Types Of Business Set Up In India
Foreign investors or companies intending to setup or start a new business in India, may opt for any of the following setup:
Liaison Office –
A liaison office is an office that acts as a channel of communication between the foreign company in India and its principal place of business i.e. the parent company. Its role is limited to collecting and providing information regarding the possible market opportunities in India to its parent company.
Following conditions are required to be fulfilled for setting up a liaison office in India:
- The parent company should have a profitable track record of immediately preceding 3 years.
- The net worth as per the latest audited balance sheet should not be less than USD 50,000/-
- Prior approval from RBI is required to set up a liaison office in India. Generally, the approval is granted for a period of 3 years which can be renewed thereafter.
- For entities engaged in the business of construction and development sectors and which are Non-Banking Finance Companies, the period is of 2 years after which the office has to be closed down or is to be converted into a Joint Venture / Wholly Owned Subsidiary in conformity with the extant FDI policy.
- A liaison office is permitted to undertake activities such as representing parent company, Promotion of Import/export, financial and technical collaboration.
- A liaison office is not permitted to acquire the immovable property in India; however, it can take property on lease.
- A liaison office is not allowed to earn income and hence it is not subjected to income tax; however, it is required to file in all the information regarding its business in form 49C with the Income Tax Department.
Project Office –
A foreign company can set up a project office in India, provided it has secured a contract from an Indian company to execute a project in India, and
- the project is funded directly by inward remittance from abroad; or
- the project is funded by a bilateral or multilateral International Financing Agency; or
- the project has been cleared by an appropriate authority; or
- a company or entity in India awarding the contract has been granted term loan by a Public Financial Institution or a bank in India for the Project.
A project office can be said to be a place of business representing the interests of a foreign company executing a project in India, but it does not include Liaison office. The difference between a project office and liaison office being that unlike the liaison office, a project office can undertake commercial activity related to the projects.
Time limits for opening a project office:
- The time taken to register a project office is generally 15 days.
- The office shall be opened within 6 months from the date of approval letter.
- For reasons beyond the control of the person resident outside India, extension for 6 months may be granted by AD Category-I bank.
- Only RBI is vested with the power to grant further extension.
As per the Companies Act 2013, a branch office in relation to a company, means any establishment described as such by the company. It refers to an establishment that carries out the same activities as by its Head Office. If the company wants to increase its customer-base and spread its business to diverse locations, setting up a branch office is the preferred option.
Following conditions are required to be fulfilled for setting up a branch office in India:
- The parent company should have a profitable track record of immediately preceding 5 years.
- The net worth as per the latest audited balance sheet should not be less than USD 100,000/-
- A branch office can be set up only after prior approval from the RBI. And such approval is granted by the RBI after it closely examines the proposed activities by the company.
- A branch office can undertake activities such as Import/Export of Goods, providing professional/consultancy services, representing and acting as buying/selling agent for parent company etc. however, it cannot undertake activities related to manufacturing, whether directly or indirectly.
- A branch can acquire assets in India, including immovable property. In the event of closing down of branch office, it shall have to liquidate the assets before applying for closing down.
- A Branch office is liable to pay income tax at the prevalent tax rates.
Wholly owned subsidiary –
A wholly owned subsidiary is an entity of which 100% shares are held by another company i.e. the Holding Company. It is a company that is entirely owned by another company. A wholly owned subsidiary can be incorporated as a private, limited by share, limited by guarantee or an unlimited liability company. In order to form a wholly owned subsidiary a minimum of two directors and two shareholders are required in case of a private company and seven in case of public company. Unlike a branch office and liaison office, a wholly owned subsidiary can undertake any legal activity authorized by its character. And is also liable to pay tax on the income earned. In case of a wholly owned subsidiary, 100% FDI is allowed through automatic route, i.e. without any prior approval of Government and RBI. However, winding up a wholly owned subsidiary, is a lengthy process. It can take months depending on the complexities involved and the kind of assets owned.
A joint-venture is a form of tactical partnership, where two or more persons incorporate a company in India and subscribe to the shares of the said company in agreed proportion, in cash and commence a new joint-venture business. A joint-venture company is formed by transferring the business of one party to the newly formed company and in consideration to such transfer, shares are issued by the company for subscription by that party. The other party subscribes to the shares in cash. A joint-venture company is one of the most preferred corporate structure by foreigners who invest in setting up a business in India.
Before entering into a joint-venture company, following are some of the points that should be assessed carefully:
- Shareholding pattern;
- Composition of board of directors;
- Management committee;
- Frequency of board meetings and its venue;
- General meeting and its venue;
- Composition of quorum for important decision at board meeting;
- Dispute resolution agreements;
- Break of deadlock;
- Termination criteria and notice.
As per the Companies Act, 2013 there are various forms of companies that can be incorporated in India. Following are the most common business structures that can be incorporated as a separate legal entity.
