Advantages of single member companies

Now a 'sole proprietorship' can be transformed into a company, after the promulgation of the Single Member Companies, Rules, 2003 by the Securities and Exchange Commission of Pakistan on December 2, 2003, thus stretching the corporatisation phenomenon to all comers of the economy.
Pakistan is the pioneer country in the developing nations as well as in Asian countries to introduce and adopt the novel concept of a Single Member Company which emerged in the world corporate sector as a result of the European Community Council Directive No 89/667/EEC in 1992.
Apart from EC member states and some US states, Pakistan modified its corporate laws to enable a single person to form a company limited by shares or guarantee and enjoy the benefits of corporate entity, viz:
-- a distinct legal entity, separate from single member;
-- limited liability of the member;
-- elevated entity status, long life of enterprise having perpetual succession;
-- compact organisational structure;
-- defined legal frame work;
-- part of documented and regulated sector;
-- simple corporate record;
-- enhanced authority, responsibility and accountability leading to high level of credibility;
-- protection of personal assets;
-- transferability of ownership/shares;
-- agency relationship, relation between company and single members would be that of principal and agent;
-- better access to capital markets;
-- easy to raise funds;
-- receive tax advantages on certain payments, such as insurance, lease rentals and other expenses being tax-deductible.
The sole proprietor business is the most natural and simplest form of business organisation where a single person runs the business in a way he likes, with low operational costs, without interference from others.
The corporate regulator of the country recognised the necessity of allowing sole proprietors to join the Corporate Sector where sole proprietors would run their business in the same way as before, but now, with extended advantages of limited liability the rights and privileges of a distinct legal entity and with proper documentation of decisions taken, in matters of sole proprietorship.
Such documentation would avoid future disputes, which often arise in cases of non-registered sole proprietorship, from an absence of documentary evidence of the past record.
Some of the developed countries in the world like the UK, some states of the European Economic Community and USA, have already implemented the idea.
After evaluating the experiences of these countries, the Securities and Exchange Commission of Pakistan, has also introduced the concept of registration of sole proprietorship in the shape of the Single Member Company (SMC) in Pakistan through a legal framework.
Necessary amendments have been made in the Companies Ordinance, 1984, through the companies (Amendment) Ordinance, 2002 (Ordinance No C of 2002) eg, Section 15 has been amended to allow the formation of a private limited company with one member replacing the previous requirement of two members.
Moreover, Section 47 has also been amended to exempt members of the SMC from penal action, which can be taken against other private and public companies in case their members are reduced below the minimum number.
The amendments in Section 160 are aimed to allow the SMC to hold its general meetings allowing single member to be present in person or through proxy.
It has allowed the member of SMC that, in case of his non-availability, he could hold a general meeting through an other person nominated through a legal document called proxy.
Yet another amendment in section 174, has facilitated the SMC to have only one member on its board of directors. Section 305 has been amended to provide for the winding up of an SMC through court if it ceases to have even a single member.
To have a comprehensive regulatory framework for effective facilitation, cognisance and regulation of SMCs, the Securities and Exchange Commission of Pakistan put in the place exclusive rules for SMCs called Single Member Companies Rules, 2003 as notified through SRO 1086(I)/2003 dated December 02, 2003.
The Single Member Companies Rules, 2003 have been outlined in a very precise manner keeping in view the practical requirements highlighted by different quarters.
In pursuance of these Rules, any single person can form a new single member company with the pattern and style of name as "XYZ (SMC-Private) Limited."
The single member will submit with the concerned registrar, at the time of the incorporation of the SMC, all such documents as required in case of a multi-members private company.
In addition, he will nominate at least two individual one, to act as a Nominee Director to manage the affairs of the company in case of death of single member till the transfer of shares to legal heirs the other individual to act as an alternative Nominee Director in case of non-availability of the nominee director.
Information regarding these nominees will be submitted on the prescribed form S1. Non of these nominees will be a member or secretary of the SMC.
The SMC incorporated prior to the promulgation of SMC Rules are also under obligation to file a nomination of the nominee and alternative nominee directors on Form S1, up till February 01, 2004.
