Types of Business Entities in India
Types of Companies in India – Types of Corporate Entities in India – Types of Legal Entities in India – Options for Foreign Investors Doing Business in India
In India, the following types of business entities are available:
- Private Limited Company
- Public Limited Company
- Unlimited Company
- Limited Liability Partnership (LLP)
- Sole Proprietorship
- Liaison Office / Representative Office
- Project Office
- Branch Office
- Joint Venture Company
- Subsidiary Company
Both the Indian promoters and the foreign promoters can form the following business entities: Private Limited Company, Public Limited Company, Limited Liability Partnership, Unlimited Company, Partnership and Sole Proprietorship. The foreign companies also have the options of forming the following type of business entities: Liaison Office/Representative Office, Project Office, Branch Office, and Joint Venture Company. It must be noted that a Joint Venture Company is not a separate type of legal entity; it could be either a Private Limited Company, a Public Limited Company, or an Unlimited Company. Similarly a wholly owned Subsidiary of a foreign company in India could be either a Private Limited Company, a Public Limited Company, an Unlimited Company, or a Branch Office.
For a foreign Investor in India it is very important to choose a right kind of business or corporate entity which best suits its purposes and takes care of liability issues and tax planning issues. Foreign Companies planning to do business in India should pay special attention to Entry Strategies in India for Foreign Investors and corporate structuring to save taxes to the best extent allowed by laws and international tax treaties.
It is also mandatory for foreign investors or foreign shareholders, both individuals and corporate shareholders, to seek Government Approvals for Investing in India In some special cases Foreign Investment Promotion Board, FIPB Approval for Foreign Investment in India is required. In other cases Reserve Bank of India, RBI Approvals for Foreign Investment in India is required. The sectors where RBI Approval for foreign investors is available under automatic route can be found at FDI in India Sector wise Guide.
A Company in India can have foreign directors provided some conditions are fulfilled. The directors of an Indian company, both Indian and foreigner directors, are required to obtain Director Identification Number – DIN and Digital Signature Certificate – DSC
There are some restrictions regarding issuing sweat equity for a company incorporated in India.
Also see Annual Corporate Filings in India for corporate maintenance requirements in India.
Private Limited Company
A private company is a company which has the following characteristics:
- shareholders right to transfer shares is restricted;
- the number of shareholders is limited to 200; and
- an invitation to the public to subscribe to any shares or debentures is prohibited.
A Private Limited Company is the most popular form of business entity used for Foreign Investors in India, including USA investors in India. There are various requirements for forming a private limited company in India. There are various steps required to establish a business in India, before and after incorporation, as mentioned hereinafter.
For more details See: Private Limited Company in India
Public Limited Company
A public company is defined as a company which is not a private company. The following conditions apply only to a public company:
- It must have at least seven shareholders.
- A public company is not authorized to start business upon the grant of the certificate of incorporation. In order to be eligible to commence business as a corporation, it must obtain another document called trading certificate.
- It must publish a prospectus or file a statement in lieu of a prospectus before it can start transacting business.
- A public company is required to have at least three directors.
- It must hold statutory meetings and obtain government approval for the appointment of the management.
There are several other provisions contained in the Companies Act 1956 which are applicable only to public companies and should be consulted.
Liaison Office / Representative Office
A Liaison Office could be established with the approval of the government of India. The role of Liaison Office is limited to collection of information, promotion of exports/imports and facilitate technical/financial collaborations.
Liaison office cannot undertake any commercial activity directly or indirectly.
Foreign companies planning to execute specific projects in India can set up a temporary project/site offices in India for carrying out activities only relating to that project. The Government of India has now granted general permission to foreign entities to establish project offices subject to specified conditions.
Foreign companies engaged in manufacturing and trading activities abroad are allowed to set up Branch Offices in India for the following purposes:
- Export/Import of goodsRendering 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 to subcontract these to an Indian manufacturer. Branch Offices established with the approval of RBI, may remit outside India profit of the branch, net of applicable Indian taxes and subject to RBI guidelines Permission for setting up branch offices is granted by the Reserve Bank of India (RBI).
Limited Liability Partnership (LLP)
A law to allow Limited Liability Partnership (LLP) in India has been enacted by the Parliament of India recently. (Limited Liability Partnership (LLP) Act of 2008).
LLP is an alternative corporate business entity that provides the benefits of limited liability of a company but allows its members the flexibility of organizing their internal management on the basis of a mutually-arrived agreement, as is the case in a partnership firm.
This format would be quite useful for small and medium enterprises in general and for the enterprises in services sector in particular, including professionals and knowledge based enterprises.
