Setting Up A Business In India

1. Business Establishments Permitted In India

  • Proprietorship
  • Partnership
  • One Person Company (OPC)
  • Limited Liability Partnership (LLP)
  • Private Limited Company (PVT LTD)
  • Public Limited Company
  • Nidhi Company
  • Producer Company
  • Trust Registration
  • Society Registration
  • Section 8 Company
  • NBFC Company

As Indian Owners

A sole proprietorship is a business that is owned and managed by a single person. You could have one up and running within 15 days, which makes it very popular among the unorganised sector, particularly small traders and merchants. There is no such thing as registration; proprietorships are recognised by other registrations, such as a service tax registration or sales tax registration. As you would imagine with a business that’s so easy to set up, though, its shortcomings are severe: the liability of the proprietor is unlimited and it does not have a continuous existence, separate legal entity, independent existence, transferability, etc., which are desirable features for any business. Therefore, proprietorship's are suited for unorganized, small businesses that will have a limited existence. At LexEquipe, we can help you establish an identity for your Proprietorship by obtaining the relevant registrations.
Partnership Firm is a very popular form of business constitution that are owned, managed and controlled by an association of people for profit. Partnership firm are relatively easy to start is prevalent amongst small and medium sized businesses in the unorganized sectors. With the introduction of Limited Liability Partnerships in India, Partnership Firms are fast losing their prevalence due to the added advantages offered by a Limited Liability Partnership. There are two types of Partnership firms, registered and un-registered Partnership firm. It is not compulsory to register a Partnership firm; however, it is advisable to register a Partnership firm due to the added advantages.
The One Person Company (OPC) was recently enacted as a strong improvement over the sole proprietorship. According to Section 2(62) of the Companies Act, 2013 OPC means Company which Has only One Person as a member. It gives a single promoter full control over the company while limiting his/her liability up to contributions to the business.

One of the biggest advantages of a One Person Company (OPC) is that there can be only one member in a OPC, while a minimum of two members are required for incorporating and maintaining a Private Limited Company or a Limited Liability Partnership (OPC).

Every One Person Company (OPC) must nominate a nominee Director in the MOA and AOA of the company - who will become the owner of the OPC in case the sole Director is disabled.
LLP is an alternative corporate business form that gives the benefits of limited liability of a company and the flexibility of a partnership. The LLP can continue its existence irrespective of changes in partners. It is capable of entering into contracts and holding property in its own name.

The LLP is a separate legal entity, is liable to the full extent of its assets but liability of the partners is limited to their agreed contribution in the LLP. Further, no partner is liable on account of the independent or un-authorized actions of other partners, thus individual partners are shielded from joint liability created by another partner’s wrongful business decisions or misconduct.

Mutual rights and duties of the partners within a LLP are governed by an agreement between the partners or between the partners and the LLP as the case may be. The LLP, however, is not relieved of the liability for its other obligations as a separate entity. Since LLP contains elements of both ‘a corporate structure’ as well as ‘a partnership firm structure’ LLP is called a hybrid between a company and a partnership.
Private Limited Companies are those types of companies where minimum number of members is two and maximum number is two hundred. A private limited company has the limited liability of members but at the same time it has many characteristics as those of a partnership firm. A private limited company has all the advantages of partnership namely flexibility, greater capital combination of different and diversified abilities, etc., and at the same time it has advantages of limited liability, greater stability and legal entity. In this sense, a private limited company stands between partnership and widely owned public company. Identifying marks of a private limited company are name; number of members, shares, formation, management, directors and meetings, etc., the maximum number of directors shall have to be mentioned in the Articles of Association. In the grand of privileges and exemptions, the Companies Act has drawn a distinction between an independent private company and other private company which is a subsidiary to the other public company.
A limited company grants limited liability to its owners and management. Being a public company allows a firm to sell shares to investors this is beneficial in raising capital. A minimum of three Directors are required for establishing a Public Limited Company and it has more stringent regulatory requirements compared to a Private Limited Company. Public Limited Companies are those types of companies where minimum number of members is seven and there is no cap on the maximum number of members. A public limited company has most of the characteristics of a private limited company. A public limited company has all the advantages of private limited company and the ability to have any number of members, ease in transfer of shareholding and more transparency. Identifying marks of a public limited company are name, number of members, shares, formation, management, directors and meetings, etc.

Special Entities Incorporation

As Special Entities

Nidhi Company is a company registered under the Companies Act, 2013, which has a sole objective of cultivating the habit of thrift and savings amongst its members. Nidhi companies are allowed to take deposit from its members and lend to its members only. Therefore, the funds contributed for a Nidhi company are only from its members (shareholders) and used only by the shareholders of the Nidhi Company.

