From Sole Proprietorship towards Corporation

(Single Member Company Registration)

Sole proprietorship is ancient form of business organization. It is as old as civilization.

Most of businesses around us are managed, owned and controlled by single individuals.

A sole proprietor owns all risks and reward of his business.  But many benefits which are attached with the company form of business remain unavailable to the sole proprietor.

In sole proprietor business the liability of the sole proprietor is considered unlimited. But in company form of business the liability of directors or members is considered limited to their shares in the company.

What is Single Member

The concept of single member company or one member company is not a new concept in corporate world many countries have adopted the concept and formation of single member companies in allowed in these countries. Through the enforcement SMC Rules, 2003 the concept of single member company was introduced in Pakistan. Before the commencement of Single Member Companies Rules, 2003, a single individual was not allowed to solely establish a business in a company form. The concept of sole director prevails in a SMC.  SMC Rules lays down the down the definition of sole director. As per clause (h) of sub rule 1 of Rule 2 of the rules “sole director means the director of a single member company who is for the time being the only director.”
Under section 174 of Companies Ordinance, 1984 minimum number of directors for the formation of a private limited company was two directors, as the SMC is a form of private company so after the promulgation of SMC  section 174 of the ordinance  was also has amended.

Characteristics and Advantages of Single Member Private Limited Companies:

A company has four major characteristics namely perpetual secession, limited liability, separate legal entity and common seal.  These characteristics are in-fact benefits which are attached to a company and ultimately render benefits to the member of the company. Being a unique form of company a single member company and its director (sole director) enjoys numerous benefits.

1. Perpetual Succession;

Perpetual succession is the continuation of existence of a company or other organization despite the death, bankruptcy, insanity, change in membership or an exit from the business of any owner or member, or any transfer of shares etc.

Normally on the death of an individual many problems arise relating to distribution of assets of the sole proprietors business. SMC Rules lays down that the Nominee Director shall be nominated by the single member. The nominee director shall manage the affairs of the SMC until the shares in the SMC is distributed to the legal heirs of the deceased single member (see Rule 4). Additionally a SMC company can be converted into private limited company at any time or on the death of single member to facilitate appointment of more than one director or appointment of  more than one legal heirs as director.Thus SMC Rules provide the advantage of perpetual succession to a business of an individual.It is a matter of common observation that on the death of owner of  a big business a tussle is usually starts among the legal heirs of the deceased owner and some time this tussle becomes so terrible that the business loses its existence. The SMC Rules regularize all possible adverse circumstances which may result in or taking the business toward closure. Under Rule 7 an Alternate Nominee Director is also appointed by single member which act as director in the absence of nominee director.

1. Limited Liability:

The sole director enjoys the benefit of limited liability, as the liability of single member or sole director is limited to his investment in the company. Contrarily the liability of a sole proprietor is assumed to be unlimited and in case of bankruptcy of sole proprietor his personal property can also be used to settle his debts and obligations.

Single member companies have both the characteristics of sole proprietorship and corporate sector. Like a corporation a SMC enjoys limited liability characteristic and like a sole proprietorship sole directors owns all gains and profits of the SMC.

1. Separate Legal Entity:

All types of companies are considered artificial judicial person or separate entities. A company is created by law and separate from its director or members. It means that a company is an artificial judicial person which is distinct from its member (s).

The concept of “Separate Legal Entity” is also applicable to a SMC.  Thus a SMC enjoys the benefit of separate legal entity. Company is separate from its owners and thus holds the status of separate legal entity.

1. Common Seal:

Common seal is also a prominent element of company form of business organization. It was necessary to give full fledge status of company to SMC’s that every SMC should have a common seal. Rule 34 of SMC Rules, 2003 lays down that every SMC shall have a common seal.

1. Tax Advantage

A sole proprietorship is not a corporation; it does not pay corporate taxes, but rather the person who organizes the business pays taxes on the profits on his business thus salary of sole proprietor is not an admissible deduction. Moreover as per clause (J) of section 21 of Income Tax Ordinance, 2001, salary or any remuneration paid or payable to a member of a partnership firm is also not an admissible expense while determining the profit of an association of persons.

As the company is treated as artificial judicial person under corporate law since income tax ordinance recognizes the artificiality of company and treat the directors separate from the company. The sole director can withdraw salary like director of any other type of company.

1. Other Advantages

There are also other benefits available to a SMC.

1. • Five year tax holiday if company establish as manufacturing concern ;
   • better access to banks and financial institution ;
   • promotion of corporate governance ;
   • protection of personal assets of sole director ;
   • minor legal requirements ;
   • defined corporate structure ;
   • better protection of trademarks and patent rights;

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