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Types of business entities available

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According to the Companies Act of 1956 in India, a company is an association that is formed for the purpose of doing business. The company is considered a separate legal entity. It mainly comprises of directors and shareholders.

India is a fast-growing economy. Therefore, there is a wide scope of opportunity to grow the businesses in India. Hence, running a business in India is much a simpler process. However, Entity Incorporation in India is a little complex process, more particularly for foreign investors or any of the non-resident individuals here. But, if we take proper Government approvals, then the things are much easier for doing the business here.

Do you want to establish an entity in India?

There is an ample opportunity for foreign companies to start their business here and expand it. The companies’ law in India is favorable for the Indian as well as foreign companies too. But, you first have to do a proper entity selection for Indian business. Moreover, to make an enterprise run successfully, it is very important to have a proper blueprint of the business.

Types of business entities available

Proprietorship

Proprietorship is a business entity where a single person is the head of the entire business organization. Therefore, that person handles all the activities here. They are also responsible for all losses and the profits for the company.
1

Membership requirement

The minimum member required for a Proprietorship firm is a single person. However, they can further hire other employees too in their company for doing the work.

2

Liability

A single individual who is the proprietor of the business is responsible for all the activities of the business as well as the profit & loss it earns.

3

Requirements

The basic requirement for starting the proprietorship firm here is that the company should register itself to get the necessary license, as per the law of land. The Indian citizen should also have a proper Aadhar card or PAN card with them. Moreover, it should register with the service tax department for all the service tax applicable.

Partnership firm under the Indian Partnership Act
The Indian Partnership Act 1932 defines a business as a partnership when two or more partners form it based on an agreement. They have also agreed to share the profits as per their agreement. Here, they fix the contribution by each of its partners beforehand. Then, they also mention profit sharing deal in detail.
1

The requirement of minimum directors

The minimum directors required here are 2 members. Also, the maximum numbers of members who can be there in the partnership firm are 20 members.

2

Requirement of shareholders

We can issue the partnership interest in this case. However, partnership firms cannot issue “Shares”. Also, we have to consider the interests as the capital ownership in the business.

3

Compliance with Act

According to the Compliance Act, the firm must file for an annual tax return with the Income Tax Department. Then, based on the nature of the business, different other tax compliance like service tax or VAT if applicable should be filed appropriately. Moreover, keep in mind that the income tax slab for the partnership firm is the same as that for the individual.

4

Audit requirements

An audited financial statement is not compulsory for Partnership firms every year. However, the firm can make audited financial statements if they want.

Limited Liability Partnership
Limited Liability Partnership (LLP) Act defines LLP firm as both a traditional partnership as well as a legal entity. So, we do not do the taxation here for the partner’s dividends. Hence, this type of firm is better suited for the small or medium-sized business or a professional. Also, the dividend distribution is not at all taxed. However, we do taxation at the corporate level only.
1

Legal requirements

There should be at least 2 partners in this firm, but no such limitations are laid down on the maximum number of the partners of this firm. There is also no requirement for the minimum capitalization. Hence, one can have any amount of the capital in this business. An LLP will require doing the audit every year. However, it will require the audit in 2 circumstances, One, if the LLP contribution is exceeding INR 2.5 million and second LLP annual turnover, is exceeding INR 4 million.

Company
1

Private limited company

A Private limited company is a non-governmental organization. The minimum shareholders of this type of company should be at least 2, and it limits the maximum shareholders to 50. Also, the right of transferring the shares is not allowed for the shareholders here.

2

Public Limited Company

The main characteristics of the Public Limited Company are:
– There should be at least 7 members here but there is no such limit on the maximum members.
– The shareholders can transfer their shares easily
– They can also approach the public to subscribe to their shares
– The minimum capital requirement in the Public Limited Company is above Rs.5 lakh

3

Listed Company

A Public Limited Company which has their Shares, Equity, Debentures, or any such Securities Listed in any of the Stock Exchanges is a listed company. Hence, they can raise the capital for the business through the securities.

4

Unlisted Company

All the other Public Limited Company comes under the category of the Unlisted Company. They cannot raise the capital for business through the Securities.

Non-profit company
A Non-profit company is not for the business entity. These kinds of the organization do not have the motive of the profits. Although, they are generally supporting for a particular social cause. The Non-profit organizations are also exempted from the tax. They operate in scientific, religious research, and educational settings.

Set up Trust
1

Requirements of Trust

Here, the registration is not mandatory for the trust formation. The only reason for doing this is that the transfer of ownership is given to the trustee as a whole.

2

Registration under the Income-tax act

Under section 10 of the Indian Act, there is no such tax implied on the total income of any trust. Therefore, it exempts them from the taxes.

For foreign companies – FEMA requirements.
According to the Act of 1999, the Foreign Exchange Management Act (FEMA) is the amendment of the law about foreign exchange. The aim is to promote orderly development, facilitating the payment and external trade, controlling the foreign exchange market in India. Hence, it deals with the formalities, procedures, dealing, and everything related to the foreign exchange in India.
RBI requirements
1

Opening a bank account

Reserve Bank of India (RBI) has to lead down certain rules for the entity in India. So, the most primary is opening a proper bank account along with the PAN details. Also, all the capital, income, and revenue should be reflected in a proper bank account.

2

Registration with Income tax

Wherever possible, every entity in India is liable to pay a proper Income Tax to the government as per the guidelines. However, the income tax slab of the business may vary as per the business revenue generated, etc. Therefore, we should do a proper audit of the company concerning the income tax paid by the organization.

3

Registration for GST

Registration of the GST is one of the important criteria RBI lays down for the organizations operating in India. Therefore, GST applies on every organization which is operating in India. However, they can vary from one type of entity to another type.

These are some general things related to the entities in India. So, Entity Selection for Indian business can be done by considering all these criteria properly.

Some general documents required for the Entity Incorporation in India are:
– Passport size photos of all the shareholders and the directors.

– Address proof of the directors/owners of the organization

– For DIN Application, fill the DIR-3 and DIR-6 forms properly

– Form INC-29, INC-1

– For PAN, form 49A

– For TAN, 49-B

Looking at all the requirements regarding the different entities in India, we should do the Entity Selection for Indian business wisely. Also, India’s double tax treaties with some countries and the tax exemption are given for the companies set up in the SEZ is very helpful for the foreign companies to explore their business widely in India.