPC” shall be a part of the name.

As a result, provisions were added to the 2013 Companies Act and the Rules created thereunder.

Some previous clauses

Prior to the 2014 amendment to Rule 6 of the Companies (Incorporation) Rules, an OPC had to change its status to a public company or a private company in certain circumstances, such as when its average annual turnover during the relevant period exceeded Rs. 2 crores or its paid-up share capital exceeded Rs. 50 lacs.

A private company for which total paid-up share capital is of Rs. 50 lacs or lower, or for which the average annual turnover during the relevant period is Rs. 2 crores or less, may convert itself into an OPC by passing a special resolution in the general meeting prior to the amendment to Rule 7 of the Companies (Incorporation) Rules, 2014. The only eligible natural person to incorporate OPC and nominate for the single member of OPC is an Indian citizen who resides in India. Here, the term “resident of India” referred to a person who had spent at least 182 days in India in the immediately prior calendar year.

A natural person is not permitted to be a member of more than one OPC at any given time, nor is the said person permitted to serve as more than one OPC’s nominee. A minor is not permitted to join the OPC, serve as a nominee, or hold shares with a beneficial interest. Section 8 of the Act prohibits the incorporation or conversion of an OPC into a company. OPC is not permitted to engage in non-banking financial investment operations, such as purchasing corporate securities. Union Budget for 2021 made no changes to the aforementioned measures.

Announcements in the Union Budget for 2021 and any updates

As a further measure that directly benefits Start-ups and Innovators, I propose to incentivize the incorporation of One Person Companies (OPCs) by allowing OPCs to grow without any restrictions on paid up capital and turnover, allowing their conversion into any other type of company at any time, and reducing the residency limit for an Indian citizen to set up an OPC from 182 days to 120 days, the Union Finance Minister said in the Union Budget Speech on February 1, 2021. Due to the incentives provided in the Union Budget, the OPC has been viewed in significant prominence ever since.

Changes to the Companies Act’s OPC-related clauses following the 2021 Union Budget

By changing the residency requirement for a member and nominee from 182 days to 120 days in the Companies (Incorporation) Rules, 2014, the Ministry of Corporate Affairs (MCA) made it possible for non-residents to form an OPC. The paid-up capital and turnover limitations have been eliminated, allowing an OPC to continue operating as such regardless of the paid-up capital or turnover standards, and to freely convert into a private or public company without having to wait the required two years following establishment. The aforementioned changes take effect on April 1, 2021.

Therefore, the obsessive conversion behaviour that restricted the development of an OPC as an organisational type has been eliminated to provide both current OPCs and new incorporations more freedom. These changes, in my opinion, are not significant enough for a businessperson to choose the OPC over a private corporation, a limited liability partnership, or a partnership firm.

What might encourage the creation of an OPC?

The idea of OPC has not received the anticipated traction for more than seven years. When a private firm, LLP, or public company can join OPC as its single member, in my opinion, OPC will be encouraged. Finding the shareholders will be simple. Simple share ownership in corporations will be required. Regarding registered owners and beneficial owners, it would not be necessary to adhere to the requirements of Section 89 of the Companies Act. Every one of these new businesses will be a wholly-owned subsidiary. In any case, the OPC is permitted to have multiple directors.

To enable OPC to invest in the securities of anybody corporates, the Government may change the appropriate regulations. OPC’s formation or conversion would be further encouraged by a tax-efficient structure. A true sense of incentive would be provided to an OPC in this way. Additionally, this would advance the simplicity of conducting business.

For entrepreneurs who wanted to organise firms as private limited companies without adding any extra members to the business, the One Person Company (OPC), incorporated under the Companies Act, 2013, came down as a blessing. As the name implies, an OPC differs from other corporate forms in that it places the company’s one shareholder or member at the centre of attention.

Experts expressed the opinion that a person who has a ground-breaking concept and wants to implement it through a business regime should not be required to do so as an organisation of people. In this case, the person needs to be provided a platform to function well, even if they are the only member. This is precisely why the Act developed the cutting-edge idea of One Person Company. The Act also approved a few compliances that were necessary for the incorporation of an OPC.

Provisions Associated with OPC Company (Incorporation) Second Amendment Rules prior to 2021

The Companies (Incorporation) Rules, 2014, as they were before to the modification, provided that:

Only when the paid-up share capital surpasses Rs. 50 lakhs or the yearly turnover during the indicated period exceeds Rs. 2 crores can an OPC transform into a public or private limited company. Additionally, an OPC could only convert voluntarily after two years of its incorporation

A private company that has a paid-up share capital of $50,000 or less, or an annual revenue of Rs. 2,000,000 or less, may become an OPC by adopting a special resolution at the general body meeting of the company.

