An assignment on
One Person Company: Benefits, Challenges, and Risks of Sham
Transactions with reference to Salomon v Salomon & Co. Ltd.
Submitted to- Submitted by-
Dr. Shima Zaman Mijanur Rahman
Professor LLB (Hons), 3rd Year
Department of Law Roll: 25
University of Dhaka Session: 2021-22
Course Name: Company Law
Course Code: LLB 305
Table of Contents
Sl No. Headings Page No.
1 Introduction 1-1
2 What is One Person Company 1-1
3 Key Benefits of a One Person Company (OPC) 1-2
4 Key Challenges of a One Person Company (OPC) 2-3
5 Difference between One Person Company and Sole 3-3
Proprietorship Business
6 Whether One Person Company Provisions will Open 4-5
Floodgate for Sham or Fraudulent Transactions
7 Legal Safeguards Against Sham or Fraudulent Transactions 5-7
in One Person Company
8 Conclusion 7-7
Page |1
1. Introduction
The evolution of corporate law has always aimed to balance ease of doing business with
regulatory safeguards. One such innovation is the concept of a One Person Company
(OPC), which allows a single individual to form a corporate entity. The concept offers the
benefits of limited liability and separate legal personality while enabling sole ownership
and control. However, it also brings potential risks, including the misuse of corporate
identity for fraudulent or sham transactions. This paper examines the structure and utility
of OPCs, their differences from sole proprietorships, and the potential for misuse, with
reference to the foundational case of Salomon v Salomon & Co Ltd and the legal safeguards
against such sham transactions.
2. What is One Person Company?
A One Person Company (OPC) is a type of company that can be incorporated by a single
individual. In Bangladesh, OPCs were introduced through the Companies (Amendment)
Act, 2020, which inserted Section 392A into the Companies Act, 1994. Under this
provision, a natural person who is a resident of Bangladesh can incorporate a private
company with a single shareholder and director.
Key Features:
➢ Only one shareholder (must be a natural person).
➢ Separate legal identity.
➢ Limited liability protection.
➢ Requirement to nominate a nominee director.
➢ Subject to conversion if capital or turnover thresholds are exceeded.
3. Key Benefits of a One Person Company (OPC):
1. Limited Liability
The most significant benefit of an OPC is limited liability. The personal assets of the
owner are protected, and their liability is limited only to the unpaid value of shares held
in the company. This protects the owner from personal financial loss due to business
risks.
2. Separate Legal Entity
An OPC is treated as a distinct legal entity from its owner under the law. It can:
➢ Enter into contracts,
➢ Own property,
➢ Sue and be sued in its own name.
➢ This provides legal clarity and ensures continuity even in case of the owner's death
or incapacity.
3. Ease of Management
Since only one person owns and manages the OPC:
➢ Decision-making is fast and independent.
Page |2
➢ There is no conflict between partners or shareholders.
➢ Compliance and board formalities are reduced compared to larger companies.
4. Better Access to Funding
Being a registered company, an OPC can:
➢ Raise funds from banks and financial institutions more easily than an unregistered
sole proprietorship.
➢ Improve its credibility with clients and investors.
5. Perpetual Succession
An OPC continues to exist even after the death or incapacity of its sole member. A nominee
director (appointed at incorporation) ensures that the business remains operational.
6. Tax Benefits and Recognition
OPCs may be eligible for:
➢ Corporate tax benefits,
➢ Deductions and allowances available to companies (subject to specific conditions
under tax laws),
➢ Recognition in government schemes for MSMEs (where applicable).
7. Credibility and Brand Image
Operating as a company gives the business a more formal structure and higher credibility
compared to a sole proprietorship, which helps build trust with clients, vendors, and
investors.
4. Key Challenges of a One Person Company (OPC):
1. Limited Scope for Capital and Growth
An OPC can have only one shareholder, which restricts the ability to raise equity capital
from other investors. If the business grows and requires external funding or partnerships,
it must convert into a private limited company, adding complexity and cost.
2. Conversion Requirements
As per the applicable law (e.g., Companies Act, 1994, Section 392A in Bangladesh), an
OPC must be converted into a private or public company if:
➢ Its paid-up capital exceeds a prescribed limit,
➢ Its annual turnover crosses a specified threshold.
➢ This creates uncertainty and potential disruption for growing businesses.