Nidhi Company is a class of NBFCs and RBI is empowered to issue directions to them in matters relating to their deposit acceptance activities. However, in recognition of the fact that these Nidhis deal with their shareholder-members only, RBI has exempted the notified Nidhis from the core provisions of the RBI Act and other directions applicable to NBFCs. Therefore, Nidhi Company is an ideal entity to take deposit from and lend to a specific group of people.
Producer Company is a company registered under the Companies Act, 2013, which has the objective of production, harvesting, procurement, grading, pooling, handling, marketing, selling, export of primary produce of the Members or import of goods or services for their benefit. Produce are things that have been produced or grown, especially by farming. Therefore, a Producer Company deals primarily with agriculture and post-harvest processing activities.

Over 85% of the Farmers in India are small and marginal farmers with land holdings of less than 2 hectares. This fragmentation in farmers and farm lands, leads to disorganization and it is not viable for Indian farmers to adopt the latest technologies. By organization of these farmers into producer companies, economies of scale can be unlocked and the livelihood of farmers can be improved. Thus the concept of Producer Company is aimed at empowering farmers by creating clusters of farmers organized as a Producer Company.
A trust may be formed for a range of purposes such as Public Charitable Trust & Religious Trust. A Charitable Trust is created for the purpose of the benefit of the general public or mankind. This kind of trust can be formed by an individual who loves doing such things and not a minor. Any person who holds the property so dedicated shall hold it under trust and shall execute the purposes specified by the settler.

A public charitable trust is usually floated when there is property involved, especially in terms of land and building. The main instrument of any public charitable trust is the trust deed, wherein the aims and objects and mode of management (of the trust) should be enshrined. A trust needs a minimum of two trustees; There is no upper limit to the number of trustees. The Board of Management comprises the trustees. The Objects are Social benefits & Charitable etc. At LexEquipe, our team of professional helps you set up a trust in the most feasible and effective way. We help you take approval on all mandatory legal obligations and carry out all necessary paper work feasibly.
Societies are registered under the Societies Registration Act, 1860. The main instrument of any society is the memorandum of association and rules and regulations. A Society needs a minimum of seven managing committee members; There is no upper limit to the number managing committee members. The Board of Management is in the form of a governing body or council or a managing or executive committee. The Objects are Literary, Charitable, Scientific and resource oriented etc.
Section 8 Company is named Section 8 of the Companies Act, 2013, which pertains to an established for promoting commerce, art, science, sports, education, research, social welfare, religion, charity, protection of environment or any such other object, provided the profits, if any, or other income is applied for promoting only the objects of the company and no dividend is paid to its members. Therefore, Section 8 Company or (Section 25 Company under CA, 1956) is a company registered under the Companies Act, 2013 for charitable or not-for-profit purposes.

A Section 8 Company is similar to a Trust or Society; expect a section 8 Company is registered under the Central Government's Ministry of Corporate Affairs. Trusts and Societies are registered under State Government regulations. A section 8 company has various advantages when compared to Trust or Society like improved recognition and better legal standing. Section 8 company also has higher credibility amongst donors, Government departments and other stakeholders.
Nonbank financial companies (NBFCs) or (NBFIs) are entities that provide certain bank-like and financial services but do not hold a banking license.

All such entities that offer financial services other than banking, may be broadly called non-banking financial institutions (NBFIs).

Investment banks, mortgage lenders, money market funds, insurance companies, hedge funds, private equity funds, and P2P lenders are all examples of NBFCs.

NBFCs can virtually do everything that a bank can. Compared to this disability, the ease of entry and lightness of regulation applicable to NBFCs makes it a tremendous focus of interest, particularly for foreign investors wanting to enter India’s financial sector.

For instance, it is possible to hold 100% foreign ownership of NBFCs, while in case of banks, there are serious caps.

2. Entry Strategies For Foreign Investors

- Setting up business in India
Foreign investor can commence business in India as:
1. Indian company*
  • Joint venture
  • Wholly Owned Subsidiary JV/ Wholly Owned Subsidiary as (i) Private Limited or (ii) Public Limited Company, s. t. Company Act 2013
2. Foreign company**
  • Liaison Office To represent the parent company in India
  • Branch Office to undertake activities such as Export, Import, research, consolatancy etc.
  • Project Office Activities as per contract to execute project
3. Limited Liability partnership
  • LLP Subject to provisions of LLP Act, 2008 FDI permitted under automatic route in LLPs operating in FDI is allowed, through the automatic route and there are no FDI-linked performance conditions***

*Incorporation of a company in India is s. t. sect oral caps and requisite approvals

*RBI guidelines regarding the establishment of Lo/ Bo/ Po. As per Companies Act 2013, only a resident with PAN to be appointed for receiving notices in India for foreign company.

