In a company, a shareholder exhibits ownership rights by investing in the company’s shares. Minors can very well be shareholders, provided the shares are gifted or transferred to the minors by their parents or guardians.
Minor be a Shareholder of a company or an institution that has invested money in a corporation, thereby owning at least one share of the said corporation. A company is therefore owned by its shareholders and they have their own rights and liabilities. The shareholders are therefore the members of the company who own its equity shares. The Companies Act, 2013 defines a member of the company as:
- A person or a body corporate who has subscribed to the memorandum of the company and who has shown consent to become a member of the company, and on its registration, shall be entered as a member in the register of the company
- Any person who has agreed in writing to become a member of the company and those whose names have been entered in the company’s register
- Person holding shares of the company and whose name has been entered as beneficial owners in the records of the company’s depository.
Minor’s Capacity to Become a Shareholder of a Company:
Before diving into learning the capacity of a minor to become a shareholder agreement, it might be interesting to check what the Indian Contract Act, of 1872 discusses about the contractual capacity of a minor. As per the provisions of this Act, a minor is not intelligible to consent to a contract and thus cannot enter an enforceable contract. As per Section 3 of the Indian Majority Act, 1785, a minor is a person who has not yet attained majority or the age of eighteen years. As per Indian Contract Act, 1872, such a person (minor) cannot enter into any agreement. Therefore, a minor cannot enter into a contract. However, Companies Act, 2013, states that any person, irrespective of age, can be appointed as a director and hold shares in the company.
Drawing the same inference here, it can be stated that minors cannot become a shareholder by purchasing shares under a share purchase agreement. Though minors cannot contract to become shareholders of a company, minors can acquire shares of a private limited company from an adult as a gift, thus making them the shareholders of the company. Here the shares are transferred to the guardian of the minor child, wherein the guardian will act as a Trustee until the minor child reaches the age to have the capacity to contract. Therefore, it can be said that a minor can very much become a shareholder of a company.
Likewise, minors are not vested with voting powers in a company, even if they are actual shareholders in the company. Also, they won’t be held liable if the company is yielding to debts. However, the minor shareholders have the right to receive their dues if the company goes into liquidation.
Participation of Minors in Private Limited Companies:
In a private limited company, an individual can act as a shareholder or a director. To be a director of a company, the said person should possess a valid Director Identification Number (DIN), which can be obtained only after the person attains majority age. Since a minor cannot hold a DIN, it is not possible for a minor to take the position of a Director. The shares of a company can be held only when it is gifted to the minor by an adult who has the capacity to contract under the Indian Contract Act, 1872.
Participation of minors in Limited Liability Partnership:
Individuals can take office as normal or designated partners in a partnership firm. The partners of an LLP firm operate by virtue of a written agreement that delineates their rights and duties as a partner of the firm. Just like how a Director of the company is expected to hold a DIN (Director Identification Number), a designated partner should also hold a DPIN (Designated Partner Identification Number). In the case of a minor, neither is it possible to enter into an agreement nor is practicable to hold a DPIN. Further, a designated partner is someone who regulates and governs the activities of an LLP, which a minor will not be in a position to perform.
Nonetheless, a minor may be admitted into a partnership merely for the purpose of sharing the profits. The minor will not be responsible for the activities of the company. On reaching maturity, the minor can opt whether or not to continue as a partner in the firm. A time period of 6 months is usually given to assess the intellectual strength of such individuals who are stepping up to be a partner once they reach their apt age.
Participation of Minors in Sole Proprietorship:
The case may be different in a sole proprietorship with respect to a minor’s participation. A sole proprietor is a single owner of the business and exhibits unlimited liability. Clearly, a minor would not fit that position. Also, the minor, thus involved in the business, cannot be held accountable for any of the acts undertaken during the course of the business. Further, a minor cannot enter into any contract with third parties or vendors, when acting as a partner, proprietor, or shareholder in the business. Therefore, a proprietorship is not something a minor can be a part of unlike a partnership or a private limited company.
Irrespective of the type of business entity, when a minor is entering a business, the liabilities of the respective person are always limited. The participation of the minor in business is minimal, and the rights are also proportional to the level of that individual’s engagement and cannot be extended beyond the scope and liabilities of the business. However, the income thus earned by the minor, by being a shareholder in the business, is taxable in the hands of parents or guardians subject to the provisions of law.
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