Introduction
According to Adam Smith's "The Wealth of Nations", individuals always weigh their own interest more than the group. When faced with a diverse and dynamic market, single member company can easily adjust its strategy through either competition or quitting the market. This may enable the company to enhance its decision-making efficiency and competitiveness.
In another word, single member company is in favour of the company's sustainment and economic development. For the first time, the concept of a "one-person company", or OPC, has been introduced in India under the Companies Act, 2013 and the intent is apparently to permit entrepreneurship of a single individual to obtain the benefit of a corporate form of organization.
This concept is likely to open up a plethora of business opportunities for small entrepreneurs especially for those in the handloom, handicraft and pottery industry. Many countries, including the US, Singapore and China, allow entrepreneurs to structure their business as One Person Company.
With increasing use of information technology and computers, emergence of the service sector, it is time that the entrepreneurial capabilities of the people are given an outlet for participation in economic activity. Such economic activity may take place through the creation of an economic person in the form of a company. Yet it would not be reasonable to expect that every entrepreneur who is capable of developing his ideas and participating in the market place should do it through an association of persons. We feel that it is possible for individuals to operate in the economic domain and contribute effectively.
To facilitate this, the Committee recommends that the law should recognize the formation of a single person economic entity in the form of 'One Person Company'. Such an entity 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. (This concept was first recommended by the Expert Committee of Dr.J.J.Irani on Company Law in 2005.)
What is a One Person Company?
This concept of one person company is a great initiative from the Ministry of Corporate Affairs and is a welcome approach for various businessmen as it would give them the freedom to establish a company without requiring any other person in the board of the company and as a shareholder of the company. Sec.2(62) of the Companies Act, 2013 defines One Person Company as a company which has only one person as a member.
Hence, it is a single shareholder corporate entity, where legal and financial liability is limited to the company only. There were no separate provisions for a One Person Company under the Companies Act of 1956. The Companies Act, 1956 required a Public Company to have at least 7 members (shareholders)and a Private Company to have at least 2 members (shareholders) and a Producer Company to have at least 5members (shareholders).
Therefore a company having a single member could not continue the existence of a registered company. Incorporation and Administration of One Person Company One Person Company will be treated as a private company and can be formed for any lawful purpose by a person by subscribing his name to a memorandum and complying with the requirements in respect of registration under the Companies Act, 2013.
OPC will have only one shareholder who may also be the director, but it can have more than one director and upto a maximum of fifteen directors. Since the company is owned by a single person, he should nominate someone to take charge of it in case of his death or disability. The nominee must give his consent in writing, which has to be filed with the registrar. Any change in the details of the member should be informed to the Registrar. The words "One Person Company" should be mentioned in brackets below the name of such company, wherever its name is printed, affixed or engraved.
Where there is only one director on the Board of Director of a One Person Company, any business which is required to be transacted at the meeting of the Board of Directors of a company, it will be sufficient if, in case of such One Person Company, the resolution by such director is entered in the minutes-book required to be maintained under section 118 and signed and dated by such director and such date will be deemed to be the date of the meeting of the Board of Directors for all purposes.
The financial statements, duly adopted by the member, along with all the related and required documents should be filed with the Registrar of Companies within one hundred and eighty days from the closure of the financial year. Where One Person Company limited by shares or by guarantee enters into a contract with the sole member of the company who is also the director of the company, the company should, unless the contract is in writing, ensure that the terms of the contract or offer are contained in a memorandum or are recorded in the minutes of the first meeting of the Board of Directors of the company held next after entering into contract.
This provision will not apply to contracts entered into by the company in the ordinary course of its business. The company should inform the Registrar about every contract entered into by the company and recorded in the minutes of the meeting of its Board of Directors within a period of fifteen days of the date of approval by the Board of Directors.
Exemptions available to One Person Company Some of the privileges and exemptions available to an OPC under the Companies Act, 2013 are:
Signatures on Annual Returns (Sec.92) -Annual returns in the case of OnePerson Company should be signed by the company secretary or where there is no company secretary, then by the director of the company.
Holding Annual General Meetings (Sec.122) - Provisions relating to General Meetings, Extra Ordinary General Meeting and Notice for convening General Meeting are not applicable to One Person Company.
However, for fulfilling the purposes of S.114 of the Companies Act, 2013, where any business is required to be transacted at an Annual General Meeting, or other General Meeting of the company by means of an ordinary or special resolution, it will be sufficient if the resolution is communicated by the member of the company and entered in the minutes book which is required to be maintained under Sec.118 and signed and dated by the member and such date will be deemed to be the date of meeting under the purposes of Companies Act, 2013.
Board Meetings (Sec.173) -Every one person company should hold at least one meeting of the Board of Directors in each half of a calendar year and the gap between the two meetings should not be less than ninety days. In case the company has onlyonly one director on its Board of Directors, then it will not be required to hold two board meetings as mentioned above.
Other provisions that will not be applicable to a One Person Company are quorum for meetings, voting procedures etc. Benefits of OPC An OPC gives the advantage of limited liability to entrepreneurs whereby the liability of the member will be limited to the unpaid subscription money.
This benefit is not available in case of a sole proprietorship. An OPC being an incorporated entity will also have the feature of perpetual succession and will make it easier for entrepreneurs 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.
Provisions regarding One Person Company under the Draft Companies Rules Some of the provisions covering incorporation and administration of One Person Company under the Draft Companies Rules are-
- Only a natural person who is an Indian citizen and resident in India will be eligible to incorporate a One Person Company and can be a nominee for the sole member of a One Person Company.
- No person will be eligible to incorporate more than five One Person Companies.
