Have you ever thought that a person can be a company on their own? It sounds a bit strange, but it has been made possible through the Companies Act, 2013.
The One Person Company, introduced in 2013 in by the provisions of Companies Act, is a revolutionary step to support the small businesses and startups. In this OPC, all benefits to an individual can be exercised for the conduct of business as separate legal entities and provides limited liability protection. This has especially benefited sole proprietors to expand their businesses while reaping the benefits of the corporate structure, through which they can gain larger market shares and bigger portions of the pie.
Key Features of OPC
- Single Shareholder: The one-person company refers to a company owned and controlled by two members, having at least 75% of its share capital held by it, as per Section 2(62) of the Companies Act.
- In contrast to a sole proprietorship, whereby a proprietor suffers unlimited liability for debts run up in the business, this structure as an OPC protects personal assets.
- Nominee Requirement: The shareholder should nominate a person who will take control of the company in case the owner becomes incapacitated or dies. The nominee should also provide prior consent for the role.
- It has fewer compliance burdens compared to other forms of corporate structure, such as private limited companies. For instance, an OPC need not hold AGMs and reporting mechanisms are made much less complicated.
- Conversion into Other Forms of Companies: The OPC structure is only meant for small businesses, however the law provides that when an OPC will convert into private limited company or any other body corporate as the business expands or grow. Rule 6 of Companies (Incorporation) Rules, 2014, states that if the paid up share capital of an OPC exceeds Fifty lakh rupees or its average turnover per annum, If during the succeeding two crore, the OPC has an average annual turnover exceeding such above-mentioned limit, it will need to consider converting to a private company or a public company within six months of this threshold limit being reached.
- This allows for the flexibility in growth that the OPC does not allow for, so there is no bar for growth of the business, and when it has outgrown the OPC structure, it can easily move into a corporation
V. Ramaswamy vs. Registrar of Companies, 2020
Yet, yet another landmark case is V. Ramaswamy vs. Registrar of Companies (2020). In it, the petitioner Ramaswamy, sole shareholder of an OPC, approached the Registrar with a petition stating his company had not been registered under the OPC’s framework. The contention here was that the Registrar’s argument on the fact that, the businessman Ramaswamy that had surged above the market turnover limit could no more be run as an OPC.
ON the very merits of the argument, Ramaswamy submitted that the turnover cap of OPCs prescribed at an INR 2 crores per annum under Rule 6 of the Companies (Incorporation) Rules, 2014, was arbitrary and violative of the principles of proportionality and equity. He further stated that the law should allow a seamless transition of the OPC into a private limited company without penalising the small businesses.
The court decides in favor of Ramaswamy, considering the fact that even restrictions on turn-over constitute an administrative necessity and should not be influenced in any way to impact business growth.
Advantages of One Person Company
- Limited Liability Protection
- Separate Legal Entity
- Ease of Management
- Access to Funding:
Challenges and Limitations:
The OPC structure has many benefits but also challenges. The Turnover cap and the paid-up share capital constraints restricting OPC from growing however, reducing it diversity can be a challenge to remain private limited company once they vulnerable these mark. This conversion process can take up valuable time and may also have further compliance requirements, which are a considerable headache for most small business owners.
What is more, the nominee requirement can itself be a barrier to participation by people who do not have a suitable party available to take over the business when there’s incapacity or event of death. The nominee must also provide their consent, as well as details generally requiring to be included in the company’s incorporation documents which can further make the process of formation cumbersome.
Conclusion
It is a historic amendment in Indian corporate law to introduce OPC registration under the Companies Act, 2013. This gives a good legal framework for individual entrepreneurs to enjoy the benefits of limited liability and corporate governance but without loosing complete control on their businesses. The OPC structure, however, has some restrictions such as a cap on turnover and the compulsion of nominee but it is still one of the most popular picks amongst small business owners to scale their businesses under corporate structure. The judicial precedent established in the case of V. Ramaswamy, reinforces the necessity for a pliant regulatory regime governing OPCs so that they continue functioning as potentially practical vehicles for supporting entrepreneurship. The OPC, in short, is a tool for the growth of entrepreneurs in the host state as a whole.
As the editor of the blog, She curate insightful content that sparks curiosity and fosters learning. With a passion for storytelling and a keen eye for detail, she strive to bring diverse perspectives and engaging narratives to readers, ensuring every piece informs, inspires, and enriches.
