Business setup in India
In recent times, India has been one of the fastest growing economies in the world and has emerged a key nation in the Emerging Markets. Entry in India for a Foreign Company can be through any of the following ways:
- Business registration/ Company – LLP incorporation in India
- Branch / Liaison/ Representative Office set up in India
- Business set up for Non-Residents, Foreign Multi-nationals and Foreign Governments -set up of subsidiary company (Limited or Private Limited Company)/ Limited Liability Partnership in India
Business registration/ Company – LLP incorporation in India
A corporate entity registration is a logical step for any Small and Medium Enterprises. Presently corporate business registration is predominantly in the form of Company or Limited Liability Partnership (LLP) incorporation in India.
Registration of business as a Company or LLP has many advantages over the traditional proprietorship or partnership firm like limited liability, corporate succession and better visibility.
Important point to note here is the Limited Liability concept. One may notice that the names of company or LLP will have the word ‘Limited’ in its name. It means the liability of the owners is limited to the business assets. In an unfortunate case where the business makes losses, then the liabilities can be recovered by using only business assets. The personal assets of the owners like their personal properties, personal gold and jewellery, personal bank balances are safe and cannot be used to pay personal liabilities under the normal circumstances.
Company and LLP incorporation in India are handled by the Ministry of Corporate Affairs, New Delhi. We usually suggest to first get the name approval and then go for the final incorporation forms. The important point to note is the drafting of the memorandum and articles (in case of a Company) and the LLP Deed (in case of an LLP). At our firm, we do not believe in a standard format but believe in constructing the same each time, with regards to the client requirements.
For start-ups and small/ medium businesses, we believe that LLP incorporation shall be more suited than a Company because of its inherent flexibility, much lower compliances as compared to a Company and an efficient tax structure (no dividend distribution taxes). You can read more about LLP here.
Single proprietorships looking for a corporate structure can also look at a One Person Company (OPC) which is a form of private limited Company but has only one Director and shareholder. It has exemption from many requirements. One can read more about OPC here.
Business registration does not end with Company- LLP registration. As per the time to time requirements of customers, some of the other registrations are as follows:
- Tax registrations with the income tax authorities like PAN, TAN, TDS-cpc registration.
- Tax registrations with indirect tax authorities like Goods and Service Taxes etc.
- Registration with local municipal authorities
- Registration with Directorate General of Foreign Trade for Import Export code etc.
- Registration with Micro, Small and Medium Enterprises (MSME registration)
Branch / Liaison/ Representative Office set up in India
Foreign companies who want to set up business presence in India but do not want a permanent subsidiary company in India can look forward to set up a branch or Liaison Office in India. Liaison Office is also called as a Representative Office in India but the formal name is always Liaison Office.
Both branch and liaison offices are an extension of their parent foreign company in India. As such, they do not have a separate corporate identity in India. They have certain restrictions as compared to a wholly owned subsidiary office in India but are an excellent means to ‘test the waters’ i.e. to understand if the market in India is viable enough before committing a full-fledged business presence in India in the form of a wholly owned subsidiary in India.
Branch office can be set up for 5 years at a time while Liaison Office can be set up for 3 years. Thereafter, the license is usually extended if there have been no defaults.
Apart from the above RBI permission, Liaison or Branch office need to be also registered with the Registrar of Companies within a fixed period of establishing their business presence in India.
Branch office can be set up if the Parent Company has been profitable for the past 5 years and has a networth of 100,000 USD or more.
Liaison Office/ Representative Office can be set up if the parent Company has been profitable for the past 3 years and has a networth of 50000 USD or more.
Branch office can carry out most commercial functions except manufacturing.
Liaison Office can only carry on liaison work in India; more specifically only those activities which are mentioned in the license approval letter by RBI. It cannot carry out commercial functions and cannot earn revenue from its activities in India. It cannot substantially negotiate or sign contracts pertaining to Sales. All its expenses have to be from money remitted by its Head Quarters or Parent company. Hence, theoretically, Liaison offices are also the least tax complicated manner of business presence since there is no transfer pricing involved.
Business set up for Non-Residents, Foreign Multi-nationals and Foreign Governments -set up of subsidiary company (Limited or Private Limited Company)/ Limited Liability Partnership in India
Unlike a Liaison or Branch Office, a subsidiary company in India by a Foreign Company does not require any prior conditions with respect to net worth of profitability. Any foreign company or for that matter, any Individual or even foreign government can set up a subsidiary company in India. It can be in the form of a limited or private limited Company. It can be a wholly owned subsidiary or a joint venture with part Indian participation.
Now, with the liberalisation of Foreign Direct Investment (FDI) norms, even Limited Liability Partnership (LLP) has become an option on account of its inherent flexibility, lower compliance and tax efficient structure. However, a subsidiary Company, due to its extensive structure and rules, continues to remain a preferred business structure in India.
The first step in business set up i.e. setting up a subsidiary or an LLP is name application and name approval. Names should be chosen with care and should not match with existing names or with existing trademarks. Of late, the Government authorities have become a bit illiberal while granting names. Once the name application is done, its easier to incorporate a company. Some of the documents of Foreign shareholders or Directors would need to be notarised or apostilled in the country of their residence.
After incorporation, the share capital committed by the shareholders should be brought in within a time bound framework and the reporting requirements as required by the Reserve Bank of India (RBI) and Foreign Exchange Management Act requirements need to be fulfilled.
Why does India offer a compelling and viable business opportunity:
- Robust domestic consumption story -partly insulated from global economic upheavals
- Fastest growing GDP, per capital income and per capita disposable income among the emerging economies in the World
- Growing middle class and rising aspirations for a better living style
- Second largest English speaking population in the World
- Fairly high standards of professional and technical skills like Accountancy, Engineering, Mathematics and Statistics, Law etc, available at reasonable costs
- Rapidly improving infrastructure facilities in railways, electricity connections, waterways and highways.
- Robust commercial and corporate laws, intellectual property (IPR) rights and an independent judicial system.
- regulations, simplification of direct and indirect taxes
All The above offer particularly attractive manufacturing, trading as well as service sector opportunities. Business set up for foreign nationals and companies can be a viable profit opportunity for Multi nationals in India by establishing a wholly owned subsidiary or a Limited Liability partnership or a Joint Venture with an Indian partner.
We, at Bhavesh K. Savla, Chartered Accountants, have helped Corporations and individuals from Russia, the United States of America, United Kingdom, Spain, UAE, Portugal to establish companies and LLP in India.