One Person Company: A Revolutionary Idea or a Half Baked Concept?
Swati Shanker and Shubham Gautam this article seeks to critically examine the concept of One Person Company.
“With the development of the practice, there will be more and more ‘exception’ phenomena which can’t be explained by the original thoughts or theories. Once these exceptions developed to such an extent that waved people’s confidence in the former thoughts or theories, crisis will happen, and scientific revolution begins.” - Thomas S. Kuhn
In view of the changing national and international economic environment and in furtherance of the objective of creating necessary environment for contemporary global corporate structure in India, revolutionary changes have been introduced in the Indian company law regime by the enactment of Companies Act, 2013 (the ‘Act’). The Act marks a remarkable shift in India’s corporate regime and aims to repair and fine tune the existing lacunas by ensuring more transparency in governance of the corporate bodies and introducing various novel concepts. One such novel concept introduced by the Act is the concept of “One Person Company”. Theenshrined goal behind the incorporation of this conceptis to promote entrepreneurship . Prior to the introduction of the concept of One Person Company, Companies Act, 1956(the ‘Old Act’) required minimum two shareholders for establishing a private company and hence, the only option available to persons seeking to start a venture alone was sole proprietorship . Since, proprietorship is not legally recognized as a separate legal entity, it discouraged persons from undertaking business ventures. Hence, this concept is being well received by the entrepreneurs and it is likely to change the manner in which traditional and household businesses function. On the other hand, this is being regarded as a
Section 4 of the Act deals withthe maternity benefits entitled to pregnant and lactating women and Section 5 and Section 6 provides various benefits for the children upto 14 years of age, elucidating the government’s concern for various sections of the society, ranging from women to
1. Refer report of J.J.Irani committee titled “Report on Company Law” available at http://www.primedirectors.com/pdf/JJ%20Irani%20Report-MCA.pdf; last accessed on 15th February, 2014
2. Section 3 (2) (iii) of Companies Act, 1956 defines a “Private Company” as a company which has a minimum paid-up capital of one lakh rupees or such higher paid up share capital as may be prescribed, and which by its articles, restricts the right to transfer its shares.
3. A business entity exclusively controlled by a single person with all responsibilities and risks.
4. By registration, under the Companies Act, a company becomes vested with corporate personality, which is independent and distinct from its members. This concept limits the liability of the shareholders only to the extent of their liability as a shareholder and does make their personal property liable for any debt incurred as a shareholder of a company.
fruitless endeavour involving complex procedures and much paperwork as compared to a sole proprietorship.Some business experts perceive it as a still born, half baked concept.
The first part of the article explains the meaning of the concept of one Person Company. Further, the article in its subsequent parts highlights some key issues associated with the concept. The article further with an objective to analyse the feasibility and success of the concept of One Person Company in Indian scenario has compared it with the countries having already implemented this concept.Towards the end, the article intends to make certain suggestions with regard to One Person Company in order to suit the need of the entrepreneurs so as to promote entrepreneurship and hence the economic growth of the country
2.MEANING OF ONE PERSON COMPANY
The term “One Person Company” seems to be an oxy-moron because in general parlance, a company means an enterprise having at least two persons. One Person Company has been defined under Section 2 (62) of the Act as “a company which has only one person as its member”. Further, Rule 2.1 of the Draft Rules under Companies Act , 2013 clarifies the term “Person”by stating that the person as contemplated by the Act should be a natural person.The Act recognizes and confers the status of a private company to an entity having only one member and terms it as a “One Person Company” . Hence,all the legal provisions applicable to a private company are also applicable to a One Person company unless and until they are expressly excluded by the Act.
Thus, One Person Company is basically a legal entity which functions on the same principles as that of a private company but has only one person (natural) as its shareholder.
One Person Company may be constituted under any of the following three categories :
a) a company limited by shares or;
b) a company limited by guarantee or;
5. Available at http://ncbfeedback.mca.gov.in/; last accessed on 15th February, 2014
6. Section 3 (1) (c) of the Act
7. A One Person Company has only one shareholder and the shareholder can act as a director as well. However, it is not necessary that the shareholder and director must be same. Further, a One Person Company can have a maximum of 15 directors.
8. Section 3 (2) of the Act
9. Section 2 (22) of the Act
c) an unlimited company
Hence, the Act enables even an individual to establish a company by subscribing his name to the memorandum of the company and complying with the provisions of registration under the Act . The new model provides an option to persons operating as a sole proprietor to operate as a company.
