One person company
With the enactment of the Companies Act, 2013, some new ideas have been introduced into India’s Corporate Legal System which weren’t part of the erstwhile old Companies Act, 1956, one such concept introduced by the Act is the concept of “One Person Company”, which means an individual can now constitute a company. Earlier, if you wanted to set up a private company, you need at least one other person because the law mandated a minimum of two shareholders. The object behind the incorporation of this concept is to promote entrepreneurship. It will help the entrepreneurs to access certain facilities like bank loans, thorough access to the market as a separate entity and legal shield for their business. The Act provided single person with full freedom to contribute in the economic activities of India. This article tries to exhibit an outline about the progressive new idea of One Person Company as presented by the Companies Act, 2013.At the heart of this article lies an attempt by the author to understand: (i) the basic concept of the One Person Policy, (ii) the need of emergence of the concept, (iii) to appreciate the merits and point out the demerits and deficiencies of the concept.
The concept of One Person Company was introduced in the Indian company law regime by the enactment of the Companies Act, 2013 (the ‘Act’). This new concept was in furtherance of the objective of creating the necessary environment for the present global corporate structure in India. The main aim behind the incorporation of such a concept is to encourage entrepreneurs who wish to set up micro economic industry, but are in search of a business structure with less effort, time and monetary resource consumption in legal conformity. Under the Company Law 1956, there was a complete bar on an individual to start a company, the only option left with him was to have a sole proprietorship, as the erstwhile law required at least two people to form a company.
One Person Company is defined under Sub-section 62 of Section 2 of the Act. It defines One Person Company as “a company which has only one person as a member”, where all the legal and financial liabilities are limited to the company and not its members. Only naturally born Indian who is a resident of India (i.e. have stayed for at least 182 days during the immediate preceding financial year) can incorporate One Person Company.
This concept of One Person Company is similar to the existing concept of Sole proprietorship. However, the ills of Sole- proprietorship which were generally faced by the proprietors were removed by this concept. The important feature of One Person Company is that the risks mitigated are limited to the extent of the value of shares held by such person in the company. This will help the entrepreneurs to take the risks of doing business without bothering litigations and liabilities getting attached to the personal assets.
II. Rationale Behind The Concept
The origin of the concept of One Person Company can be traced back to the international corporate regimes of U.K., Singapore, China and other European countries and the recommendations of the “Expert committee on Law” supervised by Dr. J.J. Irani in 2005. The reason why this concept was introduced can be best understood 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 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.”
III. Features of One Person Company
The concept of One Person Company is mentioned in the various provisions of the Act, and an analysis of these provisions, Salient features of the One Person Company can be inferred:
· It is a company which has only person as a member.
· Unless excluded by the Act, it has all the characteristics of a private company.
· It has the minimum paid up share capital of INR one lakh.
· One Person shall have minimum of One Director; and maximum of 15 directors.
· One person Company need not hold annual general meetings every year.
· It is not mandatory by One Person Company to include Cash Flow Statement in the financial statements.
· One Person Company is required to be mentioned in brackets below the name of such name of the company, wherever its name is printed, affixed or engraved.
· Shareholder of a One Person Company acts as first director, until the Company appoints a director.
IV. Advantages of One Person Company
One of the most crucial questions which arises before us is, why would a person prefer company over a proprietorship? To answer this question, we have to look at the rationale behind this concept which is to provide an individual with the benefits of incorporation while functioning like a Sole Proprietor. Following are the advantages that make the title of company more desired than that of proprietorship:
Independent Corporate existence: The Company has its own existence separate from that of its Director and Shareholder; and same will apply to One Person Company too.. This Principal was originated from the Case of Salomon v. Salomon & Co Ltd. Company forms a distinct legal personality from its members, thus a company is a person in law. In the case of T.R. Pratt v. E.D. Sasoon & Co. Ltd, the Bombay High Court has held that, “Under the law, an incorporated company is a different entity, and although the entire share maybe practically controlled by one person, in law a company is a distinct entity.”
Therefore, there is a difference between One Person Company and Sole Proprietorship. In sole Proprietorship there is no separation between person and his business.
Limited liability: As mentioned above, One Person Company has its own separate legal identity and thereby limits the liability of the entrepreneur to the extent of paid subscription money. Limited liability is considered as the most precious characteristics of the Corporation. President Eliot of Harvard regarded limited liability as "the corporation's most precious characteristic" and "by far the most effective legal invention made in the nineteenth century.” Therefore, this concept of One Person Company encourages single shareholder to participate in the economy by limiting their liabilities. In contrast to the above, in Sole Proprietorship there is no limitation on the liability.
