A

Company Law

Project on

SINGLE MEMBER COMPANIES &

LIMITED LIABILITY

PARTNERSHIP

Submitted By:

Anju Panicker

Roll No: 383

VIII Semester

NUALS

ONE PERSON COMPANY

The principal forms of business organisations permitted in India are sole

proprietorship firms (in which only one person runs the business), partnerships

(between two or more people) and companies (both private and public where it is

possible for many individuals to own the business by subscribing to its shares).

Existing Indian law currently requires at least two shareholders. That is why even for

wholly-owned subsidiaries, an individual shareholder has to hold one share as a

nominee. Most small companies are actually owned and managed by a single

individual, but currently are required to bring in another shareholder. This increases

compliance requirements, for example, shareholder meetings require the presence of

both the shareholders.

The Draft Companies Bill, 2009, (Bill No. 59 of 2009), as introduced in Lok Sabha on

3rd august 2009, introduces the OPC concept for the first time in India. With its

implementation, a single person will constitute a Company, under the One Person

Company (OPC) concept. OPC will help small single entrepreneurs, who are

currently operating under a proprietorship model, move to the corporate structure with

benefits of limited liability but with minimal compliance.

One Person Company is defined under section 2(1) (zzk) as:

““One Person Company” means a company which has only one person as a member”.

The new Company Bill, which proposes to do away with redundant provisions of the

existing Companies Act, 1956, envisages a new entity in the form of one person

company (OPC), while empowering the Government to provide a simpler compliance

regime for small companies. The proposed introduction of one-person company into

the legal system is a move that would encourage corporatisation of business and

entrepreneurship. At present, an entrepreneur in India has to find another person to

implement his skills through incorporation of a company while in the UK, Australia,

Singapore, Pakistan, etc; a single person can form a company.

In short, a one person company or a single member company is a company in which a

single person owns the whole, or practically the whole, of the share capital is termed

as 'one-man Company. There may be other acquaintances, but they may be his

relatives, friends or nominees. This central person is designated as the managing

director of the company and fully controls the company. It has all the benefits of the

corporate status and limited liability of the company. Though only one person

controls the whole functioning in a company and also enjoys the legal status.

In India, the JJ Irani Expert Committee recommended the formation of one-person

company (OPC). It has suggested that such an entity may be provided with a simpler

legal regime through exemptions so that the single entrepreneur is not compelled to

fritter away time, energy and resources on procedural matters.

The major recommendations made by the committee in this regard are:

OPC may be registered as a private company with one member and may also

have at least one director.

Adequate safeguards in case of death/disability of the sole person should be

provided through appointment of another individual as nominee director. On

the demise of the original director, the nominee director will manage the

affairs of the company till the date of transmission of shares to legal heirs of

the demised member.

‘OPC’ is to be suffixed with the name of one-person companies to distinguish

them from other companies [section 5(1)].

MAJOR FEATURES

The important feature for a start-up that registers as an OPC is that it de-risks the

business by transferring the promoter’s liability to the company. So, the key

difference between OPC and sole proprietorship is the way liabilities are treated.

For one, the OPC would have very little paper work - the Articles of Association

would be simple and short, and if the same person doubling as director, there would

be no need for board or shareholders’ meetings. Some OPC regimes in other

jurisdictions have a mandatory requirement of two directors, and therefore board

meetings are necessary, though not physically as the Bill will recognise the validity of

such meetings being held by video or teleconferencing.

Quorum requirements, proxies, maintaining of various registers of members, filing of

multiple e-forms fade away, leaving the single operator free from the fetters of

corporate governance, except that he has to maintain his books of accounts, prepare

and file annual audited balance sheet and profit and loss accounts, without the Board’s

report.

The memorandum of a One Person Company shall indicate the name of the person

who shall, in the event of the subscriber’s death, disability or otherwise, become the

member of the company.

The One Person Companies are also not required to hold any Annual General Meeting

under the new Companies Draft Bill, 2009. This facility is not extended towards any

other type of companies.

