By Rohit Kapur
The start-up landscape of India has undergone major changes over the last decade. India’s under-penetrated market offers immense growth opportunities to new and budding start-ups.
However, before starting a business in India, it is important to select the right entity type. Each entity type has its pros and cons. Key consideration is to understand the limitation of each structure and balance the advantages and disadvantages while making an entry in India.
- One Person Company (OPC) – OPC has only one person and is formed under ‘The Companies Act, 2013’. OPC is a separate legal entity from its promoter, offering a limited liability to its single shareholder. Its biggest advantage is that there can only be one member in the OPC unlike a private limited company where a minimum of two members are required for establishing a company. Foreign Direct Investment (FDI) in OPC is restricted in India.
- Private Limited Company (PLC) – This is the most prevalent type of legal entity in India. A PLC has a minimum of 2 directors with one of them being resident of India. The company has a perpetual succession with limited liability of each member or shareholder. A foreign entity can invest in India as per the FDI policy of India either by setting up a wholly owned subsidiary or by setting up a joint venture with an Indian entity.
- Partnership Firm (PF) – Minimum number of 2 people are required to start a partnership firm. Individual owners are known as partners and have unlimited liability as the entity is not separate from its members. Here, profits are distributed as per the partnership deed. PFs are governed under ‘The Indian Partnership Act, 1932’ and is relatively simple to set up with less compliance requirements. NRI or PIO residing outside India can invest in an Indian partnership firm under certain conditions. However, a person resident outside India (other than NRI or PIO) can invest in a partnership firm only after obtaining Reserve Bank of India’s (RBI) approval.
- Limited Liability Partnership (LLP) – A limited liability partnership is a hybrid of a partnership firm and a company. It is a separate legal entity, liable to the full extent of its assets, with the liability of the partners limited to their agreed contribution in the LLP. Here too, minimum 2 partners are required to form an LLP. FDI is permitted under the automatic route in LLPs operating in sectors where 100% FDI is allowed through the automatic route and there are no FDI linked performance conditions.
- Liaison Office (LO) – An LO is suitable for a foreign company which wishes to first explore the Indian market and test the waters. LO cannot undertake commercial activities in India. Hence, the role of an LO is limited to liaison activities such as communicating information about the parent company and its offerings to prospective customers in India. A prior approval from RBI is required to establish an LO in India.
- Branch Office (BO) – A foreign company needs prior approval from the RBI to establish its BO in India. The range of activities that can be undertaken by a BO is restricted and permission is required from RBI each time any new activity is to be started. A BO cannot undertake any manufacturing activity. A BO is considered as an extension of the existing company in the foreign country.
- Project Office (PO) – A PO in India is established to execute a specific project in India. Once the project execution is completed, as per the terms of the contracts awarded, the project office would have to be closed. Foreign companies working in turnkey or installation projects consider this entity type.
New entrants in the Indian market face several challenges but none as big as the constant challenge to limit the initial financial exposure and keep the business cash positive. Selecting the right entry form is essential as it can help in saving compliance cost and unnecessary taxation burden.
Depending on the business goals, duration, sector type, and activities to be undertaken by the entity, a right structure can be determined. Companies and entrepreneurs also need to keep in mind the regulatory landscape of India including FDI policy of India, The Companies Act, Income Tax Act, DTAAs, among other legal and regulatory provisions before zeroing in on an entity type.
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