However, certain limitations have been imposed with respect to the incorporation of a One Person Company. Some of the limitations imposed on a One Person Company are:
1. Only a natural person who is an Indian citizen and resident in India shall be:
(a) eligible to incorporate a One Person Company
(b) a nominee for the sole member of a One Person Company.
2. No person shall be eligible to incorporate more than five (5) One Person Companies.
3. The minimum paid up share capital for incorporation of a One Person Company is INR 1,00,000 ( One Lakh)
3. BACKGROUND AND RATIONALE BEHIND THE CONCEPT
The introduction of the concept of One Person Company under the Act is inspired by international corporate regimes of U.K, Singapore, China and other European countries and is based upon the recommendations of the “Expert Committee on Company Law” headed by Dr. J.J.Irani in 2005 . The rationale for the introduction of this concept can be inferred from the summary of the report of the committee as mentioned herein below:
“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
10. Section 2 (21) of the Act
11. Section 2 (92) of the Act
12. Section 3 (1) of the Act
13. Explanation to Rule 2.1 (1) of the Draft Rules under Companies act, 2013 explains the term “resident in India” as follows: The term "resident in India" means a person who has stayed in India for a period of not less than one hundred and eighty two days (182) during the immediately preceding one financial year.
14. See Rule 2.2 (2) of Draft Rules under Companies Act, 2013
15. The Government of India constituted an Expert Committee on Company Law on 2nd December, 2004 under the chairmanship of Dr. J.J.Irani. The committee was set up to propose revisions to the Companies Act 1956 with an objective to adopt the changes taking place in the national and international best practices and hence meet the requirements of ever-changing business models. The Committee presented its report to Government in May 2005.
16. Report of the “Expert Committee on Company Law” available at: http://www.primedirectors.com/pdf/JJ%20Irani%20Report-MCA.pdf; last accessed on 16th February, 2014
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.” (Emphasis supplied)
4. FEATURES OF ONE PERSON COMPANY
The Act enumerates the concept of One Person Company in its various provisions. On a detailed analysis of the relevant provisions of the said Act following important features of a One Person company can be inferred:
5. CRITICAL ANALYSIS OF THE CONCEPT OF ONE PERSON COMPANY
- One Person Company is one of the classifications of companies based upon the number of persons.
- It is a company consisting of only one person as its member.
- It has all the characteristics of a private company unless excluded by theAct.
- It has the minimum paid up share capital of INR one lakh (INR 1, 00,000/-) or such higher paid-up share capital as may be prescribed.
- A One Person Company may be either a company limited by share or a company limited by guarantee or an unlimited company.
- (f) It is mandatory for every One Person Company to give a legal identity to its business by specifying the name under which its business activities are carried. This has to be ensured by mentioning the words “One Person Company” in brackets below the name
17. An enterprise by virtue of registration under Companies Act acquires immunities and benefits in the form of limited liability, corporate personality, perpetual succession etc.
18. Supra at 11
19. Supra at 19
20. Section 2 (68) of the Act
21. Supra at 15
of such company wherever the name is printed, affixed or engraved . This ensures transparency as it makes persons dealing with a One Person Companyaware of its corporate status.
- The memorandum of a One Person Company shall state the name of the person or a nominee with his prior consent, who, in the event of death of the subscriber, shall become the member of the company. This written consent should be filed with the registrar of companies at the time of incorporation of a One Person Company alongwith its memorandum and articles of association. However, the nominee or other person is free to withdraw his consent at any time. Similarly, the member or shareholder of such a company is free to change the nominee at any time, by giving notice to such other person and intimating the same to the company who inturn is supposed to intimate the same to the registrar of companies.
- Member/Shareholder of a One Person Company acts as first director, until the Company appoints director(s). Further, it is not necessary that the shareholder and director of such a company should be same.
- One Person Company shall have atleast one director and a maximum of fifteen (15) directors.
- One Person Company need not hold annual general meetings (AGM) every year.
- Cash Flow Statement may not be included in the financial statements of a One Person Company.
- One director is sufficient to sign the Financial Statements/Director's Report and there is no mandate as to appointment of a company secretary.
