In this blog post, Angeline Benny, a fourth-year law student at NALSAR University of Law, Hyderabad and pursuing a Diploma in Entrepreneurship Administration and Business Laws from NUJS, Kolkata, details the incorporation of a one-person company in India.

One Person Companies are private companies that may be formed for any lawful purpose by one person.[1] One Person Company has been defined in Section 2(62) of the Companies Act of 2013 as ‘a company which has only one person as a member’. The 2013 Act has provided by the establishment of these companies based on the recommendations of the Jamshed J. Irani Expert Committee on Company Law that presented its Report on 31^st May 2005. Such a company may be formed by ‘subscribing their names or his name to a memorandum and complying with the requirements of this Act in respect of registration’.[2] They may be registered as either as ‘limited by shares’ or as ‘limited by guarantee’.

 

Who can form the One Person Company?

Companies (Incorporation) Rules, 2014 lay down the eligibility criteria for the person incorporating the One Person Company as well as the sole member. Rule 3.1 limits such person to ‘only a natural person who is an Indian citizen and resident in India’. According to the explanation of the Rule, residency in India is established if the person has stayed in India for 182 or more days in the preceding calendar year. In addition, minors do not come under the ambit of the above Rule.[3]

 

Process Of Incorporating The One Person Company

In India, the process of incorporating the Company is primarily through the website of the Ministry of Corporate Affairs. It consists of various e-forms (Form DIR-3, Form INC-1, Form INC-3, Form INC-2, Form DIR-12, Form INC-22) that have to be uploaded for applications and the process can be summarised to the following steps:

1. Acquire Digital Signature Certificate (DSC) for the proposed Director(s).
2. Acquire Director Identification Number (DIN) for the proposed director(s).
3. Shortlist a name for the One Person Company, check the availability of the company name on the Ministry of Corporate Affairs (MCA) website and then, seek approval of the same.
4. Finalise drafts of the Memorandum of Association and Articles of Association (MOA & AOA) of the Company.
5. Sign and upload the requisite documents relating to the Company with the Registrar of Companies (ROC).
6. Pay the required fee and stamp duty to Ministry of Corporate Affairs.

The aforementioned steps shall be expounded on as given below:

• Sign and upload the requisite documents relating to the Company with the Registrar of Companies (ROC): Form INC-2 shall be filed for incorporation of the One Person Company along with the requisite documents like the Memorandum and Articles of the Company, and the Form DIR-12 (if necessary). A Form DIR-12 contains particulars of appointment of directors and the key managerial personnel and the changes if any. In the case of a One Person Company, it only has to be filed if the sole member is not the sole director or in the case that there are more than one director in the proposed One Person Company.[16] It is important to check that the forms being submitted are the latest versions of the same. For instance, Forms DIR-3, INC-2, and INC-4 (to be used in the incorporation process of a One Person Company) are likely to be revised on MCA website from 2^nd September 2016.[17] 
• Shortlist a name for the One Person Company, check the availability of the company name on the Ministry of Corporate Affairs (MCA) website and then, seek approval of the same: The proposed company needs a name under which it carries out the business since the company is a separate legal entity, distinguishable from its sole member. The proposed name for the One Person Company should be checked on the MCA Website to see if it clashes with the name of any existing Company as it would not be available in case of a conflict.[7] Additionally, a public search of trademarks should also be done in order to ensure that the chosen name does not infringe any existing trademarks.[8] Further, Rule 8 of the Companies (Incorporation) Rules 2014 also provides a list of ‘Undesirable Names’ for proposed companies. Once the name seems available for the Company, Form INC-1 should be filled with the digital signature of the incorporator and fees of Rs. 1000.[9] An approved name shall be reserved for a period of 60 days from the filing of the e-Form.[10] If the proposed One Person Company is not incorporated within the period, the name shall be available to others as there is no provision for renewing the approved name.[11] Additionally, once the company has been incorporated, t is necessary to mention “One Person Company’’ in brackets below the name of the company so formed, in order to differentiate it from other forms of a company.[12]
• Acquire Director Identification Number (DIN) for the proposed director(s): In a One Person Company, the sole member of the company shall be deemed to be the first director if such first director has been provided for under Articles of the company.[6] Further, such member shall be a director until director(s) are appointed by the member. There is an upward limit of 15 directors in such a Company. The notion of Director Identification Number (DIN) was started through the insertion of Sections 266A – 266G of Companies (Amendment) Act 2006, which required existing and proposed Directors to obtain a DIN. Under the Companies Act 2013, Section 153 requires individuals intending to become Directors to apply for allotment of a DIN. The same is done by submitting Form DIR-3 along with supporting documents and the DSC on the MCA website.
• Acquire Digital Signature Certificate (DSC) for the proposed Director(s): The Digital Signature Certificate has been introduced under the Information Technology Act, 2000 for documents submitted online in order to ensure their security and verify them. All filings done under the MCA21 e-Governance programme (including filings for incorporation of One Person Companies) require DSCs.[4] Such DSC should be obtained from a Certifying Agency.[5]
• Finalise drafts of the Memorandum of Association and Articles of Association (MOA & AOA):The Companies Act 2013 as well as Rule 4 of the Companies (Incorporation) Rules 2014 mandate that the memorandum of the One Person Company shall contain the name of a person who shall become the member of the company in case of the subscriber’s ‘incapacity to contract’ or his’ her ‘death’.[13] Such additional person ought to have given prior consent in writing in Form INC-3 (Nominee Consent Form), and the same shall be filed along with the Memorandum and Articles of Association when the form is submitted to the Registrar for incorporation of the proposed Company. Moreover, the nominee may withdraw his/her consent by giving notice in writing to the sole member,[14] or the member may change the name of such nominee later.[15] The Companies Act 2013 stipulates that it is the duty of the member of the One Person Company to intimate the Company as to the same, in order for the company ensure that the Registrar makes the necessary changes. In furtherance of the same, the company has to file Form INC-4 with the Registrar to notify the change in nominee along with written consent from the new nominee as obtained in Form INC-3.
• Pay the required fee and stamp duty to Ministry of Corporate Affairs: The requisite fees under the Companies (Registration Offices and Fees) Rules, 2014, the registration fees for the Memorandum of Association as well as the applicable Stamp Duty need to be paid.