- The subscriber to the memorandum of a One Person Company should nominate a person, after obtaining his/her prior written consent, who shall, in the event of the subscriber's death or his incapacity to contract, become the member of that One Person Company.
- Name of the nominee should be mentioned in the memorandum of the OPC and the nomination along with the nominee's consent should be filed with the Registrar at the time of incorporation of the company along with its memorandum and articles.
If One Person Company or any officer of the OPC contravenes the provisions of these rules, OPC or any officer of the OPC will be punishable with fine which may extend to five thousand rupees and with a further fine which may extend to five hundred rupees for every day after the first during which such contravention continues.
Where the paid up share capital of a One Person Company exceeds fifty lakh rupees or its average annual turnover during the relevant period exceeds two crore rupees, it shall cease to be entitled to continue as a One Person Company. Such One Person Company will be required to convert itself, within six months of the date on which its paid up share capital is increased beyond fifty lakh rupees or the last day of the relevant period during which its average annual turnover exceeds two crore rupees or the close of the financial year during which its balance sheet total exceeds one crore rupees, as the case may be, into either a private company with minimum of two members and two directors or a public company with minimum of seven members and three directors in accordance with the provisions of of the Act. It should alter its memorandum and articles by passing an ordinary or special resolution to give effect to the conversion and to make necessary changes incidental thereto.
Within thirty days of ceasing to be an OPC, the One Person Company should give a notice to the Registrar informing that it has ceased to be a One Person Company and that it is now required to convert itself into a private company or a public company by virtue of its paid up share capital or average annual turnover, having exceeded the threshold limit. One Person company can also get itself converted into a Private or Public company after increasing the minimum number of members and directors to two or minimum of seven members and three directors as the case may be, and by maintaining the minimum paid-up capital as per requirements of the Act.
One Person Company in other countries World over, OPC is known as Single Member Company. Liechtenstein (a country in Central Europe) is the first country in the world to acknowledge the legal position of Single Member Liability Company by statute law. In United Kingdom the concept of Single Member Company is covered under the Companies Act of 2006. A single-member company is a private company limited by shares or a guarantee company having a share capital, which is incorporated with one member, or whose membership is reduced to one person post-incorporation.
However, the company must have at least two directors and a secretary (who may be one of the directors). The sole member may be a natural person or a body corporate. Subject to certain modifications, all the provisions of the Companies Acts, which apply to private companies limited by shares or by guarantee, will apply to single-member companies. For instance, the sole member may decide to dispense with the holding of General Meetings, including Annual General Meeting (AGMs).
However, the accounts and reports that would normally be laid before the AGM of a company are still required to be prepared and forwarded to the sole member. If the company enters into an unwritten contract with the sole member who is also a director of the company, and the contract is not in the ordinary course of the company's business, the company must ensure that the terms of the contract are set out in a memorandum or are recorded in the minutes of the next director's meeting. In Europe, single member company has been commonly recognized by most Member States thanks to the unique European Company Law system. Single Member Company Directive 2009/102/EC regulates the operation of single member companies in the European Union. In Pakistan, the concept of Single Member Company (SMC) was introduced in the year 2002 and being implemented from 2003 by the Single Member Companies Rules, 2003.
Any person can form a single member company and should file with the registrar at the time of incorporation a nomination indicating at least two individuals to act as nominee director and alternate nominee director, of the company in the event of his death. The appointment of a qualified company secretary is mandatory for the Single Member Company, which is not required in the case of the other non-listed company. Where a single member company enters into a contract with the single member of the company, the single member company should, unless the contract is in writing, ensure that the terms of the contract are set out in a written memorandum or are recorded in the minutes of the first meeting of the directors of the company following the making of the contract.
The decisions taken by the single member or sole director in the meeting of director and member of a Single Member Company are required to be drawn up in writing and recorded in the minute's book by the company secretary. Other documents, procedure of registration and fees schedule remain same as for Private Limited Company. The Securities and Exchange Commission of Pakistan (SECP) is the authority for registration of Single Member Companies.
China recognized the legal status and adopted the single member company by legislation when new Company Law took effect on January 1st 2006 which is a significant legislative progress in the legislation history of China. The term "one-person limited liability company" as mentioned in China Company Law refers to a limited liability company with only one natural person shareholder or legal person shareholder. The minimum amount of registered capital of a one-person limited liability company shall be RMB 100, 000 yuan (approx. USD 12,500). The shareholder should, in a lump sum, pay the capital contributions as specified in the articles of association.
A one-person limited liability companies should, in the company registration, give a clear indication that it is solely-funded by one natural person or legal person and the same should be specified in the business license of the company, make a financial statement by the end of every fiscal year, which will be subject to audit by an accounting firm. If the shareholder of a one-person limited liability company is unable to prove that the property of the one-person limited liability company is independent from his own property, he should bear joint liabilities for the debts of the company. This can prevent the sole shareholder from taking advantage of the company's assets for his/her personal use, so as to protect the obligee. In United States of America, the single-member limited liability company (SMLLC) is a very common form of business ownership for a solo business owner. A single-member limited liability company (LLC) is an LLC with one member.
The SMLLC is formed under state laws and regulations and it pays taxes as a sole proprietorship. Conclusion While the idea of an OPC looks promising, doing business in OPC structure may effectively result in higher tax implications on the businesses as the rate of taxation on companies is higher.
Also, since a company is a separate legal entity, the distribution of dividend by an OPC may attract dividend distribution tax. Sole proprietors, on the other hand are taxed at the rates applicable to individuals, i.e., differential rates for different slabs of income. It remains to be seen if the OPC model is widely adopted.
Mr.Nimish.A.Chodankar
Reg. No.:WRO0455539
Email id: mailto:nimish@caaa.in, nimish@caaa.in
CAclubindia