3. Nominee Director Issues
The law requires every OPC to appoint a nominee director, who will take over if the
original member dies or is incapacitated. However:
➢ There may be a lack of alignment between the nominee and the promoter’s vision.
➢ Legal disputes can arise if succession is not clearly managed.
Page |3
4. Compliance Burden
Though lighter than multi-shareholder companies, an OPC must still follow several
formalities:
➢ Filing of annual returns and financial statements,
➢ Maintenance of statutory registers,
➢ Audit requirements (depending on turnover).
For small businesses, this compliance burden may feel disproportionate.
5. Lack of Business Continuity Without Succession Planning
While OPCs offer perpetual succession, practical continuity depends on the nominee and
succession planning. In the absence of proper handover or management systems, operations
may suffer.
6. Risk of Misuse and Regulatory Scrutiny
Due to minimal oversight (with only one shareholder/director), OPCs are vulnerable to
misuse for:
➢ Tax evasion,
➢ Fraudulent transactions,
➢ Money laundering.
This can lead to increased scrutiny by regulatory authorities, potentially affecting genuine
businesses.
7. Restrictions on Certain Business Activities
In some jurisdictions, OPCs may not be allowed to engage in non-banking financial
activities or investment businesses unless converted into a multi-member company,
limiting entrepreneurial flexibility.
8. Limited Market Perception
Some clients, vendors, or investors may perceive OPCs as less stable or professional than
private limited companies, particularly in large or international markets.
5. Difference between One Person Company and Sole Proprietorship
Business
Feature One Person Company Sole Proprietorship
Legal Status Separate legal entity Not a separate legal entity
Liability Limited to unpaid share Unlimited personal liability
capital
Registration Under Companies Act, 1994 Under trade license regulations
Perpetual Succession Yes No
Ownership Single owner (with nominee) Single owner
Taxation Corporate tax regime Personal income tax
Page |4
6. Whether One Person Company Provisions will Open Floodgate for
Sham or Fraudulent Transactions
The introduction of the One Person Company (OPC) structure, while aimed at promoting
entrepreneurship and formalizing single-owner businesses, also raises concerns regarding
its potential misuse for sham or fraudulent transactions. This concern stems from the
limited internal control, sole ownership, and reduced transparency that characterize
the OPC structure. Below is an analysis of whether OPC provisions are likely to open a
floodgate for abuse:
1. High Risk Due to Lack of Oversight
In a traditional company, multiple shareholders and directors provide checks and balances.
However, in an OPC:
➢ A single person holds absolute control, making it easier to manipulate company
decisions and records.
➢ There is no boardroom scrutiny or shareholder accountability.
This centralization can encourage fraudulent practices like fabricated transactions,
falsified accounts, or concealment of liabilities, especially if regulatory oversight is
weak.
2. Shielding of Personal Liability
One of the core advantages of an OPC is limited liability, which can also be misused. A
person may:
➢ Use the corporate structure to enter into risky contracts,
➢ Incur debt in the name of the company,
➢ And walk away from financial obligations, leaving creditors unpaid.
This misuse is known as "corporate veil abuse", where the legal separation between the
company and its owner is used to evade responsibility.
3. Precedent from Salomon v Salomon & Co Ltd
The principle of separate legal entity, established in Salomon v Salomon & Co Ltd (1897),
supports the legitimacy of single-member companies. In that case, the House of Lords ruled
that once incorporated, a company is a separate legal person, even if it is effectively
controlled by one individual.
However, this very principle has also led courts to develop the doctrine of lifting the
corporate veil, to prevent misuse. The fear is that OPCs could be used like the Salomon
company—legally valid but practically indistinguishable from the individual—for hiding
assets, creating sham companies, or defrauding creditors.
4. Regulatory Concerns
If not properly monitored, the OPC structure can be:
➢ Used to run multiple shell companies by a single individual under different names.
➢ Exploited for money laundering or tax evasion.
This risk is heightened in jurisdictions where the Registrar of Companies lacks sufficient
resources for investigation and enforcement.
Page |5
5. Existing Legal Safeguards and Their Limitations
While the Companies Act, 1994 and related provisions (Sections 195–202 for
investigation and Sections 397–402 for fraud penalties) provide legal remedies,
enforcement is often reactive rather than preventive. Moreover:
➢ Nominee directors may not have real control or information.
