Pre-Company Formation: Why Choosing the Business Entity is Critical for Your India Strategy

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    Types of Business Entities You Can Establish in India

    Extending your market reach beyond your natural geographical borders is crucial for surviving and thriving in the new global economy. India presents one of the most lucrative opportunities for growing businesses in the world. However, persistent bureaucratic complexity, diversity of languages, fragmentation in market access, and a business culture based on relationships rather than numbers, could be overwhelming for many.

    company registration in india

    Therefore, you should be careful about choosing the business model and structure you adopt before commencing business in India. A crucial part of choosing your business model is choosing the right kind of company to set up or incorporate in India.

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      Choosing your company type is important to ensure that your business operates to its full capacity in a manner that minimizes wastage of resources. The right company structure will ensure that you are free to scale your business when required.

      Certain company types offer you better advantages in terms of tax and compliance. Once you’ve set up your company, it may prove difficult to convert from one type to another later. You may have to wait for the next financial year, in which case, you will lose out on savings and tax deductions. We recommend consulting a professional company formation agency to find out which company-type suits your industry and your situation best.

      type of business entities in india
      • Public limited company

      • Private limited company

      • Joint venture companies

      • Partnership firm

      • One person company

      • Sole proprietorship

      • Branch office

      • Non-government organization (NGO)

      • Limited Liability Partnership (LLP)

       

      Understanding the Private Limited Company in India

      In India, a Private Limited Company is a privately held small company firm that is regarded as an independent legal entity upon the organization. It might have as little as one stakeholder or 50. Private Limited Companies, unlike Public Limited Companies, cannot candidly exchange their shares. Any of them might have as few as 2 and as many as 15 directors.

      Expert Note: Note that Private Limited Companies are the most popular type of business entity in India. One of the reasons for this is that legal barriers to entry are lower and compliances fewer. But more importantly, a PLC structure gives you the flexibility to maneuver strategically while keeping your financial confidentiality under control.

      There are also a number of tax exemptions and incentives that the government provides once you incorporate your PLC. Prime examples are India’s semi-conductor manufacturing policy, Special Economic Zones (SEZs), etc. If you’ve decided to enter the Indian market you will need some handholding to show proof of your eligibility for these exemptions and incentives. Check with a Company Formation expert to discuss your specific case in detail.

      Public Limited Company in India

      Any company that is not a private limited company is, by definition, a public limited company under Indian law. This definition includes subsidiaries of foreign public companies. Most foreign businesses in India tend to start as private limited companies. When the opportunity to expand opens up, you can convert your private limited company to a public company depending upon the FDI cap fixed within your sector.

      What are the minimum requirements to set up a public limited company for foreign investors in India? You must have at least 7 Members and 3 Directors, one of whom must be an Indian resident. You must also have a paid-up capital of at least INR 500,000 (approx. USD 6690).

      A public company raises money from the public and hence, there are considerably more stringent accounting, taxation, and audit requirements. Consult your accountant to find out whether a public limited company is the right company type for you.

      Joint-Venture Company in India

      A Joint Venture (JV), as the name implies, is a new corporate organization shaped by a partnership of foreign and Indian investors, in which the partners split profits, losses, decision-making duties, and in-service expenditures. The profit of joint ventures includes the foreign company’s aptitude to use the Indian partner’s well-established contact network, sharing, and marketing channels, as well as the obtainable financial capital. A JV also enables investors to take the risks allied with the new business together while minimizing their interaction through liability sharing.

      A partnership firm in India

      A partnership is distinct from a company and defined under Indian law, as “the relationship between persons who have agreed to share the earnings of the company carried on by them or any of them acting on their behalf.” An association firm’s owners are documented as partners independently and as ‘commerce jointly’. A partnership business requires a minimum of two persons to get started. The maximum number of collaborators is 10. The partners divide earnings in any mutually agreed-upon ratio and have no limits on personal liability for losses. It is not compulsory to register your partnership firm.

      One-Person Business (OPC) is again, a new type of company that has been in operation in India since 2013. Incorporating an OPC is only official for Indian inhabitants. A foreigner can not form an OPC. It can have a single proprietor. This type was created to motivate individuals to begin their businesses without taking on the entire risk for the failure of the business. This is also a type of Private Corporation that may function as a separate legal entity. The owner’s liability is limited.