Section 3(1) (c) deals with the formation of One Person Company. It states that one

person, where the company to be formed is to be a One Person Company, by

subscribing his name to a memorandum in the manner prescribed and complying with

the requirements of the Act in respect of registration. The section provides that the

memorandum of a One Person Company shall indicate the name of the person who

shall, in the event of the subscriber’s death, disability or otherwise, become the

member of the company. It further provides that it shall be the duty of the member of

a One Person Company to intimate the Registrar the change, if any, in the name of the

person referred to in the preceding proviso and indicated in the memorandum within

such time and in such form as may be prescribed, and any such change shall not be

deemed to be an alteration of the memorandum.

Section 13(1) a, b, c deals with alteration of articles including the conversion of

Private Companies, Public Companies to One Person Companies and vice-versa.

One very important feature of the OPC concept is the conduction of Annual General

Meeting. Section 85(1) of the Draft Bill excludes One Person Company from holding

Annual General Meeting at least once in a year.

Section 171 deals with contracts by One Person Companies. It states:

(1) Where a One Person Company limited by shares or by guarantee enters into a

contract with the sole member of the company who is also director of the

company, the company shall, unless the contract is in writing, ensure that the

terms of the contract or offer are contained in a memorandum or are recorded in

the minutes of the first meeting of the Board of Directors of the company held

next after the entering into the contract:

It provided that nothing in this sub-section shall apply to contracts entered into by

the company in the ordinary course of its business.

(2) The company shall inform the Registrar about every contract entered into by

the company and recorded in the minutes of the meeting of its Board of Directors

under sub-section (1) within fifteen days of the date of approval by the Board of

Directors with such fee as may be prescribed, or with such additional fee as may

be prescribed within the time specified, under section 364.

(3) Where the company fails to inform the Registrar under sub-section (2) before

the expiry of the period specified under section 364 with additional fee, the

company shall be punishable with fine which shall not be less than twenty-five

thousand rupees but which may extend to one lakh rupees and every officer who is

in default shall be punishable with imprisonment for a term which may extend to

six months or with fine which shall not be less than twenty-five thousand rupees

but which may extend to one lakh rupees, or with both.

OPC IN UK

Unlike in India, the concept of OPC can be seen in UK from the time of the landmark

decision Salomon v. Salomon in 1897. In that case, Salomon’s was in the nature of a

single person company with his wife and sons as shareholders. The new Companies

Act of 1985 in UK legally recognised the concept and laid down major rules and

guidelines. The provisions of the UK law are similar to that of the Indian provisions

which are to be implemented after the enactment of the Companies Bill, 2009.

CONCLUSION

OPCs are imperative because they would give entrepreneurial capabilities of people

an outlet for participation in economic activity and such economic activity may take

place through the creation of an economic person in the form of a company. However,

there has been criticism in certain quarters against the formation of such a company as

it may give room for evasion of public funds and tax liability by an individual. Also,

the regime has yet to be conceptualised and it is not clear whether the OPC structure

will be available to foreign investors through the automatic or approval route, or

whether a migration regime will be permitted for joint stock companies and

partnerships. Would an existing limited liability company be treated as a “person” for

this purpose? If so, should not there be a limit capacity in terms of the corporations’

net worth or capital structure?

How will the regulator ensure that the OPCs are not set up as fly by night ventures

with the sole intent of liability evasion? More importantly, how strongly is the

doctrine of lifting the corporate veil being enforced against OPCs because therein lies

the acid test of the OPC dividing line Salomon and Salomon the individual.

LIMITED LIABILITY PARTNERSHIP

INTRODUCTION

With the growth of the Indian economy, the role played by its entrepreneurs as well as

its technical and professional manpower has been acknowledged internationally. It is

felt opportune that entrepreneurship, knowledge and risk capital combine to provide a

further impetus to India’s economic growth. In this background, a need has been felt

for a new corporate form that would provide an alternative to the traditional

partnership, with unlimited personal liability on the one hand, and, the statute-based

governance structure of the limited liability company on the other, in order to enable

professional expertise and entrepreneurial initiative to combine, organize and operate

in flexible, innovative and efficient manner.

LIMITED LIABILITY PARTNERSHIP

The Limited Liability Partnership Act 2008 was published in the official Gazette of

India on January 9, 2009 and has been notified with effect from 31 March 2009. The

rules have been notified in the official gazette on April 1, 2009. The first LLP was

incorporated in the first week of April 2009.