Incorporation and what happens next?

The documents shall be analysed by the Registrar of Companies and changes may be suggested in the documents or the forms. Following approval of the Forms by the Registrar, the Certificate of Incorporation shall be emailed to the Director(s) of the newly incorporated One Person Company. Once such Certificate is received, the company can begin its operations. Section 11 of the Companies Act 2013 required the Director(s) of the Company to file Form INC-21 with the Registrar regarding the Commencement of Business. However, this requirement has been dispensed with in the Companies (Amendment) Act 2015, which repealed the Section.

Furthermore, As per Section 12(1) of the Companies Act, a Company is required to have a ‘Registered Office’ within 15 days of its incorporation. Form INC-22 is a notice of situation or change of situation of registered office. This Form should be filed within 30 days from the date of incorporation of the One Person Company (Registration of Form INC-2) to verify the address of correspondence and the registered address, as proscribed by Section 12(2) of the Companies Act.

 

How suitable is a One Person Company for businesses?

A One Person Company cannot be converted into a Section 8 Company or carry out Non-Banking Financial Investment activities.[18] Such companies are generally suitable for small businesses and cannot voluntarily convert to any kind of company within 2 years from the incorporation of the Company unless a threshold has been met i.e., “threshold limit (paid up share capital) is increased beyond fifty lakh rupees or its average annual turnover during the relevant period exceeds two crore rupees.”[19] On the other hand, a private company (other than Section 8 Company) may convert to a One Person Company by applying through Form INC-6 if it falls below the aforementioned threshold, upon satisfying pre-requisite criteria.

One Person Companies are lucrative for small business and entrepreneurs due to its benefits like limited liability, procedural concessions under the Companies Act 2013, and perpetual succession due to its existence as a separate legal entity. However, the compliance requirements and taxing structure are comparatively difficult. For these reasons, it should be a case by case analysis for each business by weighing the pros and cons. While the One Person Company will not suit all, it provides a new option to those willing to consider it.

 

 

 

 

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References: 

[1] Section 3(1)(c), Companies Act 2013.

[2] Section 3(1), Companies Act 2013.

[3] Rule 3.4, Companies (Incorporation) Rules 2014.

[4] Available at: http://www.mca.gov.in/MinistryV2/acquiredsc.html

[5] List of such Agencies available at: http://www.mca.gov.in/MinistryV2/certifyingauthorities.html

[6] Section 152(1), Companies Act 2013.

[7]Available at: http://www.mca.gov.in/mcafoportal/showCheckCompanyName.do

[8] Available at: http://ipindiaonline.gov.in/tmrpublicsearch/frmmain.aspx

[9] Rule 9, Companies (Incorporation) Rules 2014. See http://www.mca.gov.in/MinistryV2/efiling.html

[10] Section 4(5)(i), Companies Act 2013.

[11] Ibid.

[12] Section 12(3), Companies Act 2013.

[13] The proviso to Section 3(1), Companies Act 2013. See also: Section 4(1)(f).

[14] Rule 4.3, Companies (Incorporation) Rules 2014.

[15] Rule 4.5, Companies (Incorporation) Rules 2014.

[16]Available at: http://www.mca.gov.in/MinistryV2/incorporation_company.html

[17] Available at: http://www.mca.gov.in/

[18] Rule 3.5 & 3.6, Companies (Incorporation) Rules 2014.

[19] Rule 3.7, Companies (Incorporation) Rules 2014.