American painter and filmmaker of the 1960s Beatles era, Andy Warhol once said: “One’s company, two’s a crowd and three’s a party”. For long, however, lawmakers have held that you need one more person besides yourself to form a company. Not any longer. It is now possible to form a company with just one person as a shareholder. Such an entity is called a ‘One Person Company’.
Though the concept has been in vogue in many Western countries, India has been a bit slow to warm up to it. The idea of a ‘one person company’ was introduced for the first time only when the law on companies was revamped with the Companies Act 2013. In the 11 months between April 2014 and February 2015, roughly 2,000 such companies were incorporated, reported BusinessLine in its edition dated April 6, 2015.
A company is an artificial person, independent of the owners who contribute to its capital. It can own assets in its name and assume obligations to third parties. A company can exist in perpetuity, no matter what happens to the initial set of people who formed it.
Limited liability
The notion of a company consisting of just one shareholder seems a bit odd, when we consider the circumstances that gave rise to the need for setting up corporate forms of organisations.
More than 400 years ago, George, Earl of Cumberland, and 215 of his Knights, Aldermen and Burgesses pooled as much as 68,373 in pounds sterling to float the East India Company, which went on to rule India for 150 years. We do not associate companies with petty ventures.
But size is not the only distinguishing criterion. The idea of a company, or what is described technically as a ‘Joint Stock Company’, has five key requirements.
One, you need large sums of money to bring a certain business idea to fruition. Two, it is beyond the capability of any one or a few individuals to put up such sums of money. Three, so large would be the pool of investors to make up the minimum capital required to set up the business that it would be impossible for all of them to be actively involved in managing the business. Some of those involved in management may not even be owners.
Four, if the business venture requires capital in such a large measure, the consequences of business failure too could be catastrophic for its owners. Indeed, so expensive that they may even baulk at setting up a business in the first place. Society would be the loser as a useful idea could never fructify into production of useful goods or services.
So, a mechanism had to be found to shield owners from the financial consequences of a business failure. Thus was born the concept of ‘limited liability’. If a company goes bankrupt, then the shareholders can be called upon to subscribe to only such sums of money as may yet be unpaid on the shares they had subscribed to when they signed up.
Conflicting objectives
If those shares are fully paid up creditors, only have recourse only to whatever assets and any other valuables the company happens to possess at any point of time. But that may seem a little harsh on the creditors, who run the risk of their claims going unmet yet never had the good fortune to partake of the firm’s profits when the going was good.
How, then, should one balance the conflicting objectives of allowing a business that has the potential to produce useful goods and services and yet, in the event of a business failure, the creditors suffer open-ended losses? The balance was struck by making companies disclose, at regular intervals, information on their financial situation to a central depository that can be accessed by any member of the public.
That brings us to the fifth dimension of public disclosure of information on financial affairs of a company. Having gained the freedom of ‘limited liability’, shareholders must simultaneously sign off on the right to keep their business affairs in the private realm.
The idea being that creditors who supply goods or services have access to the company’s financial situation at all times so they can take an informed decision about whether to deal with the company, given the fact that they have no recourse — or, at best, only limited recourse — should the business fail.
Perfectly legal
It is worth bearing in mind that Reliance Industries could never have become the corporate behemoth that it is today had a few thousand small investors not decided to back, with their contributions the share capital of the company, Dhirubhai Ambani’s dream of setting up a large synthetic yarn making facility, back in the late 1970s.
Though this is the popular view, a ‘One Person Company’ need not be seen as a radical departure from the existing structure of the law dealing with incorporation of companies. As it happens, it is perfectly legal to incorporate a private limited company with just two shareholder-members.
So a ‘One Person Company’ is just a marginal modification of the legal structure, where the requirement of the minimum number of shareholders is being reduced by just one!
Moreover, the nature of capital to start a new business has undergone a structural change. If earlier, one needed money to buy plant and equipment, in the modern world of IT-enabled businesses, the primary source of capital is usually brain power — more elegantly described by venture capital firms as ‘sweat equity’. Businesses are started in one’s backyard on the strength of one powerful new idea.
True, along the way they gobble up huge sums of money as they expand in scale and scope of operations. But in the start-up phase the capital requirements is usually not so large as to be beyond the ability of one person to come up with.
Path-breaking idea
Apple Inc., the company with the largest market capitalisation, exceeding $700 billion, had its origins in the garage of Steve Jobs’ parents. The question, then, is whether such entities should be denied the privilege of ‘limited liability’ that is the hallmark of incorporation.
If you have a potentially path-breaking idea that can be installed on a mobile phone and will revolutionise the lives of ordinary people, you should not be burdened by the fear of unlimited financial liability because the business fails to take off.
If even one out of ten such ideas takes root and flourishes, society is the better for it. So, go ahead. Work on that futuristic mobile-app you have been thinking about and set yourself up as a ‘One Person Company’.