One Person Company: concept, features and advantages for start-ups

Concept of a One Person Company

The Companies Act, 2013 provides for a One Person Company (OPC), which section 2(62) defines as "a company which has only one person as a member". It allows a single entrepreneur to enjoy the benefits of a company, separate legal entity and, in its usual form as a company limited by shares, limited liability, without needing a second member, as a private company otherwise requires. It thus bridges the gap between a sole proprietorship and a private limited company.

Features

1. Single member. One person subscribes to the memorandum and forms the company (section 3(1)(c)).
2. Nominee. When the company is formed, the founder names in its memorandum a second individual who has agreed in writing to step in as member should the founder die or lose the capacity to contract (proviso to section 3(1)). This keeps the company going. The nominee's prior consent is given in writing in the prescribed form and is filed with the Registrar, along with the memorandum and articles, when the OPC is incorporated. Later the nominee may withdraw that consent, and the member may change the nominee at any time by notice, each in the prescribed manner; the member tells the company of a change and the company tells the Registrar, within the prescribed time and manner, and a change of nominee is not treated as an alteration of the memorandum (further provisos to section 3(1)).
3. Separate legal entity. The company is distinct from its owner; it can own property, enter contracts and sue and be sued in its own name.
4. Limited liability. An OPC is usually formed as a company limited by shares; the member's liability is then limited to the amount, if any, unpaid on the shares held.
5. Perpetual succession. The company continues despite the death or exit of the member.
6. Private company. It is a kind of private company, and its name must carry the bracketed label One Person Company underneath it on every document, seal or board that shows the name (section 12(3)).
7. Directors. One director is enough, and the member may be that director; up to fifteen may be appointed without more, and a special resolution allows a larger board (section 149(1)). Like every company, it must have at least one director who stays in India for a total of 182 days or more in the financial year, applied proportionately for the year in which the company is incorporated (section 149(3)); so a sole director must meet it.
8. Lighter compliance. It need not hold an annual general meeting (section 96(1)); its financial statements need not include a cash flow statement (section 2(40)); an OPC with only one director on its board need hold no board meetings at all, and otherwise two a year are enough, one in each half of the calendar year with at least ninety days between them (section 173(5)).

Advantages for start-up businesses

1. Limited liability for a solo founder. In the usual form, a company limited by shares, the founder's personal assets are protected, which encourages risk-taking (section 3(2) also allows an OPC limited by guarantee or unlimited).
2. Full control. Management rests with the board, but a founder who is both the only member and the only director decides both as shareholder and as board, without the need to find a partner or co-shareholder.
3. Corporate identity and credibility. Customers, suppliers, banks and investors trust a registered company more than an informal proprietorship.
4. Room for finance later. The structure can later admit investors by conversion (point 7).
5. Continuity through the nominee and perpetual succession.
6. Fewer formalities than an ordinary private company.
7. Room to grow. Section 18(1) lets a registered company change into a company of a different class by amending its memorandum and articles; on the company's application, the Registrar, once satisfied that the registration provisions have been complied with, closes the old registration and issues a fresh certificate of incorporation (section 18(2)), and debts, liabilities, obligations and contracts from before the conversion are unaffected and stay enforceable (section 18(3)). So when investors arrive, the founder can turn the OPC into an ordinary private company or a public company.
8. Separation of business and personal affairs, which helps in keeping accounts and in planning.

Example. A software developer who builds and sells a billing app alone forms an OPC: her personal savings are protected if the business incurs debts, clients see a registered company, and when an investor joins later the OPC is converted into a private company.

Limitations

Only one person can own it; as a private company it cannot invite the public to subscribe to its shares; and it is more complex to form and run than a proprietorship.

Conclusion

The OPC gives individual entrepreneurs the protection and standing of a company with modest formalities, which makes it well suited to start-ups founded by one person.