The concept of a One Person Company has been included in Clause 262 of the Companies Bill, 2011.
Moving away from traditional practice
As traditionally understood, a company is an association of persons. Every management textbook, legal treatise and financial document will tell you that – “a company is an association of persons, bound together by a common seal”.
So a “One Person Company” sounds like an oxymoron. But this was precisely the demand of thousands of entrepreneurs for very long – that they be allowed the protection, security and investor friendliness of a company without having the burden of finding a co-founder and complying with (literally) dozens of regulations.
This was given further impetus by the J.J. Irani Committee, which said that:
OPC 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.”
Thus, the concept of a One Person Company has been included in Clause 262 of the Companies Bill, 2011.
What is the procedure to form a One Person Company?
The person forming the Company has to give the following information:
a. The name of the OPC
b. The nature of activities of the OPC
c. A nominee to take the place of the single member (in case of death, disability, bankruptcy etc.)
Goodbye then to Proprietorships, Partnerships and LLPs?
Not quite. Countries which have introduced the One Person Company concept, like Pakistan, UK and Australia have not seen other forms of business organisation disappear.
People will continue to form proprietorships in India even when the concept of a One Person Company exists because despite the number of restrictions coming down, an OPC will never be as flexible as a proprietorship.
In terms of taxation and filing also, there will be mandatory financial statements to be prepared for OPCs and standards of accounting will have to be followed (not followed by most Proprietorships)
The number of partnerships, proprietorships and LLPs created will definitely come down, but anyone expecting these forms of business to go extinct is almost definitely mistaken.
Who is an OPC ideal for?
An OPC is ideal for a tech entrepreneur. An entrepreneur with a major new idea or innovation which he wants to deploy on the cloud may not need the burden of a co-founder. Likewise, freelancers, designers and developers who are one man armies will now form one man companies. It also brings the possibility of investors investing in promising young entrepreneurs going it alone.
Can the “One Person” in a OPC be a Company?
As per Singapore law, a Company can be the one person in a One Person Company. So, for example, if you have an existing Company where you are a director, you can form a One Person Company with your Company as the sole director.
For instance, you have a company called Rahul Textiles Pvt. Ltd. with you and your friend Hardik as directors. Now you also want to import textiles from Italy for sale in India and want to have a separate entity to do that (for accounting and taxation purposes).
As per Singapore law, you are entitled to form a One Person Company with Rahul Textiles Pvt. Ltd. as the sole person in the company.
The Indian Companies Bill, 2011 is so far unclear on whether a Company can be the single person in a One Person Company. Parliament should ensure that clarity is brought in on this aspect when it becomes law.
[About the author: Contributed by Hrishikesh Datar, founder of vakilsearch.com, online legal services provider (Legal Advice, Legal Documents & more).