Single Member / One Person Company – Features, Origin & current scenario

Advocate Dhawal Jain

SINGLE MEMBER COMPANY

In India, the advent of framework suitable for existence of corporations existed since the enactment of the Companies Act, 2013. Despite codifying the structure for a private limited and public limited company India did not have a lot of companies incorporated. But since the past couple of decades the number of companies registered in India has risen in multi-folds. Up to 2011, the number of companies registered in India was more than 7 million. A company framework allows the entrepreneur to approach for investment by divesting equity, also it enables the entrepreneur to project a transparent look in the operation of the company and furthermore it is the overall organisation which results into going into the corporate framework which actually aides the entrepreneurs. Also, investors and shareholders and debt grantors have always preferred to invest or providing financial assistance to a Company whether Public or Private over Proprietorship Firms, Partnership Firms, etc. Thus, Companies have always been the back bone of good commercial practices. However, there was a need to continuously keep changing the framework and the rules to incorporate some of the technological developments and the changing facets seen in the current world market.

Owing to these changes the Indian Companies Act, 2013 has finally been enacted by the Legislature in August 2013. Single Member Company was first recommended by Dr. J. J. Irani Committee in 2005, which was set up by the Ministry of Company Affairs to suggest changes to the existing framework relatable to the India Corporate Structure. Thus, with these enactments Single Member Company has finally paved its way into the Indian Legal Structure. It has been introduced by the new provisions of the Indian Companies Act, 2013. SMCs are need of the hour because of the historical advantages of the corporate framework and helpful to encourage investment, develop economy and facilitate employment. But it also reduces the plethora of compliances to an ordinary Private/Public Limited Company with many members and directors, thus, saving ample time of the businessman. SMC will open the floodgates of benefits, for a young entrepreneur, of a private limited company which categorically means they will have access to credits, bank loans, limited liability, legal protection for business, access to market etc all in the name of a separate legal entity.

   However, this has been introduced belatedly after strong countries with strong legal structures for corporate framework have adopted Single Member Company (‘SMC’). Countries like the United States of America, United Kingdom and other European Countries have adopted this particular structure for companies for nearly a decade now. Lichtenstein was the first country in the world to sanction the existence of a Single Member Company and since that point forward a lot more many countries provided legal sanction to the existence of a SMC[1]. In Asia, China has also recognized the existence and the validity of a SMC way back in 2006 when China overhauled the Company Laws.

To understand what a Single Member Company is it is of paramount importance to define and understand what a Company is. In the United States, a company may be a “corporation, partnership, association, joint-stock company, trust, fund, or organized group of persons, whether incorporated or not, and (in an official capacity) any receiver, trustee in bankruptcy, or similar official, or liquidating agent, for any of the foregoing” [According to Black’s Law and lee Dictionary. Second Pocket Edition]. In the US, a company is not necessarily a corporation. Thus in USA companies, as known in India, are known as corporations which are bodies those are granted a charter recognizing it as a separate legal entity having its own rights, privileges, and liabilities distinct from those of its members. However, in USA, corporations are generally incorporated, or organized, under the laws of a particular state. The corporate law of a corporation’s state of incorporation generally governs that corporation’s internal governance (even if the corporation’s operations take place outside of that state). The corporate laws of the various states differ – in some cases significantly – from state to state. Because of these differences, corporate lawyers are often consulted in an effort to determine the most appropriate or advantageous state in which to incorporate. The federal laws of the United States and local law may also be applicable sources of corporate law.

As per the United Kingdom, to whom our legal structure and Acts are most akin to, in English law and other legal jurisdictions and instructions and precedents based upon it, a company is a body corporate or corporation company registered under the Companies Acts or similar legislation. Common forms include:

• Private companies limited by guarantee
• Companies without share capital (often non-profit entities)
• Private company limited by shares the commonest form of company
• Public limited companies

Companies, usually large, which are permitted to (but do not have to) offer their shares to the public, for example on the stock exchange. However, one must not confuse itself by the term company as per legal codes and the casually referred to firms as “Company”.