Perpetual Succession: In the One Person Company nomination of a successor by the Director is mandatory; and he will be the sole member in case of death or disability of Director. Therefore, unlike Sole Proprietorship, death or disability of sole member would not dissolve the company. Members may come and go but the company can go on forever.
Compliances: Unlike private companies, One Person Companies have not been subject to various procedural formalities such as Annual General Meeting, General Meeting or Extraordinary General Meeting, etc. The exemption from these formalities makes operation of One Person Company convenient and trouble free.
V. Deficiencies of One Person Company
Restriction On Nris: The objective behind the introduction of the concept of One Person Company was to boost economic growth of the country by promoting entrepreneurship. However, this seems to be an irony because only a naturally born Indian who is also resident of India shall be eligible to incorporate a One Person Company. On one hand this concept encourages small entrepreneurs and other hand it discourages Foreign Direct Investment by disallowing foreign companies and multinational companies to incorporate their subsidiaries in India as a One Person Company.
Mandatory Requirement To Appoint Nominee: The very purpose of the One Person Company concept was to enable the single person to enter into business venture alone without wasting his time and energy looking for a partner. This entire purpose has been defeated due to the legal mandate, which requires the shareholder to appoint a nominee, who shall, in the event of the subscriber's death or his incapacity to contract becomes the member of the company at the time of incorporation of the One Person Company. This creates procedural trouble for the subscriber such as looking for a nominee, obtaining his consent, etc.
Perpetual Succession: According to the concept of perpetual succession, the nominee whose name has been mentioned will become the sole member of the company on the event of death or disability of the subscriber. This does not sound good for the future of the company because the person who is not involved in day to day operation of the company, would not be able to handle the business properly and this will lead to the winding up of the company.
Tax Obligation: In the context of tax, a sole proprietor remains in better position than One Person Company. The concept of One Person Companies is not recognized under the Income Tax Act and therefore is taxed equal to the private companies. As per Income Tax Act, 1961, tax rate for private companies is 30%, while for sole proprietors tax rate depends upon their income. Thus, from taxation point of view, it puts heavy burden on the One Person Company.
VI. Suggestions And Conclusion
The concept of One Person Company has been proved to be a boon for the individual entrepreneurs. It has provided a speedy mechanism where a person can single handedly incorporate himself into a company rather than wasting his time, energy and resources in finding a partner. One Person Company is beneficial for both regulators as well as market players. From the perspective of regulators, organising the unorganised sector of proprietorship will make the regulation of these entities convenient and effective. On the other hand, from the perspective of market players, the status of private limited company will not only limit the liability of sole entrepreneurs but will also provide access to market players to various credit and loan facilities.
Despite of this remarkable feature introduced in the Companies Act, 2013, there are certain shortcomings which must be addressed in order to achieve the true intent of the legislature. Few changes which are immediately required to be introduced to make the concept better are as follows:
i. The position that only Indian citizen who is resident of India can form One Person Company should be relaxed and even foreign companies and NRIs should be allowed to incorporate One Person Company.
ii. The Distinction between the legal person and the natural person should be removed with respect to incorporation of One Person Company.
iii. Income Tax Act, 1961 should recognize the concept of One Person Company in order to encourage more entrepreneurs to incorporate companies.
iv. The procedural requirements which a person has to comply with in order to incorporate his company as One Person Company should be relaxed, so as to encourage more and more people to use the benefit there under.
# Company Secretary (CS) Module (2014), One Person Company, The institute of Company Secretaries of India, available at: https://www.icsi.edu/Docs/Webmodules/ONE PERSON COMPANY.pdf
# Swati Shankar and Shubham Gautam, Indian Law Journal, Vol. 7, issue 1.
# Rule 3.1 of Companies (incorporation) Rules, 2014
# Supra, at 1.
# Report of the “Expert Committee on Company Law” available at: http://www.primedirectors.com/pdf/JJ Irani Report-MCA.pdf
# Section 2(62) of the Act.
# Section 149(1) of the Act.
# Section 96(1) of the Act
# Section 2(40) of the Act.
# Section 12(3)(d) of the Act.
#  AC 2
# AIR 1965 Bom 62
# Quoted in Cook, "Watered Stock":Commissions: “Blue Sky Laws": Stock Without Par Value, Vol. 19, Michigan Law Review, April, 1921.
# Gower, Principles of Modern Company Law, 76 (3rd Edn., 1969)
# Supra, at 4
# Section 3(1) of the Act
# Namrata Gupta, One Person Company, International Journal of Legal Insight, Vol 1, Issue 3.