Monday, April 29, 2013

One Person Company – a still-born, half-baked concept?


The Companies Bill 2012 proposes a new concept of One-person Company (OPC). The obvious objective is to overcome the hurdle of needing a second person to form a company, despite the saying that “two’s company”. This brief post is to highlight its nature, some issues and also questioning the real benefit of an OPC.

OPC, as the term implies, is a company with one and only one shareholder. The need to have two directors also is avoided and only one director is needed. However, unlike a shareholder, the number of directors can be more than one. And the single shareholder need not be the director or any of the directors. A succeeding shareholder will have to be named in case of death of the initial shareholder.

Thus, it is expected to help an individual incorporate himself/herself. The need to find a second shareholder/director for a proprietary business in corporate form is avoided.

Succession/transfer of a business in corporate form is clearly easier than if it owned in a sole proprietary form. And one can delink different businesses in separate OPCs since there is no limit on how many OPCs one single individual can form.

The OPC will have to add the tag One-person Company under its name.

Some other procedural concessions in terms of meetings, etc. are given for obvious reason that there cannot be a “meeting” of a single shareholder/director.

However, beyond a few procedural concessions, and avoidance of the need of second shareholder/director, it is not clear what substantial benefits are available. The relatively long/complicated procedure for formation, maintenance and dissolution of a Company remain without any major relief. The requirement of finding a second shareholder/director is generally not found cumbersome in India where a friend, relative or staff member can easily act as such.

Further, except a few minor procedural concessions, the provisions of accounts, audit, etc. would also apply to an OPC.

Certain businesses like that of finance may face problems if sought to be carried in a Company form. Thus, an individual engaged in business of lending or investments may need prior registration from the Reserve Bank of India, minimum net owned funds of Rs. 2 crores, etc.

Conversion of existing proprietary businesses can create complexities of tax. There is an existing provision in the Income-tax Act, 1961 (section 47(xiv)) which should help in availing relief from capital gains, even if originally it was not framed with an OPC in mind. However, other tax issues may remain. The concern of deemed dividends under Section 2(22)(e), the question of allowability of remuneration to proprietor, etc. are some other challenges an OPC may face. The other challenge will be of stamp duty on transfer of the business to the OPC.

Strangely, it is not clear how an OPC may go to the next logical step of becoming a non-OPC when it wants to introduce more shareholders. Ideally, a simple amendment of its memorandum and articles should have sufficed. However, there are no specific provisions enabling this. The question therefore is whether an OPC is doomed to remain a one shareholder company during its existence?

Conversion from a non-OPC to an OPC has also not been provided for. Thus, an existing private limited company may not be able to convert itself into an OPC.

OPCs should have been useful particularly in case of wholly owned subsidiaries of companies where the parent company would be the sole shareholder. However, there is a requirement that makes one wonder whether a company can be the sole shareholder. The definition of OPC does talk of a “person” being a shareholder. However, it is required that a succeeding shareholder be named in case of death of the initial shareholder. The concept of death is generally understood in sense of natural persons and not companies. Thus, unless one takes a view that this requirement is not a mandatory one or stretch it to include dissolution of a company, the concept of OPC may not be available for forming a WOS.

All in all, it seems that despite the initial enthusiasm that this concept received, it seems that in practice, this by itself is not likely to encourage sole proprietors to convert into a company in large numbers. 

6 comments:

vswami said...

Sporadic:

OPC, for obvious reasons, makes a non-sense of not just one but more than one basic concept, historically known, followed and for vav good measure, accepted under the law on corporates. Ostensibly,the brain(s) behind the half-baked idea has chosen to take cues from and mostly been influenced by the extant practice in place across borders.It is an attempt which by any 'logic' is deplorable. To bring about and give a statutory recognition and acceptance to such a drastic and violent conceptual change, making a mockery of the age-old concepts of 'company', 'shareholder', so on, are certain to robbing them of the underlying fundamentals. To be precise, there is a contradiction in terms to call a sole owner a holder of 'SHARE'(literally and grammatically implying a second person, to share with, not a sole and lone absolute owner).