A foreign company planning to set up business operations in India has the following three options

A) As an Indian company

B) As a foreign company

C) As a Limited Liabiity Partnership

A) As an Indian company

A foreign company can commence operations in India by incorporating a company under the Companies Act, 2013 through

Foreign Companies can set up their operations in India by forming strategic alliances with Indianpartners
Foreign companies can set up wholly-owned subsidiary in sectors where 100% foreign directinvestment is permitted under the FDI policy.

Foreign equity in such Indian companies can be up to 100% depending on the requirements of the investor, subject to equity caps in respect of the area of activities under the Foreign DirectInvestment (FDI) policy.

For registration and incorporation, an application has to be filed with Registrar of Companies(ROC). Once a company has been duly registered and incorporated as an Indian company, it issubject to Indian laws and regulations as applicable to other domestic Indian companies

B) As a foreign company

Liaison office acts as a channel of communication between the principal place of business or head office and entities in India. Liaison office can not undertake any commercial activitydirectly or indirectly and can not, therefore, earn any income in India. Its role is limited tocollecting information about possible market opportunities and providing information about the company and its products to prospective Indian customers. It can promote export/import from/toIndia and also facilitate technical/financial collaboration between parent company and companies in India.

Approval for establishing a liaison office in India is granted by Reserve Bank of India (RBI).
Foreign Companies planning to execute specific projects in India can set up temporary project/site offices in India. RBI has now granted general permission to foreign entities toestablish Project Offices subject to specified conditions. Such offices can not undertake or carryon any activity other than the activity relating and incidental to execution of the project. ProjectOffices may remit outside India the surplus of the project on its completion, general permissionfor which has been granted by the RBI.
Foreign companies engaged in manufacturing and trading activities abroad are allowed toset up Branch Offices in India for the following purposes:
  • Export/Import of goods
  • Rendering professional or consultancy services
  • Carrying out research work, in which the parent company is engaged.
  • Promoting technical or financial collaborations between Indian companies and parent or overseas group company.
  • Representing the parent company in India and acting as buying/selling agents in India.
  • Rendering services in Information Technology and development of software in India
  • Rendering technical support to the products supplied by the parent/ group companies.
  • Foreign airline/shipping Company.

A branch office is not allowed to carry out manufacturing activities on its own but is permitted tosubcontract these to an Indian manufacturer. Branch Offices established with the approval ofRBI, may remit outside India profit of the branch, net of applicable Indian taxes and subject toRBI guidelines Permission for setting up branch offices is granted by the Reserve Bank of India(RBI).

Such Branch Offices would be isolated and restricted to the Special Economic zone (SEZ) aloneand no business activity/transaction will be allowed outside the SEZs in India, which includebranches/subsidiaries of its parent office in India.

No approval shall be necessary from RBI for a company to establish a branch/unit in SEZs toundertake manufacturing and service activities subject to specified conditions *

Important Note:

Incorporation of a company in India is through sectoral caps and requisite approvals

**RBI guidelines regarding the establishment of LO/ BO/ PO. As per Companies Act 2013, only a resident Indian with PAN to be appointed for receiving notices in India for foreign company. Conditions

A) As an Indian company

A limited liability partnership firm (LLP) is a cross between partnership firms and a limited company. An LLP is a separate legal entity than its members, which means that the liability of members is limited to their agreed contributions. Only in sectors where the RBI permits 100 percent foreign direct investment (FDI) can a foreign company establish an LLP. Indian government has eased FDI restrictions and the list of sectors under 100 percent FDI is growing.

LLPs can buy and own property, produce revenue, and remit earnings outside of India. LLPs are taxed at 30 percent, and an additional surcharge of 12 percent is applied to LLPs if total income exceeds one crore.

In comparison to a Limited Company, an LLP requires less paperwork and minimal record keeping. An LLP also has a reputational advantage over a Partnership Firm because of the additional registration involved. An LLP must register with the Ministry of Corporate Affairs, lending credible proof of the company’s existence.

Important Note:

Incorporation of a company in India is through sectoral caps and requisite approvals

**RBI guidelines regarding the establishment of LO/ BO/ PO. As per Companies Act 2013, only a resident Indian with PAN to be appointed for receiving notices in India for foreign company. Conditions

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