      Sole Proprietorship in India

      In India, a sole proprietorship is a kind of company in which one person manages all of the business organization. This one person is the only recipient of all the earnings and the solitary bearer of the company’s losses. The owner’s responsibility is unlimited.

      A Sole Proprietorship business is suitable if the market is limited and localized, and where customers value personal attention. This form of corporation is appropriate when the needed capital is self-effacing, and the risk involved is low. Because proprietorship does not have a legal identity, there are fewer lawful necessities.

      Branch Office in India

      Foreign firms with developing and trade operations in India can set up Branch Offices. Branch Offices may not perform developed processes on their own but subcontract them to an Indian company.

      Expert Note: Foreign companies that decide to study the Indian market before diving in can allocate investments in market research without making a long-term commitment through Representative Offices.

      The Reserve Bank of India must endorse the branch office before it starts operations (RBI) within the country. A Branch Office cannot involve itself in any profitable activity.

      The following are the kinds of Branch Offices you can set up in India as a foreign company.

      • a Liaison Office (or a Representative Office): to collect information, promote imports and exports, or facilitate technical or financial collaboration.

      • a Branch Office: to provide professional or consultancy services, perform research, develop IT products and services for the parent company, act as buying/selling agent, etc.

      • a Project Office: to execute specific projects in India.

      A Non-Governmental Organization in India

      A Non-Governmental Organization (NGO), Section 8 Company, or a Nonprofit Company is a citizen-led organization that acts separately from the government, usually to further some social cause. These companies are also called ‘not-for-profits’ or Section 8 companies and look to promote a cause or create initiatives for the good of society.

      Limited Liability Partnership (LLP)

      This company form is relatively simpler to set up than a Public Limited Company, requiring at least 2 partners and 2 designated partners, one of whom must be a resident Indian. However, your liability is limited by the number of shares in the LLP you own.

      FAQ’s on Choosing the type of Indian Company

      You should consider the following factors before deciding on the best company type for you:

      • Nature & range of objectives set for your business
      • Degree of control desired (LLP, Branch Office, Limited Company)
      • Capital needed and available sources of funding (LLPs are a good option if you desire more control. However, Limited companies are trusted by investors, commercial lenders, and banks because of stringent disclosure requirements and compliances)
      • How much liability are you willing to bear (Ask yourself if your industry is susceptible to lawsuits. If the answer is YES, consider forming a Limited company to protect your personal assets)
      • How much of audit, bookkeeping, or administrative overhead do you want to handle (LLPs do not require regular meeting records except for the minute book. Limited companies require quarterly meetings of the Board of Directors and an annual shareholder meeting to be held. The latter requires comprehensive meet records to be maintained and published every time)
      • Taxes: Have a hard look at the tax rates for the current fiscal year for LLPs, Limited companies, and Branch Offices. Eligible companies could end up paying different levels Minimum Alternate Tax, Dividend Distribution Tax, Advance Tax, TDS, and so on

      Because rules keep changing from year to year, we recommend consulting a tax and audit expert to find out which structure will work best for you.

      The cost of registering your company in India is relatively low and is notified by the Ministry of Corporate Affairs (MCA) for each type of company from time to time. The actual amount could vary depending upon the number of Directors, Members, amount of paid-up capital, professional fees, etc.

      Most foreign businesses tend to incorporate a Private Limited Company to enjoy the maximum advantage of scale and limited liability while at the same time doing just enough to keep up with regulations and compliances. However, do consider tax exemptions and incentives for your sector before diving in.

      A foreign company can set up a business in any of the following ways in India.

      • Liaison Office (only a representative office of the parent company),
      • a Branch Office (only for research, import-export, consultancy, etc.),
      • or a Project Office in India (activities to be determined by contract for specific project).

      A foreign business may set up the following Indian companies in India.

      • Joint Venture (JV): You can form a JV by sharing equity in a Private or Public Limited Company.
      • Fully Owned Subsidiary (100% ownership of an Indian company is possible for most businesses where 100% FDI is allowed. You can incorporate both Private and Public Limited companies.

      Registering your business in India as a company with the Registrar of Companies ensures that the risk you undertake in business is limited. It also formalizes your business model in a way that bankers, investors, and other institutional lenders can trust. The government can see that you have been maintaining accounts via audits and paying taxes in accordance with the law. The public has more reason to trust you because it in turn trusts the government. Finally, in the event of a dispute, you can easily refer to the Articles of Association or the Memorandum of Association, to determine the true legal position and settle things amicably.