While there has been globally a cry, a loud and unmistakably hoarse one, for 'governance' , that too with 'good' for an ideological prefix, particularly in relation to the affairs of the corporate world, it is incomprehensible , rather unintelligible, why the masters of the novel idea first of all even happened to conceive of such an idea.And done so, knowing fully well that it could only spell disaster,- impacting the valuable rights and interests of the public at large; that is, those who would be fated to have any dealing with such a OPC, if it were to be born /take off.

(unedited- left to right minded experts to do so, then deliberate in-depth and at least share with the concerned rest for the common welfare)

Howells said...

I'm not entirely sure how I feel about OPC. I think to me, it's something you have to have experienced or seen first hand to know whether it's viable or not.

vswami said...

The write-up has thrown up certain plus and minus points of concern, but from the viewpoint of a person already engaged in, or a new, business enterprise; and focsing on as to whether OPC would find favour as a preferred choice of a form of entity for carrying on any trade or business. In other words, the other side of the coin- namely, the more important aspect of its advantages or otherwise, or shortcomings, from a societal angle,- the viewpoint of the persons at large who may have dealings with it -has to be necessarily not to0 be lost sight of.
What requires to be specially noted is that, the same considerations coming into play, wrt dealings with a LLP , another form of entity mooted not long ago, again a concept likewise imported from abroad, but already given statutory recognition and in place for some time now. would, in many respects, be no different but be of equal relevance and application to this yet another latest novelty of OPC .
For a critique, one may read the two published articles on -
LIMITED LIABILITY PARTNERSHIP - (2005)128 Comp.Cas1 (2006) 65 SCL 42

Another article,- INVESTOR PROTECTION, A MYTH,
(2005) (3) KLJ 17 brings to bear serious disadvantages and exposure to high risks of a similar nature in case of having a contract agreement with a partnership firm, e.g. realty sector chosen for commonly known reasons.


Anonymous said...

18. Conversion of companies already registered
(1) A company of any class registered under this Act may convert itself as a company of other class under this Act by alteration of memorandum and articles of the company in accordance with the provisions of this Chapter.
(2) Where the conversion is required to be done under this section, the Registrar shall on an application made by the company, after satisfying himself that the provisions of this Chapter applicable for registration of companies have been complied with, close the former registration of the company and after registering the documents referred to in sub-section (1), issue a certificate of incorporation in the same manner as its first registration.
(3) The registration of a company under this section shall not affect any debts, liabilities, obligations or contracts incurred or entered into, by or on behalf of the company before conversion and such debts, liabilities, obligations and contracts may be enforced in the manner as if such registration had not been done.

CA Jayant Thakur said...

Thank you, Anonymous. That was useful.

In that case, Clause 14 is at least partly overlapping/redundant. Perhaps a specific provision for OPCs there could have helped matters.

"14. (1) Subject to the provisions of this Act and the conditions contained in its memorandum, if any, a company may, by a special resolution, alter its articles including alterations having the effect of conversion of—
(a) a private company into a public company; or
(b) a public company into a private company:
Provided that where a company being a private company alters its articles in such a manner that they no longer include the restrictions and limitations which are required to be included in the articles of a private company under this Act, the company shall, as from the date of such alteration, cease to be a private company:
Provided further that any alteration having the effect of conversion of a public company into a private company shall not take effect except with the approval of the Tribunal which shall make such order as it may deem fit.
(2) Every alteration of the articles under this section and a copy of the order of the Tribunal approving the alteration as per sub-section (1) shall be filed with the Registrar, together with a printed copy of the altered articles, within a period of fifteen days in such manner as may be prescribed, who shall register the same.
(3) Any alteration of the articles registered under sub-section (2) shall, subject to the provisions of this Act, be valid as if it were originally in the articles."

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