➢ Compliance filing does not guarantee honesty in conduct.
Hence, we can conclude that, there is a real possibility that OPC provisions, if not tightly
regulated and actively monitored, could open the floodgates for sham or fraudulent
transactions. The very features that make OPCs attractive—ease of formation, limited
liability, and minimal oversight—can also make them vulnerable to abuse.
7. Legal Safeguards Against Sham or Fraudulent Transactions in One
Person Company
One Person Companies (OPCs) provide a streamlined corporate structure for individual
entrepreneurs, but they are also susceptible to misuse for sham or fraudulent transactions
due to the absence of internal checks and balances. To mitigate such risks, several legal
safeguards are embedded in the Companies Act, 1994 and derived from general corporate
jurisprudence.
1. Separate Legal Entity and Doctrine of Lifting the Corporate Veil
Although an OPC enjoys a separate legal identity as per the precedent set in Salomon v
Salomon & Co Ltd, courts have the power to pierce or lift the corporate veil where the
company is a mere façade to conceal fraud or evade obligations.
Judicial Safeguard:
Courts may disregard the separate entity if the OPC is used:
➢ For tax evasion,
➢ To defraud creditors,
➢ To circumvent legal obligations.
2. Investigation Powers under the Companies Act, 1994
Sections 195–202: Investigation into Company Affairs
These sections empower the government to conduct investigations into the affairs of a
company, including an OPC, if there is a suspicion of fraudulent activities or
mismanagement.
Key Features:
➢ Investigation by inspectors appointed by the government.
➢ Right to demand books of accounts, records, and explanations.
➢ Power to prosecute based on the findings.
Page |6
3. Penal Provisions for Fraud and Misconduct
Sections 397–402: Penalties for Fraudulent Conduct
These provisions ensure penal consequences for any person—including directors or owners
of OPCs—who engage in:
➢ Fraudulent conduct of business.
➢ Misrepresentation of company status.
➢ Filing false statements with the Registrar.
Punishments may include:
➢ Imprisonment.
➢ Fines.
➢ Disqualification from managing companies.
4. Nominee Director Requirement
Section 392A of the Companies Act requires every OPC to nominate a nominee director,
who will assume control upon the death or incapacity of the sole member. This acts as a
safeguard to prevent:
➢ Misuse of the company after the original member's demise.
➢ Disappearance of responsibility or corporate identity.
5. Mandatory Annual Compliance and Reporting
Even though OPCs enjoy relaxed compliance compared to other companies, they are still
required to:
➢ Maintain proper books of accounts.
➢ File annual returns and financial statements with the RJSC.
➢ Conduct audits (in some cases based on turnover).
Non-compliance can attract penalties and trigger investigation.
6. Role of the Registrar of Joint Stock Companies and Firms (RJSC)
The RJSC is the regulatory authority for companies in Bangladesh and plays a vital role
in:
➢ Monitoring incorporation documents.
➢ Verifying nominee director details.
➢ Taking action on complaints or red flags regarding fraud.
The RJSC can strike off an OPC if it is found to be a shell entity or involved in unlawful
activities.
7. General Law Remedies
Apart from the Companies Act, OPCs are also subject to:
➢ Contract Law: Contracts made in bad faith can be voided.
➢ Criminal Law: Fraud, misrepresentation, and falsification can attract criminal
liability.
➢ Bankruptcy Law: Fraudulent preference or asset concealment during insolvency
is punishable.
While the OPC model facilitates ease of doing business for solo entrepreneurs, it must be
balanced with a robust legal framework to prevent abuse. The existing safeguards in the
Page |7
Companies Act, 1994, along with the courts’ ability to pierce the corporate veil, offer
essential tools to detect and deter fraudulent or sham transactions. However, the
effectiveness of these measures ultimately depends on vigilant enforcement and regulatory
oversight.
8. Conclusion
One Person Companies represent a modern step toward formalizing the informal economy
and empowering individual entrepreneurs. They bring the dual benefits of corporate status
and operational simplicity. However, the foundational principle laid down in Salomon v
Salomon—that a company has a separate legal identity—must be tempered with caution,
as it can also shield dishonest behavior. Bangladesh’s regulatory framework must evolve
to ensure strong oversight, corporate transparency, and awareness, ensuring that OPCs
fulfill their intended role without becoming tools for abuse.
THE END