- One Person Company should inform the registrar about every contract entered and also should record in the minutes of the meeting within fifteen (15)days from the date of approval by the board of directors
22. Section 12 (3) of the Act
23. Section 3 (1) of the Act
24. Section 4 (1) (f) of the Act
25. Supra at 23
26. Section 149 (1) (a) and (b) of the Act
28. Section 2 (40) of the Act
29. Section 92 (1) of the Act
30. Section 193 (2) of the Act
The introduction of the concept of One Person Companyin the Act is being regarded as a promising concept. This conceptenvisages bringing in the unorganized business sector into the form of organized business sector by conferring them the status of a private limited company and also promotes entrepreneurship by providing various incentives and exemptions to persons aspiring to establish a One Person Company.
The Old Act mandated a minimum of two shareholders in order to constitute a company which was an obstacle for entrepreneurs who intended to launch a business venture with limited liabilities. Such entrepreneurs were left only with the option of starting a sole proprietorship.The foregoing requirement of bringing in two shareholders was a hurdle for aspiring entrepreneurs to incorporate a company and also an obstacle for the growth of the Indian economy. In an attempt to make things more logical and with a view to promote more avenues for sole business ventures, the Act has incorporated the concept of One Person Company.
This part of the article critically analyses the concept of One Person Company and an attempt has been made to carve out certain advantages and disadvantages of the concept against the concept of sole proprietorship.
5.1 ONE PERSON COMPANYv. SOLE PROPRITERSHIP
In order to critically examine the concept of One Person Company and its success over sole proprietorship it becomes pertinent to draw a distinction between the two concepts.
The table herein below highlights the significant differences between the concept of a One Person Company and that of a sole proprietorship:
31. One person companies to eliminate middlemen: Sachin Pilot, available at http://articles.economictimes.indiatimes.com/2013-09-08/news/41873696_1_sachin-pilot-corporate-affairs-minister-sachin-new-companies-act; Last accessed on 20th February, 2014
32. Supra at 3
33. Refer Saloman v. Saloman & Co. Ltd 1987 AC 22 in order to understand the concept of independent corporate existence.
5.2 ADVANTAGES OF ONE PERSON COMPANY:
|ONE PERSON COMPANY
Separate Legal entity
A One Person Company has a separate legal identity from its shareholders i.e. the company and the shareholders are two different entities for all purposes.
|Not a Separate Legal Entity
A sole proprietorship does not have a separate legal identity from its members.
The liability of the shareholder of a One Person Company is limited. It means that the sole member of such a company is not liable personally for the debt of the company. The liability of the member is limited only up to the extent of his share in the company.
The liability of members of a sole proprietorship is unlimited. It means that in case of any failure to pay debt owned by the sole proprietor(s), even the personal properties of the members of such entity can be charged for discharge of such debt.
The existence of a One Person Company is not dependent upon its members and hence, it has a perpetual succession i.e. death of a member does not affect the existence of the company.
No Perpetual Succession
Sole proprietorship is an entity whose existence depends on the life of its members and in the event of death or any other contingency may lead to the dissolution of such an entity.
The incorporation and operation of a One Person Company requires various procedural formalities.
Simple Legal requirements:
A sole proprietorship need not adhere to such procedural complexities and need not register itself for its operation and functioning.
Huge Tax Burden
A One Person Company fall under the same tax slab as is applicable on private companies (30% tax slab) and hence the tax burden is huge.
Reasonable Tax burden
Sole proprietors are taxed at the rates applicable to individuals, which mean that different tax rates are applicable for different income slabs.
5.3 SHORTCOMINGS AND AMBIGUITIES
- Limited Liability: One Person company confers a separate legal identity upon single person business entities and thereby limits the liabilities of the entrepreneurs to the extent of paid subscription money only. Hence, by limiting the liabilities of the single shareholders this concept extends a protective cover and encourage their participation in the economy.
- Perpetual Succession: A One Person Company being an incorporated entity shall be a perpetual entity and thereby unlike a sole proprietorship, the death or incapacity of the sole member would not dissolve the company. This would hence enable many successful ventures to run irrespective of the death or any incapacity of the proprietor to run the venture.
- Middlemen eliminated: One Person Companies enable small entrepreneurs to set up a company by allowing the shareholders to directly access the target market and avail credit facilities, bank loan rather than being forced to share their profits with middlemen . Thus, such companies will provide an opportunity to various small entrepreneurs like weavers, artisans etc. to start their own ventures with a formal business structure.
