Image Source: Pixabay

This article is written by Anushka Ojha, a third-year student of ICFAI University, Dehradun. In this article, she discusses the introduction on one person company, Indian scenario, the reason for the formation, features of one person company, about the independent corporate existence, tools before entering into one person company.

Introduction

To understand a “one-person business”, now called OPC, it becomes essential to first analyze what a business is. The word has no strict technical or legal meaning. Under the Companies Act 2013, a “corporation” means a corporation incorporated under this Act or any other corporations act.

The purpose of incorporating this concept is to promote entrepreneurship. This will help entrepreneurs access certain facilities, such as bank loans, by allowing them to enter the market as a separate entity and as a legal shield for their business. The law gave one person the freedom to contribute to the economic activities of India. This article attempts to present the broad outline of the new progressive corporate idea to a person as presented by the Companies Act 2013.

At the heart of this article, the author attempts to convey

  • The basic concept of the single-person policy.
  • The need to emerge from the concept.
  • To appreciate the benefits and highlight the disadvantages and shortcomings of the concept.

When the concept of personal law was read in accordance with the provisions relating to the incorporation of a company, the question was whether a single person could, in the exercise of his personal rights, constitute a company. that is, the individual right of a person to establish a trade, a business or a trade would be limited by the provisions of company law which obligate at least two members to create a company.

A one-person business is defined in subsection 62 of section 2 of the Act. It defines a company as “a corporation with only one person as a member”, in which all legal and financial responsibilities are limited to society and not to its members. Only native-born Indians residing in India (that is, having stayed at least 182 days in the previous fiscal year) may constitute One Person.

This concept of one-person society is similar to the existing concept of the individual enterprise. However, the individual business ills that the homeowners generally faced were removed by this concept. The important characteristic of One Person Company is that the mitigated risks are limited to the magnitude of the value of the shares held by that person in the company. This will help entrepreneurs to take the risk of doing business without hindrance to personal property disputes and liabilities.

The concept of “one-person corporation” (OPC) can be introduced into law with the following characteristics: –

  • A one-person corporation (OPC) may be registered as a private corporation with a member and may also have at least one director.
  • Adequate guarantees in the event of the death/disability of the sole person should be provided by the appointment of another person as the nominated Director. In the event of the death of the first director, the designated director will appoint the affairs of the corporation until the date of transfer of the shares to the legal heirs of the deceased member.
  • The letters “OPC” must be supplemented by the name “One Person Companies” to distinguish it from other companies.

Indian Scenario

In India, the 1956 Companies Act was the first comprehensive attempt to create a status for corporations and related matters. It was a bill based on English law. Although complete, it was voluminous legislation that needed to be changed periodically. We currently have the Companies Act 2013, which has introduced a wave of new changes that should bring industries to a new level, in line with international forums. The most controversial of these provisions is the concept of a one-person corporation or OPC.

This concept of OPC was recommended for the first time by Dr JJ Irani’s expert panel in 2005. In its report, the committee had stated that the OPC should offer a whole new range of opportunities for those wishing to start their own business with an organized corporate structure. OPC will give the young businessman all the advantages of a limited liability company, which expressly means that he will have access to loans, bank loans, limited liability, legal protection of companies, access to the market, etc. entity.

https://lawsikho.com/course/diploma-m-a-institutional-finance-investment-laws

Reasons for the formation

Under the old Companies Act, 1956, at least two members were required for the formation of a limited liability company. It was an obstacle for entrepreneurs who wanted to go solo. 

According to the old law, the only options were either to create a private company of at least two members or a public company of at least seven members, which was either limited in shares, guaranteed or unlimited. The parliamentarians invoked at least two members for a private company, to differentiate it from that of an individual company that could be launched by an individual.

But people started to create companies by adding a nominal member/director and assigning them only one share, the prerequisite for being a director, and keeping the rest with themselves. It was a way of circumventing the law to comply with legal requirements while exercising a dominant position.

This has been considered by the legislature as a fraudulent activity. Although constituted in accordance with legal provisions, it seeks to violate the very reason for which such a restriction has been imposed. That is to say that section 12 of the Companies Act of 1956 sought to remedy the wrong sought because it guarantees that an enterprise would not be left under the sole control of an individual, but would be shared by at least two individuals. But this intention of the legislature was defeated by incorporating private corporations to a nominal member.

Independent corporate existence

Like any other company, an OPC will have its own existence, distinct from that of its director/shareholder. The principle was emphasized for the first time in Salomon v. Salomon & Co Ltd. A company is entitled to a person with a perpetual estate and a common seal. It constitutes a separate legal personality independent of its members. Thus, a mutual fund becomes a legal entity capable of immediately exercising all the functions of an incorporated individual. He becomes impersonalized.

In Palmer’s words, “the benefits of incorporation can hardly be overstated.” It is because of incorporation that the owner of the business ceases to trade on his own. The company operates the business, the liabilities are the liabilities of the company and the owner is not liable for what the company does, although as the largest shareholder it is allowed to take full advantage of the profits made. By the Society. Pratt v. E.D. Sassoon & Co. Ltd, the High Court of Bombay tried it.

Under the law, an incorporated company is a different entity and, although the entire share can be practically controlled by one person, in law, a corporation is a separate entity. This is in contradiction with an individual company where there is no separation of identity between the individual and his company. They work as one and share the same identity.

Limited liability

As mentioned above, One Person Company has its own distinct legal identity and thus limits the contractor’s liability up to the amount of its subscription. Limited liability is considered one of the most valuable features of society.

