Forming an Entity in India

Over the years, we have gained in-depth experience and professional expertise. Our team of Company Secretaries and Chartered Accountants understand the nuances of forming an entity in India – be it a Company or LLP in India. This Indian entity can either be a resident entity, wholly owned subsidiary, joint venture, or simply an entity owned by foreigners / NRIs. Our team would assist you in determining best structure for your operations.

 

There are two types of entity that can be formed which have the status of a separate legal entity:


1. Limited Liability Company:

 

a) One Person Private Limited Company (OPC);

b) Private Limited Company;

c) Public Limited Company

 

2. Limited Liability Partnership.

 

The basic differences between a Limited Liability Company and a Limited Liability Partnership is as under:

 

Factors of Comparison

Limited Liability Company

Limited Liability Partnership

Governing Act

Companies Act, 2013

LLP Act, 2008

Minimum no. of subscribers

1 (in case of OPC);

2 (private limited company);

7 (public limited company)

2

Structuring

Bifurcation is possible between management and owners (shareholders).

 

External investment received from shareholders who need not become management (directors).

 

The management cannot bind the shareholders for the affairs of the company

There is no distinction between ownership and management. Both of them are regarded as partners.

 

It is not possible to receive investment in LLP without becoming partners.

 

Any one partner can bind all the partners for any of his actions.

Outside Loans

There are certain restrictions on receiving loans from non-financial institutions / non-shareholders

It can freely receive loans from anyone.

Changes in Management / Ownership

Process to change management / ownership is lengthier

It is easy to change management structure / distribution of profits in LLP

Taxation

OPC / Private Limited company are subject to tax @25% if turnover < INR 2500 million

 

Otherwise all entities are taxable @ 30%

Flat rate of 30%

Distribution of Profits after Tax

Dividend is further subject to Dividend Distribution tax of 20%

Profits can be freely distributed among the partners.



All the above entities are with limited liability. In case you desire to know more and determine the most suitable structure for your operations, you can write to us on This email address is being protected from spambots. You need JavaScript enabled to view it.

 

 Once the company is formed, the following registrations are required under various laws:

1. Permanent Account Number (PAN);

2. Tax Deduction Account Number (TAN);

3. Goods and Service Tax number (GST);

4. Import Export Code (IEC);

5. Profession Tax.

Immediate actions required post formation of the Entity:

1. Opening of Bank Account;

2. Depositing the Capital Amount in the Bank Account;

3. Issue of Share Certificates (for limited liability company);

4. Preparation of Statutory Registers (for limited liability company);

5. Filing of Forms and Declarations with RBI under FEMA for foreign capital introduction.

 

 

In our experience, the following criteria should be considered while choosing a bank for their banking needs in India

 

  • Global Presence and Global relationship with global banks;
  • Foreign Exchange rates offered;
  • Online tax payments facility;
  • Secured On line gateways;
  • Minimum balance maintenance;
  • Minimum Service charges;
  • Support services

The process involves furnishing of relevant forms, resolutions, KYC documents with the Banks in India and liaising for opening of account & registration of signatories. We assist you with the entire process and ensure timely opening of the account. Once the bank account is established, it is mandatory to deposit the capital contribution into the account.

 

Once an entity has been established, there are basic obligations which needs to be complied

S.No.

Particulars

1]

Contemporary Requirements:

1.a

Monitoring statutory dues compliances.

1.b

Filing of Quarterly returns under Income Tax Act;

1.c

Filing of Monthly & Quarterly Returns under GST Act;

1.d

Payroll Management and Compliance

2]

Annual Requirements

2.a

Statutory Audit of the Company / LLP

Tax Audit of the Company / LLP

Filing of Income Tax Return

2.b

GST Audit of Company / LLP

2.c

Filing of Annual return with ROC

2.d

Maintenance of Secretarial Records for Company

2.e 

Filing of forms/returns under FEMA

Towards initial capital contribution

      Towards external commercial borrowings

      Towards annual returns and foreign assets and liabilities during the year

 
 

Basis

Liaison Office

Branch Office (BO)

Wholly owned subsidiary(WOS) / Joint Ventures (JV)

[Private Limited Company]

Limited Liability Partnership (LLP)

Meaning

1. Liaison Office acts as representative office and acts as a channel of communication between the parent company (Head Office) and parties in India.

2. It is not allowed to undertake any commercial activity - directly or indirectly and cannot thus earn/accrue income in India.

3. It is an extension of Head-office

4. A simple form of structure having no separate legal standing of its own.

1. Companies incorporated outside India engaged in manufacturing or trading activities can setup a BO in India with specific approval of Reserve Bank of India (RBI).

2. It is an extension of Head-office with a right to accrue income.

3. A simple form of structure having no separate legal standing of its own.

4. BO are generally engaged in the activity of its parent company.

 

An incorporated entity formed and registered under Companies Act, 2013. It is generally a private limited company for a closely held shareholding.

 

It is distinct and legal entity apart from its shareholders.

An incorporated entity formed and registered under LLP Act, 2008.

 

It is a partnership with limited liability.