A limited liability partnership is a legal entity and a body corporate. That means it has

a legal personality separate from that of its members. Like a limited company, a

limited liability partnership can do all the things an individual or company can do. It

can make contracts, sue or be sued, hold property or become insolvent. By and large,

partnership law does not apply to a limited liability partnership, but the arrangements

between the partners may closely follow a traditional partnership agreement. A

limited liability partnership is not the same as a limited partnership, regulated by the

Limited Partnerships Act 1907. It is an alternative corporate business entity that

provides the benefits of limited liability of a company but allows its members the

flexibility of organizing their internal management on the basis of a mutually-arrived

agreement, as is the case in a partnership firm. LLP combines the advantages of ease

of running a Partnership and separate legal entity status and limited liability aspect of

a Company.

The desirability of LLP form has been expressed in the context of small enterprises by

Bhat Committee (1972);

Naik Committee (1992);

Expert Committee on Development of Small Sector Enterprises headed by Sh.

Abid Hussain in 1997; and

Study Group on Development of Small Sector Enterprises (SSEs) headed by

Dr. S P Gupta (2001).

Following Committees set up by M/o Company Affairs have also recommended for

legislation on LLPs-

Committee on Regulation of Private Companies and Partnerships headed by

Sh. Naresh Chandra (2003)

The Committee on New Company Law (Dr. J.J. Irani Committee) (2005)

MAJOR FEATURES

The LLP shall be a body corporate and a legal entity separate from its

partners. Any two or more persons, associated for carrying on a lawful

business with a view to profit, may by subscribing their names to an

incorporation document and filing the same with the Registrar, form a Limited

Liability Partnership. The LLP will have perpetual succession.

The mutual rights and duties of partners of an LLP inter se and those of the

LLP and its partners shall be governed by an agreement between partners or

between the LLP and the partners subject to the provisions of the LLP Act

2008 . The act provides flexibility to devise the agreement as per their choice.

In the absence of any such agreement, the mutual rights and duties shall be

governed by the provisions of proposed the LLP Act.

The LLP will be a separate legal entity, liable to the full extent of its assets,

with the liability of the partners being limited to their agreed contribution in

the LLP which may be of tangible or intangible nature or both tangible and

intangible in nature. No partner would be liable on account of the independent

or un-authorized actions of other partners or their misconduct. The liabilities

of the LLP and partners who are found to have acted with intent to defraud

creditors or for any fraudulent purpose shall be unlimited for all or any of the

debts or other liabilities of the LLP.

The name of the LLP shall end with “LLP” or “Limited Liaability

Partnership” inorder to distinguish it from other forms of business.

LLP must have two ‘designated partners’ who must be individuals. If a body

corporate is a partner of LLP, it can nominate a person as 'designated partner'.

He has to give consent to act as designated partner. He has to obtain DPIN

[Designated Partner Identification Number] from Central Government. The

designated partner is liable for all compliances as required under the Act and

is liable to penalty for contravention of those provisions. Personal liability

shall arise if the number of partner’s falls below two, However there exists no

upper limit on the same. In India for all purposes of taxation, an LLP is treated

like any other partnership firm. For statutory compliances provisions at least

one resident designated partner (DP) in every LLP is available in India for at

least six months for regulatory compliance requirements. The LLPs would

have freedom to appoint more than one resident as DP. LLP as an entity would

always remain liable for regulatory or other compliances.

The LLP shall be under an obligation to maintain annual accounts reflecting

true and fair view of its state of affairs. A statement of accounts and solvency

shall be filed by every LLP with the Registrar every year. The accounts of

LLPs shall also be audited, subject to any class of LLPs being exempted from

this requirement by the Central Government.

The Central Government have powers to investigate the affairs of an LLP, if

required, by appointment of competent Inspector for the purpose.

The compromise or arrangement including merger and amalgamation of LLPs

shall be in accordance with the provisions of the LLP Act 2008.

