Single Member Companies

By Almas Shaikh, National University of Advanced Legal Studies, Kochi

Editor’s Note: The Companies Act, 2013 has introduced provisions for a large number of instances, which were not covered under the 1956 Act. The concept of Single Member Companies is one such inclusion. Section 2(62) of the 2013 Act deals with these companies which have only one member. This paper discusses various aspects and advantages of Single Member Companies.

Abstract

This topic deals with the new aspect of single member companies or one person company that has been introduced in India through the Companies Act, 2013. The project will deal with this concept in three parts. The first part of the project will deal with the position of the English law on single member companies. The second part will address the recent Indian legal position on One Person Companies. The third part shall tackle the concept of one person companies and the corresponding limited liability.

Single Member Companies

A single member company, as the name itself suggests, is a company with only one member. The sole member is also referred to as the shareholder. This concept, though new in India, is very popular in the European countries, especially UK. A company may be formed as a single member company or may become a single member company following a share transfer whereby the number of shareholders is reduced to one.  This one shareholder will hold all of the shares of the company in their name.[i] But care has to be taken that the name of the Company identifies itself as a Single Member Company to the public.

These companies are regulated by the European Regulations that are in place regarding single member companies in the form of the European Communities (Single-Member Private Limited Companies) Regulations, 1994. It was due to the permit given by these regulations that a sole person, whether natural or legal, could form or become a single member company.

Apart from this, a common guideline exists for the smooth running of single member companies. This guideline, which is known as the Twelfth Council Company Law Directive, came to be in 1989 as an answer to the non-harmonised practice in regulation of the single member limited liability companies.

In United Kingdom, the Companies Act 2006 provides separate regulation for one-man companies. The UK is the only legislation which has paid attention to quorum in one-man companies. An individual member, corporate representative or proxy present at the meeting may all be “qualifying persons” with respect to the quorum and in case of single-member Company only one qualifying person is enough to pass a resolution. This also extends to the fact that even though there is no separate provision on the singe shareholder’s possibility to delegate the voting rights on general meetings, he/she can appoint a proxy in relation to a particular meeting.[ii]

One-Person Companies: Indian Legal Position

The concept of one person company in India is very new. It was introduced formally to the Indian Company Law arena through the Companies Act, 2013. S. 2(62) of the Companies Act defines this as follows:

2.(62) “One Person Company” means a company which has only one person as a member.

This notion was first brought to the notice in India was through the J.J Irani Expert Committee Report of 2005. In the report, it was said that it is not reasonable to expect entrepreneur to develop his ideas and participate in the market place through an association of persons.[iii]

Salient Features

The salient features of One-Person Company as follows:

  • There shall only be one member and one director in the one person company.
  • 3(1)(c) of the Companies Act, 2013 classifies a one-person company as a private company for all the legal purposes with only one member. [iv]
  • A One-Person Company may either be a company limited by share or a company limited by guarantee or an unlimited company, by virtue of section 3(2).
  • But if an OPC is limited by shares, it shall have to follow conditions such as:
    • A minimum paid up capital of INR 1 lac
    • Restriction of the rights of the share to be transferred
    • Prohibition of any invitations to public to subscribe for the securities of the company
  • An OPC has to give itself a legal identity by choosing a name under which the businesses of the Company could be carried on.
  • The words “One Person Company” should be mentioned below the name of the company, wherever the name is affixed, used or engraved.[v]
  • According to Rule 3(1) of the Companies (Incorporation) Rules, 2014, it can be observed that the advantages of an OPC can only be obtained by those Indians who are naturally born and also resident of India. No person shall be eligible to become a nominee in more than one OPC.
  • A person cannot form more than five One-Person Companies.

At the time of incorporation, it is required by the sole member of the OPC to appoint another person as his nominee and this other person’s name will be mentioned in the Memorandum of Association of the OPC.

According to Rule 3(5) of the Companies (Incorporation) Rules, 2014, a OPC cannot be incorporated or even converted into a company under section 8 of the Act, that is, companies with charitable objects.

Conversion of OPC into Private/ Public Companies and vice-versa

According to Rule 6(2) of the Companies (Incorporation) Rules, 2014; it is mandatory for the OPC to convert itself, either into a private or public company. As per rule 6(2), (3) an (6) of the same rules, an OPC should ensure that the conversion shall happen in accordance with the provisions of s. 18 of the Companies Act, 2013 which provides for necessary alteration in memorandum and articles, read with section 122 of the Act.