Another route to form an SMC is to convert any existing multi-members private company into a SMC after passing a special resolution for the purpose, by members of the existing company.
It should seek the approval of the Commission for such conversion, transferring shares in the name of the single member, notifying changes in the board of directors on Form 29 prescribed under Companies (General provisions and Forms) Rules, 1985 and then submitting a certified copy of the Commission's approval along with notice of change of status on prescribed Form S5 and particulars of nominees on Form S1, with the concerned registrar.
He will issue a certificate in the form, as set out in Form S6. The name of the company will be changed by inserting the letters and hyphen "SMC-" before the word "Private" in the parenthesis.
After formation of an SMC, its day-to-day affairs will be run by its director/member and any decision taken through resolution or otherwise will be drawn up in writing and recorded in the minutes book, to be maintained and referred to in future whenever required.
The other person present in the meeting would be the company secretary as the Rules do not allow appointing the company secretary as proxy.
The meeting would be deemed held if the sole member or the sole director signs the minutes of the meeting.
This documentation process in matters of a SMC, unlike the non-registered sole proprietorship, would develop the confidence of all those concerned who deal with SMC as creditors, suppliers, Government agencies, etc.
The appointment of a qualified Secretary has been made mandatory under the rules.
The role of the Secretary is also very important, in that, he will attend each and every meeting of the members and directors and will make fair and accurate summary of the minutes of all the proceedings of the meetings and record the names of those participating in such meetings.
The role of the secretary in the meeting is to facilitate the sole member or sole director to record the minutes properly.
Neither his presence would be counted toward the quorum nor would have any right of vote or speech.
The qualification of the company secretary includes that he be:
-- a member of a recognised body of professional accountants;
-- a member of a recognised body of corporate/chartered secretaries;
-- a person holding a masters degree in Business Administration or Commerce or being a Law Graduate from a university recognised by the Higher Education Commission with at least two years relevant experience.
Recognising the distinct legal entity status of a SMC apart from the single member, the Rules have allowed both the single member and the SMC to enter into mutual contracts, but such contracts must be in writing and must be recorded in the minutes of the first meeting of the directors of the SMC following such a contract.
An SMC can be converted into a multi-members company through the transfer of shares or further allotment to more than one member in which case a special resolution has to be passed, an alteration made in the articles and additional directors appointed to fulfil the provisions of the law with regard to multi-members private limited companies.
The SMC can also be converted into a multi-member company through the operation of law. In such a case the shares of the company would be transferred in the name of persons in compliance with the order of the court or any other authority.
A special resolution must be passed for conversion and an alteration must be made in the articles and additional directors appointed.
In case of death of the single member, the legal heirs may either decide to wind up the SMC or convert it into a multi-member private company.
If the members decide to wind up, the directors would meet the requirements of making a declaration of solvency publication of notices in newspapers and in the official Gazette, which are meant for voluntarily winding up of a company.
In case, the members decides to convert the status of the company from SMC to a multi-member private company, the nominee director shall manage the affairs in case of the death of the single member till the transfer of shares in the names of legal heirs.
Simultaneously he will inform the registrar concerned, providing particulars of legal heirs, and will report impediments, if any.
The Nominee director will transfer the shares in the names of the legal heirs and call the general meeting, wherein the members would make alteration in articles and elect appoint additional directors in pursuance of clause (b) of sub-section (1) of section 174 of Companies Ordinance, 1984.
It may be mentioned that in case of non-availability of nominee director, the alternative nominee director would perform all these functions.
A standard set of regulations has also been included the rules and an SMC may adopt such regulations as its articles of association or make modification the regulation, forming its articles of association as nearly as possible thereto.
The rules have been formulated to cover every practical aspect of the activities of single member companies.
The law has opened a new era in the corporate sector of the country whereby sole proprietors have been given the option of doing business under the net of the corporate sector, enjoying benefit of limited liability.
So far 86 Single Member Companies have been incorporated in Pakistan.
The Commission has also recommended the Central Board of Revenue to grant the status of "an Individual" tax- payer to a Single Member Company.
The future, will reveal the result of the decision of the Commission regarding Single Member Companies.
(The write is Additional Registrar of Companies.)