A firm, private company or an unlisted public company is allowed to be

converted into LLP in accordance with the provisions of the Act. Upon such

conversion, on and from the date of certificate of registration issued by the

Registrar in this regard, the effects of the conversion shall be such as are

specified in the LLP Act. On and from the date of registration specified in the

certificate of registration, all tangible (moveable or immoveable) and

intangible property vested in the firm or the company, all assets, interests,

rights, privileges, liabilities, obligations relating to the firm or the company,

and the whole of the undertaking of the firm or the company,  shall be

transferred to and shall vest in the LLP without further assurance, act or deed

and the firm or the company,  shall be deemed to be dissolved and removed

from the records of the Registrar of Firms or Registrar of Companies, as the

case may be.

The LLP Act 2008 confers powers on the Central Government to apply

provisions of the Companies Act, 1956 as appropriate, by notification with

such changes or modifications as deemed necessary. However, such

notifications shall be laid in draft before each House of Parliament for a total

period of 30 days and shall be subject to any modification as may be approved

by both Houses.

The winding up of an LLP may be either voluntary, or by a tribunal. A LLP

may be wound up voluntarily if the LLP passes a resolution with approval of

at least three fourth (in number) of total number of partners, requiring the LLP

to be wound up voluntarily. A copy of resolution shall be filed with the

Registrar within 30 days of passing up such resolution in Form as prescribed

in Appendix II.

ADMINISTRATION

Ministry of Corporate Affairs, Government of India is the administrating ministry.

Registrar of Companies (RoC) of respective State is the administrative authority

where all documents are to be filed, the Central Government can make applicable any

provision of Companies Act to LLP with suitable modifications by issuing a

notification. However, provisions of Indian Partnership Act will not apply to LLP.

ADVANTAGES AND DISADVANTAGES OF LIMITED LIABILITY

PARTNERSHIP

By combining aspects of partnerships and corporations, limited liability partnerships

offer several advantages and disadvantages from both.

1. Limited Liability- Limited liability partnerships, not surprisingly, offer

limited liability for partners. That means each partner is responsible only for

the amount of money he has given or promised to the partnership, and each

partner is not “personally liable.” By limiting liability to partnership liability,

the only money a person suing the partnership could win is partnership money

-not a partner's personal savings. This makes limited liability partnerships

more secure and less financially risky than a partnership.

2. No Double Taxation - Unlike corporations, limited liability partnerships are

taxed directly through the partnership. This avoids corporate double taxation,

where income from a corporation and distributed profits are both taxed.

3. Management - The ability to directly manage a partnership is a significant

advantage of a limited liability partnership. In a corporation, shareholders hold

stock in the company and elect a board of directors, who then make executive

decisions for the company. Corporations also may have company directors

doing more mundane, daily business. Limited liability partnerships avoid the

unnecessary extra steps by allowing each partner to directly own or control a

portion of the partnership.

4. Some Personal Liability - While some states restrict liability of partners in a

limited liability partnership, some do not. For example, some states limit

liability only for negligent civil wrongdoings ("torts") but allow personal

liability for intentional torts or criminal actions. Other states restrict liability,

even for intentional torts--but there may be some situations where personal

liability may arise.

5. Some Restrictions - Some states restrict the types of professions that may

form a limited liability partnership. Traditionally, professional fields of study,

such as attorneys, architects and accountants, are included. Some states limit

limited liability to these traditional fields.

6. Liable for Partner’s Action - The partnership will be liable for actions taken

by a partner in furtherance of the partnership. This means that financially,

being a member of a limited liability partnership may be less secure than

merely being a shareholder of a corporation.

COMPARISON BETWEEN COMPANY, PARTNERSHIP AND LIMITED

LIABILITY PARTNERSHIP MODE OF BUSINESS

Features Company Partnership firm LLP

Registration Compulsory Not compulsory. Compulsory

registration

required with the

ROC. Certificate

of Incorporation is

conclusive

evidence.

Unregistered

Partnership Firm

will not have the

ability to sue.

registration

required with

the ROC

Name

Name of a public

company to end

with the word

“limited” and a

private company

with the words

“private limited” No guidelines.