- Compliances: One Person Companies have been exempted from various procedural formalities not otherwise available to private companies such as conducting an AGM, General meeting or Extraordinary General Meeting (EGM) etc. thereby, making its operation very convenient and hassle free.
34. Supra at 31
CONCEPT OF ONE PERSON COMPANY: AN INTERNATIONAL PERSPECTIVE
Requirement to appoint a nominee for incorporating a One Person Company:
The very purpose behind introducing the concept of One Person Company is to enable even an individual to enter into a business venture with limited liability without wasting his time and energy looking for a partner . However,this entire objective has been overshadowed due to the legal mandate, which requires that the shareholder shall during the incorporation of a One Person Company mention the name of a nominee in the memorandum of the company who in the event of death of the subscriber or his incapacity to contract shall become the member of the company. Though this provision was introduced with the objective of preserving the basic characteristic of a company i.e. perpetual succession but at a practical level this mandate ultimately creates procedural hassle for such sole subscribers by compelling them to enter into the process of looking for a suitable nominee, obtaining his consent etc.
Further, the freedom extended to the nominees to withdraw their consent to their nomination presents yet another challenge for the sole subscriber, requiring him to nominate another person within fifteen days from such withdrawal, intimating it to the company, amending the memorandum of the company and further communicating such fact to the registrar of the company. Thus, the concept of nominee though has a rationale objective but at a practical levelit mars the entire objective of the concept through its procedural complications.
- NRIs not allowed to incorporate One Person Company:
As per Rule 2.1 (1) of the Draft Rules under Companies Act, 2013 only a natural person who is an Indian citizen and resident in India shall be eligible to incorporate a One Person Company. This provision seems to be an irony, as the entire objective behind introducing the concept of One Person
35. Under Companies Act, 1956, minimum two persons were required to constitute a company.
36. Supra at 27 and 28
37. Non Resident Indians
Companywas to boost economic growth of the country by promoting entrepreneurship.This concept though encourages small entrepreneurs but on the other hand, discourages foreign direct investment by disallowing foreign companies and multinational companiesto incorporate their subsidiaries in India as a One Person Company.
- Procedural Complexities:
Though the Act extends slew of exemptions to a One Person company in terms of conducting AGM, EGM, Quorum of meetings, restriction on voting rights or filing its financial statements, yet the incorporation of such a company requires lots of paper work as compared to a sole proprietorship. Theseprocedural complexities with respect to incorporation of One Person Company might make this concept less attractive for sole entrepreneurs.
- Taxation of One Person company under the Indian Income Tax Act, 1961 (IT Act):
The concept of One Person Company is not a recognized concept under IT Act and hence such companies will be put in the same tax slab as other private companies for taxation purposes. As per the Income Tax Act, 1961, private companies have been placed under the tax bracket of 30% on total income.On the other hand, sole proprietors are taxed at the rates applicable to individuals, which mean that different tax rates are applicable for different income slabs. Thus, from taxation point of view this concept seemsto be a less lucrative concept as it imposes heavy financial burden as compared to a sole proprietorship.
- Incompleteness in the provisions of the Act:
The Draft Rules under the Act do not deal with the status of a One Person Company incorporated in contravention of the maximum permissible limit i.e.five . Whether such corporate entity will have to be dissolved or its corporate personality shall be disregarded or it will be treated as a sole proprietorship has not been clarified.
The concept of One Person Company might be a novel concept in India but itis a well established notion in countries like U.S.A, China, Singapore, France and various other European countries. England was the first country which paved the way for the development of this concept through its decision in Saloman v. Saloman & Co. Ltd . Finally in 1925 England gave statutory status to the concept of One Person Company thereby, becoming aninnovator. With due course of time various other countries adopted this concept and currently around 36 countries have introduced this conceptas part of their company law. Though, the structure and legal requirements for incorporation of a One Person Company in these jurisdictions may vary but all these countries introduced this concept with the common objective of promoting entrepreneurship and thereby accelerating their economic development.
The authors have analyzed the Indian version of the concept of one Person Company with that of other countries and have highlighted some of them as below mentioned:
- Capital Requirement
U.S.A and U.K have adopted a flexible standard with respect to minimum capital requirement for incorporation of a One Person Company as they do not provide fora minimum capital requirement for incorporation of such companies. According to their rules, the capital of the company should “meet the expectable strains of a business of its size and nature”. On the other hand, countries like China, Pakistan, France, they have expressly provided minimum capital requirement with respect to a One Person Company.