Only a natural person who is both an Indian citizen and an Indian resident may incorporate an OPC. An individual needed to have spent at least 182 days in India during the previous calendar year in order to qualify as a resident.

Companies’ Modifications (Incorporation) 2021 Second Amendment Guidelines:

The Union Budget 2021 took actions to encourage OPCs since it placed a strong emphasis on supporting start-ups and innovators. The limitations placed on the incorporation of OPCs were removed. To encourage OPCs, the following major rule modifications have been made:

  • Regardless of their yearly turnover, paid-up share capital, or number of years since incorporation, OPCs were permitted to convert into public or private limited companies.
  • Indians who are not residents of the country were permitted to form OPCs and act as nominees.
  • The duration of the residency was shortened from 182 days to 120 days.

As a result, when the rules went into force in April 2021, the qualifications were weakened, which significantly increased the OPCs’ incentives. Without a doubt, removing the restrictions on the incorporation of OPCs would inspire many untapped entrepreneurial talents. The strict requirements for converting OPC to a public or private limited company would undoubtedly have hampered the company’s expansion. A greater number of OPCs would be incorporated under the new regulations, and an even greater number would be transformed into public and private enterprises.

Although it is believed that the incentives so suggested are not sufficiently alluring to persuade one to choose an OPC over a public or a private limited company, this might undoubtedly motivate sole proprietors to start the initial step. We must therefore wait and see if an OPC is actually motivated by these recommendations because it may be too soon to make a determination at this time.

Additionally, some professional perspectives contend that the requirement that only a natural person be able to incorporate an OPC restricts the company’s potential. Real incentive is anticipated to occur if additional public or private limited entities are allowed to join an OPC. Additionally, the act stipulates that a shareholder may only belong to one OPC. Additionally, OPCs, which are now thought to be non-existent, urgently need efficient tax structuring. Although implementing these ideas might appear unrealistic, doing so would indicate that the OPCs have been properly motivated.

OPC registration: What is it?

With the passage of the Company’s Act in 2013, a novel idea known as the “One Person Company” was established in India. A single person in India can form a “One Person Company.” A single person could not form a business prior to  implementation of Companies Act of 2013. OPC combines pros of a sole proprietorship with that of a registered company. During the previous periods, a person should only choose a single proprietorship if they wanted to establish a new firm.

A business can be formed under Section 2 (62) of the Company’s Act 2013 holding only 1 member and 1 director. There are less compliance requirements for one person companies registered in India than for private limited companies.

According to the Companies Act of 2013, a one-person company can register in India with just one director and one member. The same person may serve as both the Director and a member. Here, a person can register an OPC in India whether they are a resident or non-resident Indian.

Benefits of OPC Legal standing

  • Legal standing

The member is granting the OPC a legal entity status which is independent. The sole member who formed the OPC is protected by its distinct legal standing in th eyes of law. The member’s liability is restricted to the value of his or her shares; he or she is not personally responsible for the company’s loss. Therefore, the OPC and not the member or director of the OPC can or shall be sued by the creditors in case of legal dispute arising during the course of business.

  • Easy access to funding

OPC can easily raise money through angel investor, venture capital, and even the incubators, along with other sources because it is a private firm. Banks and other financial institutions prefer to lend money to corporations over sole proprietorship businesses. This makes getting money simple.

  • Limited or Fewer conformities

The Companies Act of 2013 grants the OPC some exemptions in relation to compliances. The cash flow statement does not have to be made by the OPC. The annual reports and books of accounts can only be signed by the director; the company secretary is not required to sign them.

  • Simple integration

OPC can be incorporated quickly because all that is needed is one member and one nominee. The director may also be a member. There is no minimum paid-up capital requirement, but the minimum allowed capital for incorporating OPC is Rs. 1 lac. As a result, incorporation is simple in comparison to other business structures.

  • Simple to control

The OPC can be founded and maintained by a single person, making administration simple. Making decisions is simple, and decision-making happens quickly. By entering the ordinary and special resolutions in the minute book and having only one member sign them, the member can easily pass them. An entity can be incorporated under Section 2 (62) of the Company’s Act 2013 with just 1 member and 1 director. There are less compliance requirements for one person companies registered in India than for private limited companies.

  • Perpetual succession

According to the Companies Act of 2013, a one-person company can register in India with just one director and one member. The same person may serve as both the Director and a member. Here, a person can register an OPC in India whether they are a resident or non-resident Indian.

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