Name to end

with “LLP””

Limited

Liability

Partnership”

Capital

contribution

Private company

should have a

minimum paid up

capital of Rs. 1

lakh and Rs.5

lakhs for a public

company Not specified Not specified

Legal entity

status

Is a separate legal

entity

Not a separate

legal entity

Is a separate

legal entity

Liability

Limited to the

extent of unpaid

capital.

Unlimited, can

extend to the

personal assets of

the partners

Limited to the

extent of the

contribution

to the LLP.

No. of

shareholders /

Partners

Minimum of 2. In

a private

company,

maximum of 50

2- 20 partners Minimum of

2. No

maximum.

shareholders

Foreign

Nationals as

shareholder /

Partner

Foreign nationals

can be

shareholders.

Foreign nationals

cannot form

partnership firm.

Foreign

nationals can

be partners.

Taxability

The income is

taxed at 30% +

surcharge+cess

The income is

taxed at 30% +

surcharge+cess

Not yet

notified.

Meetings

Quarterly Board

of Directors

meeting, annual

shareholding

meeting is

mandatory Not required Not required.

Annual

Return

Annual Accounts

and Annual

Return to be filed

with ROC

No returns to be

filed with the

Registrar of Firms

Annual

statement of

accounts and

solvency &

Annual

Return has to

be filed with

ROC

Audit Compulsory,

irrespective of

share capital and

turnover

Compulsory Required, if

the

contribution

is above

Rs.25 lakhs or

if annual

turnover is

above Rs. 40

lakhs.

How do the

bankers view

High

creditworthiness,

due to stringent

compliances and

disclosures

required

Creditworthiness

depends on

goodwill and

credit worthiness

of the partners

Perception is

higher

compared to

that of a

partnership

but lesser

than a

company.

Dissolution

Very procedural.

Voluntary or by

Order of National

Company Law

Tribunal

By agreement of

the partners,

insolvency or by

Court Order

Less

procedural

compared to

company.

Voluntary or

by Order of

National

Company

Law Tribunal

Whistle

blowing No such provision No such provision

Protection

provided to

employees

and partners

who provide

useful

information

during the

investigation

process.

LIMITED LIABILITY PARTNERSHIP IN UK

In the United Kingdom LLPs are governed by the Limited Liability Partnerships Act

2000. A UK Limited Liability Partnership is a Corporate body - that is to say, it has a

continuing legal existence independent of its Members, as compared to a Partnership

which may have a legal existence dependent upon its membership.

A UK LLP’s members have a collective (joint) responsibility, to the extent that they

may agree in an LLP agreement, but no individual (several) responsibility for each

other’s actions. As with a limited company or a corporation members in an LLP

cannot, in the absence of fraud or wrongful trading, lose more than they invest. There

has been discussion over whether limited partnerships operating under English law

should be made separate legal entities in the same way as limited liability partnerships

are. The Law Commission report on partnership law suggests that creation of separate

legal personality should be left as an option for the partners to decide upon when a

partnership is formed.

In relation to tax, however, a UK LLP is similar to a partnership; it is tax transparent

or pass-through, that is to say it pays no UK tax but its members do in relation to the

income or gains they receive through the LLP. It is a unique entity in its synthesis of

collective and individual rights and responsibilities and its infinite flexibility - there is

in fact no requirement for the LLP agreement even to be in writing because simple

partnership-based regulations apply by way of default provisions.

CONCLUSION

Generally limited liability partnership is not applicable for all activities such as non-

profit-making activities. Before the concept being introduced in India it has been

accepted in countries like U.S.A, U.K, Australia, and Germany. It is a form of

business entity, which allows individual partners to be restricted from joint liability of

partners in a partnership firm. The Liability of the partners incurred in the normal

course of business is that of LLP and it does not extend to the personal assets of the

partners. This is a great relief to the partners, particularly professionals like Company

Secretaries, Chartered Accountants, Cost Accountants, Advocates and other

professionals. These professionals may also form multi-disciplinary LLPs to meet the

changing economic environment. The introduction of LLPs in India is a good

beginning towards a long journey. The hybrid structure of LLP will facilitate

entrepreneurs, service providers and professionals to organize and operate in an

innovative and efficient manner for effectively competing in the global market.