 

It is a distinct entity apart from its partners

Permitted Activities

1. Representing parent company / group companies in India.

2. Promoting export / import from / to India.

3. Promoting technical/ financial collaborations between parent / group companies and companies in India.

4. Acting as a communication channel between the parent company and Indian companies.

1. Export/import of goods.

2. Rendering professional or consultancy services.

3. Carrying out research work, in areas in which the parent company is engaged.

4. Promoting technical or financial collaborations between parent / group companies and companies in India.

5. Representing the parent company in India and acting as buying/ selling agent in India.

6. Rendering services in Information Technology and development of software in

India.

7. Rendering technical support to the products supplied by parent/group companies.

8. Foreign airline/shipping company.

 

Any activities as stipulated in the “Object Clause” of the Memorandum of Association of the Indian Company subject to Indian laws and regulations.

 

 

Any activities as stipulated in the “Objects” of the Partnership Deed.

Time Limit for setup

It generally takes 4-5 months to setup a BO, as permissions from RBI take time.

It generally takes 4-5 months to setup a BO, as permissions from RBI take time.

 

Around 1-2 months.

Around 1-2 months.

Criteria for set-up

1. Parent Company should have a profit making track record during the immediately preceding three financial years in the home country.

2. Net Worth of the Parent Company not less than USD 50,000 or its equivalent.

3. An authorized Indian person to represent before RBI and ROC.

1. Parent Company should have a profit making track record during the immediately preceding five financial years in the home country.

2. Net Worth of the Parent Company not less than USD 100,000 or its equivalent.

3. An authorized Indian person to represent before RBI and ROC.

1. A private limited company to be incorporated requires minimum 2 shareholders and 2 directors. The minimum capital requirement has been done away with.

No requirement of track record of parent company.

 

2. The company at the time of incorporation and during the entire tenure of its existence has to compulsorily have an Indian executive director on board.

 

1. An LLP to be incorporated requires minimum 2 partners. The minimum capital requirement has been done away with.

No requirement of track record of parent company.

 

2. The LLP at the time of incorporation and during the entire tenure of its existence has to compulsorily have an Indian partner on board.

 

Time Limit of approval

Normally 3 years from the date of approval. On completion of the time period, application for extension can be made.

 

Normally 3 years from the date of approval. On completion of the time period, application for extension can be made.

At will - till the company decides to shut down its operations.

At will - till the LLP decides to shut down its operations.

Liabilities of the entity

The liability of LO is unlimited. The assets of parent company are at risk of attachment for the expenses incurred by the LO.

The liability of the Branch is unlimited. The assets of the parent company are at risk of attachment in case the liabilities of the branch exceeds its assets.

 

The liability of the Parent company is limited to the extent of its shareholding in the WOS/JV.

The assets of the parent company are not subject to any attachments

The liability of the Parent company is limited to the extent of its capital contribution in the LLP.

The assets of the parent company are not subject to any attachments

Registrations required:

The following registrations (post formation) will be required:

(a) PAN / TAN;

(b) Shops & Establishment;

(c) Import Export Code;

(d) Registrar of Company (ROC) registration;

(e) Profession Tax

The following registrations (post formation) will be required:

(a) PAN / TAN;

(b) GST;

(c) Shops & Establishment;

(d) Import Export Code;

(e) Registrar of Company (ROC) registration;

(f) Profession Tax

 

The following registrations (post incorporation) will be required:

(a) PAN / TAN;

(b) GST;

(c) Shops & Establishment;

(d) Import Export Code;

(e) Professional Tax

The following registrations (post incorporation) will be required:

(a) PAN / TAN;

(b) GST;

(c) Shops & Establishment;

(d) Import Export Code;

(e) Professional Tax

Permitted Incomes / Receipts

1. Entire expenses of LO will be met from the funds received from head office through normal banking channels.

2. No Income accrual in India

3. No Borrowings in India.

1. Entire expenses of BO will be met either from income generated in India or from the funds received from head office through normal banking channels.

2. No Borrowings in India.

1. All Incomes arising out of business in India.

2. Borrowings allowed from financial institutions in India.

3. External Commercial Borrowings (ECB) are subject to RBI approval.

 

1. All Incomes arising out of business in India.

2. Borrowings allowed from financial institutions in India.

3. External Commercial Borrowings (ECB) are subject to RBI approval.

Annual Compliance

(a) Statutory Audit by Chartered Accountant;

(b) Annual filings of audited accounts of LO, Global accounts with ROC;

(c) Annual submission of Activity Certificate with RBI and AD Bank;

(d) Filing of quarterly TDS Returns;

(e) Filing of audited accounts with Directorate of Income Tax, New Delhi.

(f) Filing of Form 49C with the Income Tax department (no IT Return as there is no income).

(a) Statutory Audit by Chartered Accountant;

(b) Tax Audit in case turnover exceeds INR 1 cr;

(c) Annual filings of audited accounts of BO, Global accounts with ROC;

(d) Annual submission of Activity Certificate with RBI and AD Bank;

(e) Filing of quarterly TDS Returns;

(f) Filing of monthly, quarterly and annual GST Returns and GST Audit.