As per Companies Act, 1956, the predecessor of the New Companies Act, 2013, A Company is defined in section 3 as:

(i) company” means a company formed and registered under this Act or an existing company as defined in clause (ii);

(ii)  “existing  company” means a company formed and registered under any of the previous companies laws specified below:—

(a)  any Act or Acts relating to companies in force before the Indian Companies Act, 1866 (10 of 1866) and repealed by that Act;

(b)  the Indian Companies Act, 1866 (10 of 1866);

(c)  the Indian Companies Act, 1882 (6 of 1882);

(d)  the Indian Companies Act, 1913 (7 of 1913);

 (e)  the Registration of Transferred Companies Ordinance, 1942 (54 of 1942); and

(f)  any law corresponding to any of the Acts or the Ordinance aforesaid and in force—

 (1)  in the merged  territories or in a Part B State (other than the State of Jammu and Kashmir), or any part thereof, before the extension thereto of the Indian Companies Act, 1913 (7 of 1913); or

(2)  in the State of Jammu and Kashmir, or any part thereof, before the commencement of the Jammu and Kashmir (Extension of Laws) Act, 1956 46e[, in so far as banking, insurance and financial corporations are concerned, and before the commencement of the Central Laws (Extension to Jammu & Kashmir) Act, 1968, in so far as other corporations are concerned];] and

(g)  the Portuguese Commercial Code 46g[* * *], in so far as it relates to “sociedades anonimas”;]

(iii)  “private company” [means a company which has a minimum paid-up capital of one lakh rupees or such higher paid-up  capital as may be prescribed, and by its articles,—]

(a)  restricts the right to transfer its shares, if any;

(b)  limits the number of its members to fifty not including—

(i)  persons who are in the employment of the company; and

(ii)  persons who, having been formerly in the employment of the company, were members of the company while in that employment and have continued to be members after the employment ceased; and

(c)  prohibits any invitation to the public to subscribe for any shares in, or debentures of, the company;

[(d)  prohibits any invitation or acceptance of deposits from persons other than its members, directors or their relatives:]

Provided that where two or more persons hold one or more shares in a company jointly, they shall, for the purposes of this definition, be treated as a single member;

(iv)  “public company” means a company which—

    (a) is not a private company;

    (b) has a minimum paid-up capital of five lakh rupees or such higher paid-up capital, as may be prescribed;

    (c) is a private company which is a subsidiary of a company which is not a private company.]

Infact even in the Income Tax Act, 1961, has defined Companies in section 2(17) as:

“company” means—

 (i)  any Indian company, or

(ii)  any body corporate incorporated by or under the laws of a country outside India, or

(iii)  any institution, association or body which is or was assessable or was assessed as a company for any assessment year under the Indian Income-tax Act, 1922 (11 of 1922), or which is or was assessable or was assessed under this Act as a company for any assessment year commencing on or before the 1st day of April, 1970, or

(iv)  any institution, association or body, whether incorporated or not and whether Indian or non-Indian, which is declared by general or special order of the Board to be a company :

Provided that such institution, association or body shall be deemed to be a company only for such assessment year or assessment years (whether commencing before the 1st day of April, 1971, or on or after that date) as may be specified in the declaration ;]

Types of Companies in India before the enactment of the Companies Act, 2013:

• Indian Company: A Company formed and registered under the Indian Companies Act, 1956 or a Corporation formed under a Central, State or Provincial Act or any institution, association or body declared by the body to be a Company.
• Foreign Company: Means a company which is not a domestic company.
• Domestic Company: Indian Company or any other company with respect to its income, liable to tax under the Income-Tax Act, has made the prescribed arrangements for the declaration and payment within India, of the dividends, including dividends on Preference Shares, payable out of such income.
• Company in which Public Substantially Interested:
  • Government Company
  • A company having Government participation
  • Section 25 Companies (Not for Profit Companies)
  • Company Declared by CBDT
  • Mutual Benefit Finance Company
  • Company having Co-operative Society participation
  • Company whose shares a publicly listed on Recognized Stock Exchange(s)
  • Any Other public Company.

Now that a company has been defined and the types of Companies have been enumerated. It is only fitting that the focus now is redrawn upon the Single Member Company which is a new addition to the existing types of Companies enumerated above.

Thus, Single Member Company or One Person Company has been defined as “A Company which has only one person as a member” under sub section 62 of section 2 of the Companies Act, 2013. It is now possible for a person, competent to enter a contract, to start such One Person Company which is like a proprietary firm with the benefits of a Limited Company.

Single Member Company has been classified, as per section 3 of the Companies Act, 2013, as a Private Limited Company for all legal purposes with only one member. All provisions as applicable to a Private Limited Company are in the same manner applicable to a Single Member Company.

As per the Draft Rules to the Companies Act, 2013 on http://ncbfeedback.mca.gov.in/ , and the only real exception to the Global Phenomena of One Person Company is that a SMC can be incorporated only by a Natural Person who is a citizen of India and who is also a resident of India. Thus, the benefit of a SMC can only be obtained by Naturally Person who are citizens of India and who are also resident in India. Also, one person cannot form more than 5 SMCs. Moreover, according to draft rules which can be found on http://ncbfeedback.mca.gov.in/, the nominee which has to be named in the Memorandum of Association and / or informed to the Registrar of Companies, must also be a Natural Person who is a Citizen of India and for the purposes of determination of the residency of a Particular Person in India then it is defined as a “person who has stayed in India for a period of not less than one hundred and eighty two days during the immediately preceding one financial year.” Also, if a natural person who is a member of a SMC becomes a member of another SMC by the virtue of him being named as a nominee in the latter SMC then such person shall have to meet the eligibility within 180 days from the date he becomes a member in such other SMC.