If the paid up share capital of an OPC exceeds 50 lakh rupees or its average annual turnover during the period of immediately preceding three consecutive financial years exceeds 2 crore rupees, it will not be considered as an OPC.

Compliance burden for an OPC

Although an OPC comes under private company according to section 2(68) of the 2013 Act, it has been given a number of exemptions and thus has a comparatively lesser compliance burden. Some of these exemptions are:

  • Non-requirement to prepare cash flow statement as part of financial statement as per section 2(40).
  • The member of the OPC can take financial assistance for purchase of its shares according to section 67 (2).
  • In case an OPC does not have a company secretary, the annual return can be signed by the director of the company. [Section 92(1)]
  • Neither is it necessary to hold an annual general meeting for an OPC [Section 96(1)], nor is it required to prepare a report on Annual General Meeting. [section 121(1)].
  • The provisions of the following sections shall not apply to an OPC –

(a) Section 98: Power of Tribunal to call meetings of members, etc.

(b) Section 100: Calling of extraordinary general meeting

(c) Section 101: Notice of meeting

(d) Section 102: Statement to be annexed to notice

(e) Section 103: Quorum for meetings

(f) Section 104: Chairman of meetings

(g) Section 105: Proxies

(h) Section 106: Restriction on voting rights

(i) Section 107: Voting by show of hands

(j) Section 108: Voting through electronic means

(k) Section 109: Demand for poll

(l) Section 110: Postal ballot

(m) Section 111: Circulation of members’ resolution[vi]

  • The Minimum number of directors is limited to one. And the provisions of section 173 and 174 which deal with the Meetings of Board and the quorum for meetings of board and quorum for meetings of board.
  • Only one director can sign the financial statement and the Board’s report. [section 134(1)]

Apart from these privileges/ exemptions, as per section 462(1), the Central Government has the power to grant further privileges to OPCs by issuing a notification in public interest.

Contracts by an OPC

If an OPC which is limited by shares or by guarantees enters into contract with the sole member of the company and if such a contract is not in writing, it should be ensured that the terms of the same are mentioned clearly in the memorandum of association or recorded in the minutes of the first meeting of the Board of Directors of the Company held after entering into contract. This is provided for in section 193 of the Companies Act, 2013. But this does not apply if the contract is in writing and occurs during the ordinary course of business.

All the contracts that are entered into by the One Person Company should be informed to the Registrar within a period of 15 days of the date of approval by the Board of Directors as enshrined in section 193(2).

According to section 152(1), the member of an OPC will be considered its director and can enter into contracts until such director or directors are duly appointed by the member in accordance with the provisions of the respective section.

Taxation of OPC

As the concept of One Person Companies has not yet been incorporated with the tax laws, it is assumed that an OPC will be considered in the same category as any other private company. According to the Income Tax Act, 1961, a private limited company is taxable at the rate of 30%, in addition to surcharge and education cess.

Limited Liability of One-Person Companies

A company is always considered a separate legal entity. The liabilities of the company and of its members are different and are differentiated by the corporate veil. This raises the question as to the liability of the OPC’s as it has only one member.

A company is considered as a separate legal entity, its liabilities being separate from those of its members. Thus, it is logical to wonder the liability of a One-Person Company as it has only one member.

The concept of liability in an OPC is a combination of limited liability with complete dominion of sole proprietorship. A sole proprietor, operating a moderate sized business, organizes a corporation to which he surrenders the business and assets. In return he takes all the shares excepting the few necessary to comply with the statutory provision respecting incorporators and directors. The few shares he does not take are allotted to his relatives or employees, in order to qualify them as incorporators or directors in accordance with the requirements of the corporation statute. Thus, a corporation is created “in legal form” the sole or principal shareholder remains in effect the exclusive control and full dominion he enjoyed as a sole proprietor; and, in addition, he achieves the desired privilege of limited liability.[vii]

In an OPC, the liability, legally and financially, is limited to the company and does not extend to the person. The OPC is a revolutionary concept which will give the entrepreneurs all the benefits of a company, which means they will get credit, bank loans and access to market, limited liability and legal protection available to the companies.[viii]