Perpetual succession

The director of the corporation must appoint a successor as the sole member in the event of death or disability. The qualifications have already been discussed to be a candidate. He will act as the new director and take over the business. Thus, the business is essentially ceded to another person, but it continues to survive. “Members can come and go, but society can go on forever.” It should be noted that liabilities and all assets will also change hands during this process.

The property, on the other hand, ceases to exist when the real owner dies. By changing hands, his identity changes; and therefore the old property ceases, and a new may be born.

Separate property

Again, a company with a separate legal entity, any property acquired by it will be it’s own. He is able to own, enjoy and dispose of the property in his own name. He becomes the owner of his own assets. The member has no insurable interest in the property of the corporation. The shareholder has the right not to own any property belonging to the company because there is no legal interest or equity. Thus, incorporation makes it possible to clearly distinguish the property of the corporation from that of the member.

In a sole proprietorship, there is a distinction of identity. The owner is the owner and any owner of the property is his and vice versa. As a result, any creditor of the property will have a valid claim on all the assets of the owner.

Transferability of shares

In an ordinary business, shares are treated as movable property. Thus, any individual can sell his shares on the open market and recover his investment without having to withdraw money from the company. But in a mutual fund, there is only one member. The question of the transfer of a part of the shares does not arise, because it then ceases to become a “one person” company.

It can not transfer all actions as this will result in significant changes, including changes to the association protocol due to the change of ownership. Changes will also have to be made regarding the candidate. Parliamentarians have not yet addressed this issue and the foregoing is a personal perspective on logical interpretations. It would appear, therefore, that in the case of a mutual fund, the transferability of the shares is limited.

Such a question need not necessarily arise in the case of a sole proprietorship.

Capacity to sue and be sued

A mutual fund has the ability to sue and be sued on its own behalf. In fact, this is one of the main benefits of a separate legal entity. Criminal complaints can be filed by or against an OPC, but it must be represented by a natural person, who in this case would ideally be the sole director or any director if there are more than one.

As a separate entity, she has always had the power to protect her name. Any act affecting his reputation or likely to harm his business may be a reasonable cause.

Such a question need not necessarily arise in the case of a sole proprietorship. The owner suing in his own name and in the name of the property.

Important tips to remember before going into an OPC

Tax obligation

The end result being the creation of a company, it is regrettable to note that it will be subject to the same tax obligations. Taxes usually fall under the following headings for a business:

Corporate Tax – 30%

Alternative minimum tax – 8.5%

Dividend distribution tax – 15%

A mutual fund may be exempted from all or part of these obligations, but it will still be considered a business and therefore more heavily taxed than a sole proprietorship. The question arises primarily because many sole proprietors who wish to incorporate may not be able to pay such a heavy tax. As a result, chances are that it will end soon after it is created.

On the other hand, in a sole proprietorship, as there is no difference between the business and its owner, the only tax that it is required to pay is the income tax related to profits that it realizes. This will not be tedious as the Income Tax Act sets specific limits for different income groups. The person will only have to pay a reasonable amount set by the government.

Fraud

UCIs can also be abused to carry out fraudulent activities. This is partly explained in England by the fact that private companies with capital of less than £ 5,000 increased from 20% to 33% from 1897 to 1901.

It seems that frauds by single-member companies have been a problem for ages. While most fraud by the OPC can also be committed by real companies, the lack of balance between powers and interests within a single-person company makes it easier for the fraudster to commit personal fraud.

For example, under the new law, a person can make up to five CPVs. In such circumstances, the individual can avoid liability by creating many individual corporations and quickly transfer property owned by a problem corporation to another corporation, which companies are controlled by one person.

Creditor’s psychology

It should also be noted that most creditors of the company will be aware of the danger posed by this new concept. Generally, a company with at least two members is a welcome investment.

Banks are willing to grant loans and creditors are available. But when it comes to an individual, the chances that he manipulates or uses the name of the company for fraudulent purposes are still present and the chances of being fooled are greater because unlike a regular business the only decision that counts is that of the single member and the only person actively involved in the decision-making process is itself.

Even if there are more administrators, this always gives the single member some kind of veto over all others. It is therefore likely that these companies face difficulties in obtaining financial assistance.

Liability for the Director

It is no secret that the director of a company can be held responsible for his actions in certain circumstances. One-way nature can make isolated businesses easier to engage in crime. Even in cases where the manager is not to be held personally liable, the responsibility may be directed against the director as he is the person responsible for the operation of the business.

It is often found that the principle of “lifting the corporate veil” has been used in cases where it is relevant to look for the person responsible for the acts of the company. But here, the courts are even relieved of this obligation since there are only one main shareholder and one principal director. The fingers can be easily pointed at him, even in cases where he can be innocent.

Suggestions & Conclusion

This new concept can bring people making up companies to generate profits, leaving the responsibility to the company and wash their hands of any responsibility. This is still a pilot attempt in a country like India. Thus, concerning one person, it is suggested to choose a sole proprietorship.

There are still dubious areas that can generate a lot of ambiguity and cause losses to the person. It may take years to prove that the system works perfectly, but in the meantime, it is impossible to reverse the development of one-person companies.

Instead, it is more important to think of measures to prevent its use as a sham. It can be expected that more restrictions will be imposed on individual businesses by the legislature and the judiciary to ensure that protection is an individual right will not be used as a forum to commit fraud in the general public.

Did you find this blog post helpful? Subscribe so that you never miss another post! Just complete this form…

LEAVE A REPLY