From the above gist it can be reasonably contemplated that the Ministry of Company Affairs, in order to bring the unorganised proprietorship business to the organised corporate world, has introduced the SMC provisions and also to reduce the rising litigation owing to disputes amongst the shareholders, members directors of the company as well as introducing flexibility for such individuals to operate within the corporate sphere with liability of the member limited by shares or limited by guarantee. This can be aptly called Limited Liability Proprietorship.

At the outset, features of a SMC are to be known before provisions are dealt with in detail:

• SMC can be incorporated only as a Private Limited Company
• It cannot have more than one member at any point in time.
• It can have only Director
• Various Exemptions with respect to Annual Returns, Board Meetings, General Meetings, etc.

Thus following are the provisions relating to One Man Company a.k.a Single Member Company a.k.a Single Person Company as enacted by the Companies Act, 2013:

SMC and Related to its Formation:

SMC can be incorporated only as a Private Limited Company with prohibition in regard to invitation to the public for the subscription of the shares or securities of the company so as to keep the Public not to be substantially interested in SMCs.

• SMC can be formed as a SMC either Limited by Shares or Limited by Guarantee.

A SMC limited by shares has to comply with the following requirements:

• Minimum Capital of Rs. 1 Lac.
• Restriction on the Right to Transfer Shares.
• Prohibition on handing out invitations to public to subscribe to the shares or securities of the company.

SMC has to provide a legal identity by specifying a name for the company under which it will be pursuing its business and other commercial activities. Also, the words “(ONE PERSON COMPANY)” have to be mentioned under the name of SMC.

Furthermore, The Member of the SMC has to nominate a nominee along with a written consent from the nominee and the same must be filed with the Registrar of Companies (RoC). The Nominee has to be mentioned in the Memorandum of Association of the SMC. These provisions have been enacted so as to ensure the continuity of the SMC in case of the inability of the member to discharge duties of the SMC, death or owing to any other reason, whatsoever. On account of death of the Member, the nominee is automatically entitled for all shares and liabilities of the SMC. The member of the SMC can change the Nominee at any point in time by providing notice to the RoC in the form as prescribed by the RoC. Not only does the member but also the Nominated Person has his prerogative to withdraw his name and consent as being the Nominee of the SMC. All such changes must be intimated to the RoC as may be prescribed from time to time.

SMCs have been bestowed upon with the following privileges or exemptions or exception from rules which apply to a Private Limited Company, which are as under:

i) Cash Flow Statement does not form part of the definition of “Financial Statements”. It means Cash Flows will not be a part of the Annual Financial Statements in the case of a Single Member Company. [Section 2 (40)]

ii) The Annual Returns of a SMC shall be signed by a Company Secretary. However, in a case where there is no Company Secretary Appointed or the Company Secretary is not present, then, in that case the said Annual returns can be signed by the Director of the SMC. [Section 92]

iii)It is not mandatory for SMCs to call and hold an Annual General Meeting as in the case of other Limited Companies whether Public/Private/Section 25, etc. [Section 96]

iv) Furthermore, provisions of Section 98 (Power of Tribunal to Call meetings of members, etc.) and Provisions from Sections 100 to 111 (provisions relating to holding and the procedure for General Meetings, like notice, etc.) are not applicable to a SMC.

v) As in the case of a Private Limited Company, General Meetings and/or Extra Ordinary meetings are to be called and held and reasonable notice must be provided to the members, a Single Member Company is not required to call for General Meetings or Extra Ordinary Meetings. Thus for compliance of section 114, it shall be sufficient compliance if the resolution is communicated by the member to the Company and entered into the minutes book as required to be maintained under section 118 and signed and dated by the member and such date is deemed to be the date of the meeting for all purposes. [Section 122]

vi) Similarly, in case of Board of Directors has only one Director on the Board of Directors of a SMC, then it shall be sufficient if the resolution by such director is entered in the minutes book required to be maintained as required by Section 118 and signed and dated by the Directors and such date shall be deemed to be the date of meeting for all purposes. [Section 122]

vii) Financial Statements of a Single Member Company shall be approved by One Director and must be submitted to the Auditor for his report thereon. [Section 134]