As proposed in the Bill, LLP shall be a body corporate and a legal entity separate from its partners. It will have perpetual succession. While the LLP will be a separate legal entity, liable to the full extent of its assets, the liability of the partners would be limited to their agreed contribution in the LLP.
Further, no partner would be liable on account of the independent or unauthorized actions of other partners, thus allowing individual partners to be shielded from joint liability created by another partner�s wrongful business decisions or misconduct.
For more details visit LLP in India
Typical Procedure to Establish Business in India
In India establishing a business takes some time. Besides incorporation there are many other formalities in establishing a business in India. The following chart contains typical formalities including incorporating a private limited company in India:
|Nature of Procedure in India||Procedure Number||Duration (days)|
STEPS FOR COMPANY FORMATION IN INDIA
|Obtain Director Identification Number DIN for proposed Directors of the new Company||1||1*|
|Obtaiinf Digtal Signature Certificate DSC for proposed Directors of the Company||2||2*|
|Filing the proposed name of company for approval to the Registrar of Companies (ROC)||3||2|
|Get the Memorandum of Asociation and Articles of Association printed||4||1|
|Pay stamp duties online||5||1|
|File all incorporation forms and documents online, including the Memorandum of Association and the Articles of Association.||6||2|
|Obtain the certificate of incorporation||7||2|
|Request and obtain Certificate to Commence Operation, if required||8||5|
OTHER STEPS FOR SETTING UP BUSINESS IN INDIA
|Obtain a company seal||9||3|
|Obtain a Permanent Account Number (PAN) from an authorized franchise or agent appointed by National Securities Depository Services Limited (NSDL) or Unit Trust of India (UTI)||10||7*|
|Obtain a Tax Account Number (TAN) for income taxes deducted at source from the Assessing Office in the Income Tax Department||11||7*|
|Register under Shops and Establishment Act||12||4*|
|Register for value added tax (VAT) before the Sales Tax Officer of the ward in which the company is located||13||12*|
|Register for Profession tax||14||2*|
|Register with Employees’ Provident Fund Organization||15||12*|
|Register with ESIC (medical insurance)||16||9*|
|Filing for Government Approval before RBI/FIPB for Foreigners and NRI’s||17||15*|
Note: Procedures sometimes take place simultaneously. Instances of this are marked with an asterisk (*). The above procedures and timings are indicative for a typical big city in India where all the required documents are ready with the promoters. The actual time and procedure may vary with city and state and the nature of business.
All the procedures must be followed.
Director Identification Number – DIN
Directors for an Indian company, both Indian and foreigners, must register and get and identification number under the new requirements. It is called Director Identification Number- DIN.
Digital Signature Certificate for Directors – DSC
Directors for an Indian company, both Indian and foreigners, are also required to get Digital Signature Certificate – DSC – under the new requirements. Digital Signature Certificate (DSC) is required for all Directors or authorized representatives of any company and professional who will require to sign ROC forms or documents. A DSC, like hand written signature, establishes the identity of the sender filing the documents through internet which sender can not revoke or deny. A DSC is not only a digital equivalent of a hand written signature it adds extra data electronically to any message or a document where it is used to make it more authentic and more secured. There are various classes of DSC.
Requirements for a Private Limited Company
- A Registered Business Name: This must be followed by the word �Limited’ or �Ltd’. The Companies Registration Office exercises some control over the choice of name, it cannot be identical (or very similar to) the name of an existing company. It won’t be considered if it is offensive or illegal and the use of certain words in a company (for example, `Institute’, `National’) can only be used in certain circumstances. The company name must be displayed in a conspicuous place at every office, or other premises where the company carries out business.
- A Registered Office: This need not necessarily be the same address as the business is conducted from. Quite frequently the address used for the registered office is that of the firm’s solicitor or accountant. This is the address, through, where all official correspondence will go.
- Shareholders: There must be a minimum of two shareholders (also described as `members’ or `subscribers’). A private company can have up to 200 shareholders.
- Share Capital: The company must be formed with a stated, nominal share capital divided into shares of fixed amounts. Minimum authorized capital of Indian Rupees 100,000 (US $ 2250 approximately) is required to form a private company in India.
- Memorandum of Association: The memorandum is the company’s charter. It states the company’s name; the situation of its registered office; its share capital; the fact that liability is limited and, most importantly, the object for which the company has been formed. In theory, the company can only operate in the areas mentioned in the objects clause but in practice the clause is drawn to cover as wide an area as possible, and anyway a 75 per cent majority of the members of the company can change the objects whenever they like. Nevertheless, it is worth bearing in mind that directors of the company will incur personal liability if the company engages in a type of business which is not authorized by the objects clause. The memorandum must be signed by at least three shareholders.