(g) Filing of Annual Income Tax Return.

(a) Statutory Audit by Chartered Accountant;

(b) Tax Audit in case turnover exceeds INR 1 cr;

(c) Annual filing of accounts and Annual Return with ROC;

(d) Annual compliance with RBI in case of shares allotted to foreign persons;

(e) Filing of quarterly TDS Returns;

(f) Filing of monthly, quarterly and annual GST Returns and GST Audit.

(g) Filing of Annual Income Tax Return.

(h) Conducting of Board meetings – atleast 1 meeting per quarter. 1 Board meeting with atleast 2 directors physically present together for approval of accounts.

(i) Minimum 1 shareholder meeting annually for approval of accounts and appointment of auditor.

 

(a) Statutory Audit by Chartered Accountant if turnover exceeds INR 4 million;

(b) Tax Audit in case turnover exceeds INR 1 cr;

(c) Annual filing of accounts and Annual Return with ROC;

(d) Annual compliance with RBI in case of shares allotted to foreign persons;

(e) Filing of quarterly TDS Returns;

(f) Filing of monthly, quarterly and annual GST Returns and GST Audit.

(g) Filing of Annual Income Tax Return.

 

Taxability (including surcharge)

No Income tax as there is no Income.

BO is treated as a foreign company and taxed as under:

41.60 % (income < 1cr);

42.43% (income < 10cr);

43.68% (income > 10cr).

If the annual turnover is less than 250 cr:

26.00 % (income < 1cr);

27.82% (income < 10cr);

29.12% (income > 10cr).

 

If the annual turnover exceeds 250 cr:

31.20 % (income < 1cr);

33.38% (income < 10cr);

34.94% (income > 10cr).

 

LLP is treated as a partnership firm and taxed as under:

31.20 % (income < 1cr);

33.38% (income < 10cr);

34.32% (income > 10cr).

 

Dividend to Parent Company

No Dividend as there is no income.

Divided paid to the parent company is tax free.

 

 

Dividend can be paid to parent company after payment of Dividend Distribution Tax (DDT) @ 20.56%.

 

Thus total cost of repatriating profits by way of dividend is 42.66% (for companies having turnover less than 250 cr and earning income less than 10cr) compared to 42.43% for BO.

 

After payment of tax, profits can be distributed freely to the parent company (if it is a partner) and is tax-free.

Repatriation of Funds to Parent Company

Only on closure of LO.

Profits can be freely repatriated to Parent company subject to payment of applicable taxes in India

1. By way of Dividend on payment of DDT;

2. By way of Royalty / Fees for Technical fees;

3. By way of Management fee;

4. Related party transactions (point 2 & 3 or any other transactions) are subject to Transfer Pricing Regulations.

 

Profits can be freely repatriated to Parent company subject to payment of applicable taxes in India.

Closure of Entity

LO need not go through winding up process for closure. It only needs to file Closure application with the RBI

A BO need not go through winding up process for closure. It only needs to file Closure application with the RBI

 

 

 

Winding up process for a WOS/JV can be quite lengthy with minimum from 6-8 months and more depending on complexity and type of assets it owns.

However for a redundant WOS/JV (not having any assets / liabilities and not operating business since 2 years) can be simply closed down by filing a Strike-off application.

Winding up process for a LLP can be quite lengthy with minimum from 6-8 months and more depending on complexity and type of assets it owns.

 

Advantages

1. Not a separate legal entity hence cost of compliance is less.

2. Ideal if no income accrual in India.

3. Easy to shut down.

1. Not a separate legal entity hence cost of compliance is less.

2. Easy repatriation of funds.

3. No Tax on dividends;

4. Easy to shut down.

1. Separate legal entity for Indian operations;

2. Limited Liability;

3. Lower tax rate;

4. Can freely borrow funds from Indian financial institutions.

External Commercial Borrowings are subject to RBI approval.

5. Future collaboration with Indian investor / partner is possible only for Indian operations.

6. Freely expand its activities by altering its Memorandum of Association.

1. Separate legal entity for Indian operations;

2. Limited Liability;

3. Lower tax rate;

4. No tax on dividends

5. Can freely borrow funds from Indian financial institutions.

External Commercial Borrowings are subject to RBI approval.

6. Future collaboration with Indian investor / partner is possible only for Indian operations.

7. Freely expand its activities by altering its Memorandum of Association.

Disadvantages

1. Unlimited liability;

2. Requires reporting of Global accounts before Indian authorities;

3. Indian Income tax authorities also try to hold Indian LO as “PE” of foreign company.

1. Unlimited liability;

2. Requires reporting of Global accounts before Indian authorities;

3. May lead to being treated as “PE”.

4. Higher tax rate;

5. Future collaboration with Indian investor / partner is not possible.

6. Cannot borrow funds from Indian financial institutions.

 

1. Attracts DDT on payment of Dividend

2. Cost of compliance is high as it is a separate legal entity and reporting is required before various authorities.

1. Higher Income Tax rate compared to private limited company, if LLP plans to retain profits in India;

2. External investors / VCs prefer to invest in private limited companies compared to LLPs due to more defined structure and stricter regulations.