When setting up a business, it is crucial to determine the appropriate legal entity in view of the business's exact needs. The chosen entity should be relevant from a fundraising and taxation perspective and with respect to the foreign direct investment (FDI) norms in light of the nature of the business and the activities that it proposes to conduct. For instance, certain relaxations are offered to limited liability partnerships (LLPs) which are not offered to companies and vice versa. Such factors should be considered before setting up a business in India.
This article sets out the types of entity which are available for doing business in India.
Companies (private or public)
A company can be a private limited company or a public limited company. The most common form of entity used to conduct business in India is the private limited company, set up as a subsidiary or joint venture.
LLPs
An LLP is a body corporate and a legal person which is separate from its partners. FDI is permitted in LLPs which operate in sectors and perform activities where 100% FDI is allowed through the automatic route and there are no FDI-linked performance conditions.
Offices (branch, project and liaison offices)
A foreign company can open a branch, liaison or project office in India. The scope of operations of such offices is typically limited to activities and functions such as:
- being a representative office;
- providing sourcing, technical and marketing support;
- importing and exporting; and
- executing a specific project.
The establishment of a branch or liaison office is a two-pronged process which involves:
- seeking Reserve Bank of India approval (through an Authorised Dealer Category I bank); and
- registering the branch or liaison office with the relevant registrar of companies.
Further, foreign companies may open project offices in India without prior approval from the Reserve Bank of India provided that they have secured from a company a contract to execute a project in India (subject to the fulfilment of certain conditions).
Franchise agreements, distribution agreements and agents
Foreign companies, subject to the nature of their business, can conduct business in India through an unincorporated presence. Foreign companies may choose to appoint a distributor for all of India or for a certain defined territory by entering into a detailed distribution agreement. Further, foreign companies may appoint an agent, wherein the foreign company is the principal and retains control over the product sale and price. The agent represents only the foreign company in India.
Companies can also do business in India under the franchise model. Foreign companies may adopt franchise arrangements to distribute their products in India. This arrangement is generally adopted where sharing of technical know-how and business methods is required. In India, many foreign companies have adopted the franchise model to sell their products.
There are various means of establishing a legal presence in order to carry out business in India. The most commonly used structure for setting up a presence in India is a company incorporated in accordance with the Companies Act 2013. The following types of company can be incorporated in India:
- public companies with a minimum of three directors (who are individuals) and seven shareholders; and
- private companies with a minimum of two directors (who are individuals) and two shareholders.
In order to set up a company, the following prerequisites must be identified:
- the proposed name and principal or registered office premises in India; and
- the proposed directors and shareholders.
The company must also prepare the charter documents (ie, the memorandum and articles of association). The memorandum of association must include the company's name, registered office, object, liability and authorised capital clauses. The articles of association are the company's bylaws. The Companies Act allows Indian companies to alter their memorandum and articles of association when required in accordance with the process prescribed in the act.
The process of incorporation involves submitting the requisite application along with the supporting documents to the Ministry of Corporate Affairs. If the application is complete, the company will be registered and the ministry will assign a company identification number. As soon as a company is registered, its information (eg, name, authorised share capital, paid-up share capital, registered office and directors) is made available on the Ministry of Corporate Affairs' website along with its company identification number.
Depending on the investors' requirements, wholly owned subsidiaries and joint venture companies can be set up as private or public limited companies. Private limited companies have fewer obligations under the Companies Act than public limited companies.