A distinction has to be made between the company and its sole shareholder. Even if the member holds entire share capital, he cannot be held liable. The company’s money and property belong to the company and not to the shareholder. This distinction is carefully preserved for legal purposes.[ix]

The concept of treating a company as an independent person extends even to the corporate and personal obligations of the sole shareholder. Just because one person owns all the shares and property in an OPC, its corporate personality cannot be disregarded. This concept will be taken into consideration only till it is used for legitimate purposes. Limited liability is a privilege given only when two requirements are complied with. Firstly, the distinct identity of a corporation must be maintained and the business conducted should be on corporate footing. Secondly, it must establish the corporate venture on an adequate financial basis.[x]

Advantages of One Person Companies

The most obvious and important advantage that comes to mind when talking ant OPC’s is that of limited liability. A one person company differs from a sole proprietorship in such a way that, the liability of the member will be limited to the unpaid subscription money, which is not available in a sole proprietorship.

An OPC, due to it being an incorporated entity will have the feature of perpetual succession. The existence of the company does not cease on the death of a member or director. This makes it easier to raise capital for business. Also, since it will have lesser compliance burden compared to private companies, it can be preferred mode of business for small industries.[xi]

Corporate Affairs Minister, Sachin Pilot, has stated that the incorporation of One Person Companies will eliminate middlemen, thus making it easier for small entrepreneurs to directly access target markets rather than being forced to share profits with middlemen. Sachin Pilot, in a recent press conference stated thus,

This would provide tremendous opportunities for millions of people, including those working in areas like handloom, handicrafts and pottery. They are working as artisans and weavers on their own, so they don’t have the legal entity as a company. But the OPC would help them do business as an enterprise and give them an opportunity to start their own ventures with a formal business structure.”[xii]

 Conclusion

OPC’s have finally been introduced in India. This is a huge step forward from the sole proprietorship that was formerly available. This type of a company has preferential status over sole proprietorship which discourages people due to the unlimited liability that is attached to it. The introduction of OPC in the legal system is a move that would encourage corporatization of micro-businesses and entrepreneurship.Thus one-person companies comes as a blessing for small entrepreneurs who want to develop their ideas without being worried about the responsibility of the liabilities. Although it is a new concept, it has the potential to be used extensively due to the advantage it has provided by bridging a gap between sole proprietorship and the limited liability.

Edited by Sinjini Majumdar

[i] “Formation And Advantages Of a Single Member Company – Ireland”, Pearse Trust Blog, Wednesday March 20, 2013, Available at http://www.pearse-trust.ie/blog/bid/95248/Formation-And-Advantages-Of-A-Single-Member-Company-Ireland.

[ii] Beretka Katinka, “Concept of Single Member Companies In the Light of EU Harmonization – Comparative Analysis of Servia, Germany, United Kingdom”, Central European University, March 29, 2010.

[iii] Dr. Jamshed J. Irani, Report on Company Law, May 31st 2005

[iv] Vatsala Singh, One Person Company: A Concept for new age Business Ownership, Singh & Associates (28th November 2013),  Available at http://www.mondaq.com/india/x/278154/Corporate+Commercial+Law/One+Person+Company+A+Concept+For+New+Age+Business+Ownership

[v]Available at http://www.slideshare.net/ANANDGAWADE1/one-person-company-opc-under-new-companies-act-2013

[vi] Available at http://corporatelawreporter.com/2013/10/17/analysis-one-person-company-companies-act-2013-karandeep-makkar/

[vii] Note, 45 HARV. L, REV. 1084 (1932)

[viii] Sabarnee Chatterjee, “One Person Company and Limited Liability on its member”, (2014) 3 COMP LJ (1)

[ix]Button v. Hoffmen 61 Wis.20, 20 N.W.667 (1884)

[x] Bernard F. Cataldo, Limited Liability with One Man Companies and Subsidiary Corporations, Law and Contemporary Problems, Available at: http://scholarship.law.duke.edu/lcp/vol18/iss4/4

[xi] Available at http://corporatelawreporter.com/2013/10/17/analysis-one-person-company-companies-act-2013-karandeep-makkar/

[xii]One person companies to eliminate middlemen: Sachin Pilot, available athttp://articles.economictimes.indiatimes.com/2013-09-08/news/41873696_1_sachin-pilot-corporate-affairs-minister-sachin-new-companies-act.

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