- Articles of Association: The document contains the internal regulations of the company, the relationship of the company to its shareholders and the relationship between the individual shareholders. Many companies don’t bother to draw up their own articles but adopt (sometimes with some modifications) articles set out in the Companies Act.
- Certificate of Incorporation: This is the document, which the registrar of companies issues to you once he has approved your choice of name and your memorandum. When you receive this document your company legally exists and is ready to trade.
- Auditors: Every company must appoint a qualified auditor. The auditor’s duty is to report to the treasurer whether or not the books of the company have been properly kept, and that the balance sheet and profit and loss account presents (or doesn’t present) a true and fair view of the company’s affairs and complies with the Companies Act. Auditors are appointed or re-appointed at general meetings at which annual accounts are presented, and they hold office from the conclusion of the meeting until the next general meeting.
- Accounts: The Companies Act lays down strict rules on accounting. Every company must maintain a set of records, which show the financial position at any one time with reasonable accuracy. The accounts comprise a profit and loss account and balance sheet with the auditors’ and directors’ reports appended. A new company’s accounting reference period begins on its incorporation and runs until the following 31st March – unless the company notifies the registrar of companies otherwise. Within ten months of the end of an accounting reference period, an audited set of accounts must be laid before the shareholders at a general meeting and a set delivered to the registrar of companies.
- Registers, etc.: In addition to the accounts books, companies are required to have: a register of members and share ledger; a register of directors and secretaries; a register of share transfers; a register of charges; a register of debenture holders; a book can be purchased to hold all of the above. This will be provided automatically if you buy a running concern.
- Company Seal: All companies must have an engraved seal. This must be impressed on share certificates and must be used whenever the company has to execute a deed. Again, this is included in the ready-made company package.
Corporate Documents for Registration of a Company
For incorporating a company in India, an application for registration should be submitted to the registrar of companies with the following documents:
- Memorandum of Association;
- Articles of Association;
- A declaration signed by a person named in the articles of the proposed company as a director, manager, or secretary of the company, or by an advocate of the Supreme Court or High Court, or by an attorney entitled to appear before the High Court, or by a chartered accountant practicing in India stating that all the requirements of the Companies Act 1956 and the applicable rules with respect to the registration and other matters have been complied with;
- A list of persons who have consented to act as directors of the company.
- If the proposed company is a public company, consent of very person prepared to act as a director must be submitted in a prescribed form;
- Information about directors, managing directors and managers and secretary must be submitted in a prescribed form;
- Information about the registered office in a prescribed form;
- Power of attorney in favor of one of the promoters or any other person, authorizing him/her to make corrections in the documents submitted to the registrar of the companies, if it becomes necessary; and
- Applicable registration fee payable to the registrar of the companies.
Advantages of Incorporating in India
- Many tax exemptions available to the company set up in Special Economic Zone;
- Many tax incentives available to IT companies;
- India has got double taxation treaties with many countries;
- Minimum authorized capital of only INR 100,000 (US $ 2250 approximately) is required to form a private company in India;
- Skilled and intelligent employees available at nominal rate;
- With its large base of English speaking skilled human resource, it is most sought after destination for business process outsourcing, Knowledge processing etc.
Applicable Laws for Forming a Company in India
The laws applicable for incorporating a company in India include the India Companies Act 2013, read with Companies (Central Governments’) General Rules and Forms, the Indian Income Tax Act, and other laws & regulations. The previous law was India Companies Act of 1956.
The Foreign Exchange Management Act of 1999 is applicable for foreign investments and transactions.
Where to Incorporate in India?