Sole Proprietorship is the easiest and simplest form of business setup in India. All you require is a PAN card, Bank A/c, certain licenses and capital. There is no need for formal online registration and other complex procedures. The owner is the whole and soul of such sort of business. He enjoys all the profits as well as bears the losses. The right to all the asset lies in the hands of the owner and his liability is unlimited. Sole Proprietorship allows you maximum privacy. And if circumstances change in future, it is easy to change your legal structure depending on your business requirements.
Partnership is defined as a relation between persons who have agreed to share the profits of a business carried on by all or any one of them acting for all. In case of Partnership the liability of the members is unlimited. The minimum number of partners required is 2 and the maximum can be 20. In case of banking companies, the maximum number of partners is limited to 10.
Limited Liability Partnership (LLP) –
A Limited Liability Partnership is a legal entity separate from its partners. The liability pf the partners is restricted to their contribution in the LLP. Another salient feature that separates an LLP from a partnership firm is that the action of one partner do not bind the others, all partners are agents of the LLP. The rights and duties of all the partners are governed by an agreement designed by them in accordance with the act. A minimum of 2 members are required to form an LLP, there is no limit to the maximum number. LLP enjoys the benefits of perpetual succession and common seal also.
One Person Company –
One Person Company (OPC) is a type of private company that has only one shareholder as its member. An OPC shall have a minimum of 1 director and can have a maximum of 15 directors. The only member may also be the director of the company. One Person Company is preferred by many instead of a sole proprietorship because of its several advantages and benefits available to it under the Companies Act. Some of the privileges of OPC include:
a) They are not required to hold annual general meeting (AGM).
b) Provisions of Independent Director do not apply to OPCs.
c) The directors can also sign the annual reports, etc.
P.S. OPCs cannot convert voluntarily into other form of companies until the expiry of a term of two years from the date of their incorporation.
Small Company –
A Small Company is a company in which –
a) The paid-up share capital does not exceed fifty lakh rupees or such higher amount as may be prescribed which shall not be more than five crore rupees; or
b) The turnover as per its last profit and loss account does not exceed two crore rupees or such higher amount as may be prescribed which shall not be more than twenty crore rupees.
Only a private company can claim the status of a Small Company. A Small Company enjoys certain privileges over other forms of companies. It may hold only 2 board meetings in a year as compared to the requirement of 4 board meetings by other companies. Small Companies are exempt from the requirement of mandatory rotation of auditors, they are also exempt from certain complex provisions that are designed exclusively for large companies. But the above provisions do not apply to its holding company, subsidiary company and section 8 company or any other company governed by any Special Act.
Co-operatives is a voluntary form of organization formed by individuals. The minimum number of members required is ten. There is no limit on the maximum number of members. There is no restriction to the entry or exit of any member a Co-operative. A distinct feature that differentiates a co-operative from other forms of business is that its motive is service to the members rather than making profit. It is compulsory to register a Co-operative with the Registrar of Co-operatives Societies. After registration it becomes a separate legal entity i.e. a body corporate independent of its members. Co-operative also enjoy perpetual succession, which means it will continue to exist irrespective of death, retirement, insolvency, etc. of its members.
Private Limited Company –
A Private Limited Company is the most preferred vehicle for carrying out a business. In this type of company, the articles of association restrict the rights to transfer its shares. It is also not allowed to invite subscriptions to any of its shares or debentures. A Private Limited Company should have a minimum of 2 members and 2 directors. The only 2 members of the company may also be its 2 directors. The maximum number of members in a Private Limited Company is limited to 200. Some of the benefits of Private Limited Company are: limited liability, perpetual succession, easy transferability of ownership, capacity to sue and be sued, etc. A Private Limited Company can be incorporated in the following three variants:iling the form and other documents:A Private Limited Company is the most preferred vehicle for carrying out a business. In this type of company, the articles of association restrict the rights to transfer its shares. It is also not allowed to invite subscriptions to any of its shares or debentures. A Private Limited Company should have a minimum of 2 members and 2 directors. The only 2 members of the company may also be its 2 directors. The maximum number of members in a Private Limited Company is limited to 200. Some of the benefits of Private Limited Company are: limited liability, perpetual succession, easy transferability of ownership, capacity to sue and be sued, etc. A Private Limited Company can be incorporated in the following three variants:
a) Private Limited Company
b) Small Private Limited Company
c) One Person Company
Public Limited Company –
A Public Limited Company has limited liability and can raise capital from its investors, promoters or close relatives and can also trade its securities in open market by offering it to public at large. It is a type of company whose stocks can be freely traded and listed on a stock exchange. A Public Limited Company should have a minimum of 7 shareholders and 3 directors. However, there is no limit to the maximum number of shareholders and directors. In order to protect the interest of the investors, there are strict regulations and controls in relation to a Public Limited Company that one must comply with. A Public Limited Company is required to publish its true and fair financial accounts which are available for inspection to its shareholders and potential investors. It is mandatory for a Public Limited Company to obtain a trading certificate in order to run its business.