viii) In case of the report of the Board of Directors, it must be signed by the One Director and be attached to the Financial Statements and should speak in detail and explain and comment on every reservation, qualification and adverse remark of the Auditor. The Auditor Report shall also be attached to the Financial Statement in the same manner as in the case of Private Limited Companies.[Section 134]

ix) In the case of a Single Member Company, the limitation period for the filing of Financial Statements before the Registrar of Companies is 180 days from the closure of the financial year. Meaning thereby that the financial statements must be filed within 180 days from the date on which the financial year ends. [Section 137]

x) A SMC needs to have a minimum of one Director but to a maximum of 15 Directors. But the said limit can be increased by passing a special resolution as in the case of any other company. [Section 149]

xi)  An individual who is a member shall be deemed to be the first Director of the SMC until director(s) are duly appointed by the member according to the provision of the Act [Section 152]

xii) In case of One Person Company, it shall be deemed to have complied with all the requirements of Section 173 if at least one meeting of the Board of Directors has been conducted in each half of a calendar year and the gap between two meetings is not less than ninety days. Also, there is a proviso to the effect that the provisions of sub-section 5 of section 173 and provisions of section 174 are not applicable to Single Member Company in which there is only one director on its Board of Directors. [Section 173]

xiii)  Where a SMC enters into transactions or contracts with the sole member of the SMC and also a Director of the company, the SMC shall, unless the contract is in writing, ensure that terms of the contract/transactions/offer are put forth in the memorandum or are to be recorded in the minutes of the first meeting of the Board of Directors held next after entering into contract and to inform the RoC within 15 days from the approval of the Board of Directors. However, contracts entered into by SMC in the ordinary course of its Business are not covered by the said section. [Section 193]

ADVANTAGES OF A SINGLE MEMBER COMPANY

• Benefits of Being a Company
• Separation of Owner and Business
• Separate Legal Identity and Continuity
• Investor Confidence
• Limited Liability
• Relaxation from provisions relating to AGMs, EGMs, etc.

DISADVANTAGES OF A SINGLE MEMBER COMPANY

• Slower to start than a sole proprietorship
• Greater Compliance responsibility owing to Annual Returns, etc.
• If classified as PVT LTD in Income Tax then Greater Income Tax burden than Sole Proprietorship
• One person can incorporate or be a sole member of only 5 Single Membor Companies’.

Thus there are differences in the two structures which seem to be akin to each other but are not viz. SMC and Sole Proprietorship.

The most fundamental point of difference is that a SMC is incorporated with a Limited Liability. Furthermore, SMC has a separate and distinct legal identity from that of the owner unlike in a Sole proprietorship where the both are fused into the owner.

The profits from a sole proprietorship are taxed in the individual hands of the owner. With the SMC the position is still unclear as tax structure with regard to SMC is yet to be brought it. But, if provisions standing today are read for a SMC, which is classified in Companies Act as a Private Limited Company, then a SMC would be taxed at 30% plus Surcharge (if applicable) and Education Cess.

The other major advantage of SMC is that it carries the benefit of succession. At the time of incorporation the member has to nominate a nominee and the same will be applicable to the nominee when he becomes a member.

One major disadvantage would be the amount of paperwork and the administration and annual return filing compliance linked to the SMC. Also, strict compliance to provisions is the only way to save the SMC from hefty penalties. Also, compliances would Income Tax would also increase as it is classified as a Company then it would have to apply for TAN, PAN, etc from the day of incorporation. Also, VAT, CST, Profession Tax, Shops and Establishment Acts compliances are a few additional compliances.

It must be, appreciated that Indian Corporate Laws have finally taken a big step forward to bring itself at par with the Corporate Laws of other countries like the ones in the European Union, United States of America, China, Singapore, Hong Kong, etc. As this is a new concept it may probably take some time to seep in through the entrepreneurial sector in India but the revolutionary change which will be brought about by the advent of One Person Company will be historical for the Indian Business sector. One of the highlights of the SMC will be the swiftness of the procedure in incorporation of a SMC, relatively less paperwork in comparison to a fully fledged company and the ability to take quick decisions without any additional shareholders. OPCs would be the most apt for Indian Businessmen who wish to enter the foreign markets with a view to have a wholesome share, entering Joint Ventures with Foreign Corporations. Concept of OPC has done well in European Countries, South East Asian Countries, America, etc. Dr. J. J. Irani recommended OPC to organise the unorganised Sole Proprietorship sector in India. This will be India’s boost to the Global Economy. Moreover many like how many partnership firms got converted into LLPs, many proprietorships would now be converted to OPCs which will be very healthy from a regulatory perspective.

Note: Ministry of Company Affairs is yet to issue rules and the effective date for commencement rules for SMC. Draft rules are available on the website of the Ministry of Company Affairs http://ncbfeedback.mca.gov.in/