A company incorporated in any state of India can do business in all the states of India. The following are the locations of Registrars of Companies (ROC’s) in India:
|States & U.T.’s of India||ROC Locations|
|Delhi & Haryana||Registrar of Companies Delhi & Haryana,
|Karnataka||Registrar of Companies Karnataka
|Maharashtra, Dadra & Nagar Haveli||Registrar of Companies Maharashtra
MUMBAI ( Bombay )
|Pune, Kolhapur, Ratnagiri, Satara, Sindhudurga, Sangli, Sholapur & Ahmednagar districts in Maharashtra||Registrar of Companies Pune,
|Tamil Nadu||Registrar of Companies Tamil Nadu,
CHENNAI ( Madras )
|Coimbatore, Nilgiris, Periyar Salem, Dharmapuri & Dindigul, Quaid-e-Milleth districts in Tamil Nadu||Registrar of Companies Coimbatore
|Gujarat||Registrar of Companies Gujarat,
|Andhra Pradesh||Registrar of Companies Andhra Pradesh,
|Assam, Tripura, Manipur, Nagaland, Meghalaya, Arunachal Pradesh, Mizoram & Shillong||Registrar of Companies Assam, Tripura, Manipur, Nagaland, Meghalaya, Arunachal Pradesh, Mizoram & Shillong
|Bihar & Jharkhand||Registrar of Companies
|Goa, Daman & Diu||Registrar of Companies Goa, Daman & Diu,
|Jammu & Kashmir||Registrar of Companies Jammu & Kashmir
JAMMU & SRINAGAR
|Kerala, Amindivi, Minicoy & Lakshadweep Islands||Registrar of Companies Kerala
|Madhya Pradesh & Chhattisgarh||Registrar of Companies Madhya Pradesh,
|Orissa||Registrar of Companies Orissa
|Pondicherry||Registrar of Companies
|Punjab, Himachal Pradesh & Chandigarh||Registrar of Companies Punjab, Himachal Pradesh & Chandigarh,
|Rajasthan||Registrar of Companies Rajasthan ,
|Uttar Pradesh & Uttaranchal||Registrar of Companies Uttar Pradesh,
|West Bengal||Registrar of Companies West Bengal
|Andaman||The Registrar of Companies Andaman
New Companies Act 2013
The New Companies Act of 2013, has made major changes in the corporate laws of India. Among the major changes introduced by the new Act are the followings:
For all companies:
- Resident Director: Every Company must have a director who stayed in India for a total period of 182 days or more in previous calendar year.
- Company Letterheads, bills or other official communications must have the full name, address of its registered office, Corporate Identity Number (21 digit number allotted by Government), Telephone number, fax number, Email id, website address if any.
- Accounting Year: Every company shall follow uniform accounting / financial year i.e. 1st April -31st March. Those companies which follow a different financial year have to align their accounting year to 1st April to 31st March within 2 years.
- Articles of Association: In the next General Meeting, it is desirable to adopt Table F as standard set of Articles of Association of the Company with relevant changes to suite the requirements of the company.
- Memorandum of Association: Every copy of Memorandum of Association and Articles of Association issued to members should contain a copy of all resolutions / agreements that are required to be filed with the Registrar.
- Loans to Director: The Company can not advance any kind of loan / guarantee / security to any director, director of holding company, his partner, his relative, Firm in which he or his relative is partner, private limited in which he is director or member or any bodies corporate whose 25% or more of total voting power or board of directors is controlled by him.
- Disqualification of Director: All existing directors must have Directors Identification Number (DIN) allotted by central government. Directors who already have DIN need not take any action. Directors not having DIN should initiate the process of getting DIN allotted to him and inform companies. The Company, in turn, has to inform registrar.
For Public Companies:
- Appointment of Statutory Auditors: Every Listed company can appoint an individual auditor for 5 years and a firm of auditors for 10 years. This period of 5 / 10 years commences from the date of their appointment. Therefore, those companies have reappointed their statutory auditors for more than 5 / 10 years, have to appoint another auditor in Annual General Meeting for year 2014.
- Woman Director: Every Listed Company /Public Company with paid up capital of Rs 100 Crores or more / Public Company with turnover of Rs 300 Crores or more shall have at least one Woman Director.
Sweat Equity in a company in India
The question is asked a lot, if an Indian company can issue sweat equity. There are separate rules for sweat equity in a private company in India and a public company in India.
Sweat Equity in a private company in India
The provisions for issue of Sweat Equity are covered under Section 79A of the Companies Act. It provides that a company may issue sweat equity shares of a class of shares already issued if the following conditions are fulfilled:
- the issue of sweat equity shares in authorized by a special resolution passed by the company in the general meeting.
- The resolution specifies the number of shares, current market price, consideration, if any, and the class or classes of directors or employees to whom such equity shares are to be issued.
- not less than one year has, at the issue elapsed since the date on which the company was entitled to commence business.
- The sweat equity shares of a company whose equity shares are listed on a recognized stock exchange are issued in accordance with the regulations made by the Securities and Exchange Board of India in this behalf.
- In view of the above provisions, you can’t issue Sweat Equity at the time of incorporation of your Company as one year has not elapsed since the date on which the company was entitled to commence business.
In addition to the above provision, other regulatory provisions are applicable for issuing sweat equity shares for a private company in India. Please feel free to Contact us for further information about sweat equity in an Indian company.
Sweat Equity in a public company in India
The aforesaid provisions regarding issuing of Sweat Equity under Section 79A of the Companies Act are applicable to a public company in India.
The sweat equity shares of a company whose equity shares are listed on a recognized stock exchange are issued in accordance with the Securities and Exchange Board of India (Issue of Sweat Equity) Regulations, 2002.