Now, get ready for the 'one-person company'

The draft Companies Bill, 2007, has proposed a new entity called a one-person company as a measure to provide start-up entrepreneurs and professionals the much-needed flexibility in setting up a business in India.

The onerous compliance requirements that apply to large widely-held companies will not be imposed on such entities.

Officials told Business Standard that a proposal to this effect has been included in the Bill, which has been sent for inter-ministerial consultation.

The ministry of corporate affairs had said the Bill may be put up for legislative approval in the winter session of Parliament, but officials now say it is unlikely.

"We are waiting for comments from other ministries. After that we will have to seek Cabinet approval and then take it to Parliament," the official said.

The move to permit OPCs in India was recommended by the J J Irani expert committee on revising India's company laws in May 2005.

Various countries permit this kind of a corporate entity (China introduced it in October 2005) in which the promoting individual is both the director and the shareholder.

The principal forms of business organisations permitted in India are sole proprietorship firms (in which only one person runs the business), partnerships (between two or more people) and companies (both private and public where it is possible for many individuals to own the business by subscribing to its shares).

The fundamental difference between a sole proprietorship and an OPC is the way liability is treated in the latter.

A one-person company is different from a sole proprietorship because it is a separate legal entity that distinguishes between the promoter and his company, said Rajiv Luthra, founder and managing partner, Luthra & Luthra.

Luthra added that the promoter's liability is limited in an OPC in the event of a default or legal issues. On the other hand, in sole proprietorships, the liability is not restricted and extends to the individual and his or her entire assets.

For instance, if a sole proprietorship firm is sued, the promoter also gets sued automatically. In the case of companies, liability is restricted to the shares of a company, except for criminal matters.

"It is a good and highly desirable move, especially as it reduces the level of compliance for OPC's vis-à-vis companies," he said.

The move is expected to ease start-up formalities for prospective entrepreneurs. Similarly, small entrepreneurs who are running their businesses under the proprietorship model could convert to OPCs, with the benefit of limited liability and none of the cumbersome compliance requirements, said corporate law expert Naveen Goel.

What is an OPC?
It is a one shareholder corporate entity, where legal and financial liability is limited to the company only.

Is it prevalent in India?
No. Existing Indian law currently requires at least two shareholders. That is why even for wholly-owned subsidiaries, an individual shareholder has to hold one share as a nominee.

What will be the impact of OPC in India?
Most small companies are actually owned and managed by a single individual, but currently are required to bring in another shareholder. This increases compliance requirements, for example, shareholder meetings require the presence of both the shareholders. OPC will help small single entrepreneurs, who are currently operating under a proprietorship model, move to the corporate structure with benefits of limited liability but with minimal compliance.

Source: Naveen Goel, corporate law expert