38. Rule 2.1 (2)
39. 1987 AC 22
40. Bernard F. Cataldo, Limited Liability with One-man Companies and Subsidiary Corporations, 18 Law & Contemp.Probs.474, 1953
India expressly provides the minimum capital requirement for a One Person Company. This has been done to ensure clarity. The “expectable strains test” as followed by U.S.A and U.K. is very subjective and may give rise to various ambiguities, thereby, burdening the judiciary. Hence, from this perspective the Indian position is very sound and perfect.
- Demonstration and Disclosures
The rules laid down by U.S.A, Germany and France related to a One Person Company provides for robust demonstrations and disclosures regime in order to secure the interest of the creditors and prevent any abuse of this concept. However, China, fails on this count.
India has introduced stringent disclosure and demonstration requirements.It provides for mandatory registration of a One Person Company, filing of financial statements, auditing of their reports etc. This is a positive aspect as it ensures the protection of the creditors and maintains transparency in the governance of such companies. However, excessive procedural requirements should be avoided in this context.
- Legal and natural person
Majority of countries, with respect to qualification as to incorporation of a One Person Companydo not put restrictions in terms of natural and legal persons.
India, however, allows only natural persons to incorporate a One Person Company, which is a negative aspect. This deters the objective of the concept.
- Transferred One Person Company
As per English law if the member of an existing legal entity reduces to only one, the legal entity may continue to exist provided that this doesn’t conflict with the provisions in the company’s articles of association.
41. Supra at 24
42. Zhu Ciyun, Analysis to the Advantages and Disadvantages of One-man Company and the Legislation for One-man Company, China Civil and Commercial Law Website, available at http://www.civillaw.com.cn/article/default.asp?id=22452; last accessed on 1st March, 2014
Indian law does not deal with this aspect. This should be taken into account because in absence of this provision many companies will have to be dissolved due to failure to meet the minimum number of member requirement leading to the wastage of resources of the country.
In light of the above critical analysis of the concept of One Person Company and Inter-country comparison the authorswould suggest following changes to be introduced with respect to this concept in order to further its objectives more effectively and without any ambiguity:
- No restriction should be imposed upon incorporation of a One Person Company basedupon the distinction between natural and legal person.
- The conditions regarding citizenship and residents in India should be relaxed and even foreign companies and NRIs should be allowed to incorporate a One Person Company.
- The Act should recognize the concept of transferred One Person Company. This means that in the event a private limited company falls short of the minimum number of member requirement under the Act, such companies should be treated as a One Person Company. This will ensure protection of national resources.
- Income Tax Act, 1961 should recognize the concept of One Person Company by providing for a different tax treatmentto such companies in order to encourage more people to incorporatesuch companies.
- The procedural requirements to be complied by a One Person Company arecommendable. However, they should be relaxed keeping in mind the fact that too many formalities might discourage individuals to opt for incorporation of such companies.
Theconcept of One Person Company is advantageous both for the regulators and the market players. From regulators perspective, One Person Companies by organizing the unorganized sector of proprietorship will make the regulation of these entities convenient and effective.
Further, the conferment of thestatus of private limited company on a One Person company will not only limit the liability of sole entrepreneurs but also provide access to market players to various credit and loan facilities and hence would encourage entrepreneurship. However, this concept has been criticized on grounds of excessive procedural formalities and tax burden. Further, this concept is also being regardedas unnecessary as India already hasa Limited Liability Partnership Act, 2008, which limits the liabilities of the members of a partnership.
The authors after critically analyzing the various provisions and rules related to One Person Companies andcomparing it with that of other countries scheme has arrived at the conclusion, that though the concept might have certain grey areas but overall the Indian version of One Person Company is very sound and complete. Further, this concept is having an edge over Limited Liability Partnership Act, 2008 as they not only limits the liability of the partners in a business venture but by conferring the status of a company extends them various immunities and provides them access to various credit and loan facilities.
Freedom should always be regulated and hence the procedural requirements in incorporation and operation ofa One Person Company are merely to check the abuse of liberty and immunity given to single person business entities. Hence, this concept, if implemented properly, will act as a big incentive for small entrepreneurs and thereby will boost the economic growth of the country.
SWATI SHANKER & SHUBHAM GAUTAM are students pursing B.A. LL.B (Hons.) from National Law Institute University, Bhopal. They can be reached at email@example.com.