One person company and the Companies Act

The new Companies Act, 2013 under section 2(62) defines one-person company as a company which has only one person as its member. The concept of one-person company is new to the Companies Act as it was not provided for in the previous Act of 1956. The Companies Act, 1956 strictly provided, that for incorporating a private limited company a minimum of two directors and shareholders is mandatory.

The new Companies Act of 2013 provided for the concept of One-person company wherein one person could act both as a director as well as a shareholder of the Company. The process of incorporating a One-person company is very simple and similar to the incorporation of a private limited company with a few addition and alterations. Legal Consultation is barely required to understand the procedure for incorporation of a One-person Company.

Following conditions need to be fulfilled for incorporating a One-person Company:

1. Minimum Paid up capital of 1,00,000

2. Memorandum of association

3. Limited by shares or limited by guarantee or unlimited

4. Word one person must mandatorily to be mentioned below the name of the company

5. One person can form only 1 one-person company at a time

6. One-person company can only be formed by a natural Indian resident or a citizen

The basic requirements for incorporating a One-person company is that only a single natural person who is either a resident of India or a citizen of India can incorporate such a company also it is made mandatory that the company must have a minimum paid up capital of Rs. 100000.

Like any other private limited company one-person company is also required to have Memorandum of Association prescribing the name of the person who shall be the nominee or who shall after the death or disability of the subscriber assume the position of the subscriber. The name of the nominee can be changed by the subscriber any time after giving a due intimidation to the registrar. Just like the private limited company one-person company can be incorporated either limited by the share capital or limited by guarantee and can even have an unlimited liability. It is highly important to mention with the name of the company that the company is a one-person company.

The top Supreme Court lawyers and even other lawyers while arguing cases concerning a company lay great emphasis on the liability that a company has undertaken. Since it is important to draw a difference between an individual and a company even with regards to a One-person Company. The law has not only legalized the concept of forming a one-person company but has also provided various relaxations to One-person companies as compare to the general private limited companies.

Various exemptions granted to a One-person company are as follows:

1. The Act does not burden One-person company with the intricacies of the provisions of Annual General Meeting and Extra-Ordinary General meetings.

2. One-person company is exempted from conducting Board meetings in case the company consists of only one director. However, a One-person company can have a maximum of 15 directors.

3. One-person company is deemed under the Act to have complied with the provisions relating to board meetings if the company has conducted at least one meeting in each half of the calendar year. To avail this exemption, it is important that the gap between two meetings should not be less than 90 days.

4. The company is not required to appoint a first director since the sole member is deemed to be the first director.

5. One-person company is also exempted from the provisions dealing with the notices of the meetings, statements annexed to notice, quorum of meetings, appointment of chairman of meetings, and other provisions dealing with restrictions on voting rights, voting by show of hands, voting by electronic.

6. Furthermore, one-person company is also exempted from the provisions of demand for poll, postal ballot and circulation of members resolution. However, for understanding the concept of One-person company it is of prime importance to differentiate it from a sole-proprietorship.

When thinking about the concept of One-person company one would wander for free legal advice on the matter for understanding how it is a company and not a sole-proprietorship.

Listed below are the points differentiating between a One-person company and a Sole-proprietorship:

1. One-person company has a separate legal entity from its owner making the liability of the owner separate from the company. While as in sole-proprietorship there exists no such distinction and the liability of the owner is not separated.

2. Image of the company is separate from that of its owner and the personal financial trustworthiness and credit ratings of the owner does not in any way effect the rating of the company directly. In case of the sole-proprietorship the opposite of it prevails.

3. One-person company is taxed separated than its owner while as the same is not in sole-proprietorship.

4. One-person company needs to have a designated nominee for the purpose of succession and it is important that the nominee must also be a natural born resident or citizen of India. While as in Sole-proprietorship the provision of succession is made through an execution of the last testament and will.

5. One-person company has to file annual returns and get the accounts audited mandatorily. Sole-proprietorship only needs to get the accounts audited when the turnover crosses the specified amount.

6. The law prescribes that a One-person company must convert itself into a private or a public limited company once its average turnover is more than 2 crore rupees for three consecutive years or a paid-up share capital of over 50 lakhs.

A sole proprietor has no such responsibility of conversion on matter what its revenue will be. Although the Act provided for the concept of One-person company to aid the young budding entrepreneurs but it has certain limitations as well.

The limitations attached to a One-person company are as follows:

1. A single person cannot incorporate more than one, one-person company or become a nominee of more than one, one-person company at the same time. This limits the possibility of expansion and exploration to a budding business personnel.

2. The Act limits the provision of One-person company towards minors as it provides that a minor cannot become a member or a nominee of a One-person company neither can a minor hold any shares with beneficial interest.

3. One-person company cannot carry out Non-Banking Financial Investment Activities including investment in securities of any other body corporate.

4. One-person company cannot be converted into any kind of a company voluntarily.

For the conversion it is necessary that 2 years must have passed from the date of its incorporation or when the annual turnover is crossed, or when the Paid-up share capital increases beyond 50 lakhs.

Despite the drawbacks the advantages of forming a one-person company overweigh its disadvantages and are listed below:

1. One-person company gives you the liberty to start your own business without dependence on any other person for starting your business idea. A single person is authorized to solely run the company this ensures a speedy decision making and execution of plans of business. Also, to ease the burden from a single director one-person company can appoint a maximum of 15 directors.

2. The law treats company and its members as separate entities making the functioning easier and business friendly.

3. One-person company is exempted from various annual general or regular compliances.

4. To provides as a testing ground for the startup entrepreneurs.

5. It is a better platform than a sole-proprietorship as the liability is limited on to the business assets. After comparing the advantages, disadvantages and procedures of forming a one-person company it is considered to be a huge step towards the development of the nation as it attracts more people to start a fresh and it is also becoming a platform easily accessible to new budding entrepreneurs.