Being one of the largest emerging markets in Asia, India can offer numerous business prospects for investors who want to establish a company here. When starting a company in India, the first aspect that should be decided by the investors is the legal entity under which their business will operate.
Commercial Law in India offers numerous types of companies, but the one preferred by most businessmen is the private limited company. Our team of specialists in company formation in India can offer assistance on the main regulations available for each Indian company type, which is incorporated following the provisions of the Companies Act 2013.
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What are the main legal entities in India?
The procedure on how to form a company in India requires investors to perform a set of actions, including choosing a legal entity. The business form should be chosen depending on the business plans of the investors, the capital they are willing to invest, the liability on the company’s debts, and others.
| Quick Facts | |
|---|---|
| Sole proprietorship | Owned by a single person in India with unlimited liability. |
|
Partnership |
Similar to the UK “partnership”. It is registered under the Partnership Act, 1932. |
|
Limited liability partnership (LLP) |
It is a hybrid form of partnership with limited liability for its partners, governed by the Limited Liability Partnership (LLP) Act in India. |
| Private limited company | It is a privately held business entity with limited liability for its shareholders. This entity is governed by the Companies Act. You can incorporate this type of company in India with a nominal capital of INR100,000. |
| Public limited company |
A type of company in India that offers shares to the public. It offers limited liability for its shareholders. |
| One-person company (OPC) in India |
Can be registered by a single individual as a shareholder and director. |
| Section 8 company (non-profit) |
This non-profit company structure is for promoting art, science, commerce, social welfare, religion, charity, etc. |
| Producer company |
This entity is for farmers, artisans, or professionals involved in primary produce. |
| Government company |
It is a type of company in India in which most of the share capital is held by the government, state, or central. |
| Joint venture | A joint venture is a formal agreement between parties. It often involves incorporation of a new entity. |
| Holding company |
It is incorporated as a private or public limited company. Its primary purpose is to hold the shares of other companies. |
| Subsidiary company |
It is registered as a private or public limited company. A subsidiary is controlled by another company (the parent) through ownership of shares. |
| Indian Subsidiary of Foreign Company |
Similar registration as regular subsidiary. A series of docs related to the mother company are required. |
| Small scale industry/company |
Registered under the Micro, Small, and Medium Enterprises Development (MSMED) Act for various benefits. |
| Start-up company | Startups are the newly established companies, often driven by innovation, or technology. It should be registered with the Department for Promotion of Industry and Internal Trade (DPIIT) under certain criteria. |
According to the Indian Companies Act 2013, a company is defined as an association that can be formed by natural persons, legal entities, or a mixture between the two, and the main purpose of the company is to develop commercial activities. The Companies Act 2013 provides the following types of business forms:
- Private limited company – a business form that is most suitable for small companies, as the investors will be liable for the company’s debts only to the extent of their participation in the company’s capital;
- Public limited company – the legal entity can be formed by at least seven shareholders;
- Unlimited company – in this type of company, the investors will become fully liable for the company’s debts;
- Limited liability partnership – it represents a mixture of the characteristics of the limited liability company and the ones of a partnership;
- Sole proprietorship – it is the simplest way to set up a business in India and it is addressed to natural persons;
- Joint venture company – in order to establish this type of legal entity, it is necessary to obtain governmental approval;
- Section 8 company – a legal entity that is usually selected when entering the market as a non-profit organization.
We can also assist with the registration of trademarks in India if company owners are interested in creating their own brands.
The video below offers a short presentation on the Indian legal entities:
Statutory and registered companies in India
Depending on the legislation governing them, Indian companies can be divided into statutory and registered companies.
Statutory companies are set up in accordance with a specific law passed by the central or local authorities and fall under the provisions of the respective laws. In most cases, statutory companies are created for public purposes, or better said, they serve the general public. These types of Indian companies are subject to special audit criteria which is why they are uncommon to foreign investors. Among the industries in which such companies operate are the banking and insurance ones. These businesses usually fall under the supervision of the National Bank of India.
Then, there are registered companies which are usually employed by local and foreign investors as they fall under the governance of the Company Law of 2013. These are categorized as companies limited by shares, companies limited by guarantee, and unlimited companies.
If you want to register a company in India and need assistance, you can rely on our local consultants for assistance in choosing the business form that suits your objectives.
Companies with limited liability for the shareholders
Without a doubt, the most advantageous type of company in India is the one that protects the interests and assets of the shareholders. Luckily, there are several types of business forms that provide a high degree of protection for the shareholders. These are the companies that offer limited liability and among these:
- The company limited by shares;
- The company limited by guarantee.
The company limited by shares is a business form that provides for limited responsibility of the shareholders to the unpaid amount of money related to the shares they own. The company limited by guarantee implies that each member has limited responsibility to the amount they are willing to contribute in order to meet the deficiency of the company’s assets in case of company liquidation. It is not necessary for such companies to have share capital. In this case, the liability of the shareholders will be established based on the capital of the firm. There is also the case of unlimited companies where the liability extends to the shareholders’ assets, however, this business form is not often employed in India. The most common business form remains the private limited liability company which in many ways resembles the same type of entity in Western countries, hence its popularity among foreign investors who come to India.
If you want to register a company in India and need guidance, our specialists can handle the procedure on your behalf.
A company limited by guarantee in India
An entity that lacks share capital is classified as a company limited by guarantee, wherein the accrued profits are reinvested into the organization. This type of company possesses a distinct legal identity, enabling it to conduct activities such as property transactions, employment, borrowing funds, and legal defense under its name. Moreover, members are shielded from personal liability for debts arising within the company’s business operations. The company limited by guarantee structure is the legal preference for numerous non-profit organizations, charity societies, clubs, and similar entities. These companies, being non-profit entities, retain their profits internally or allocate them for specific purposes rather than distributing them to the members. If you like this entity and want to open a company in India, our agents are here to help.
Why choose a company limited by guarantee?
One key advantage is limited liability. Without registration as a limited company, administrators, such as the managing committee of a community project or charity, can be personally held responsible for unpaid debts. This poses a significant risk, particularly for community groups with enduring liabilities, such as leasehold premises or financial contracts for equipment. Insufficient income to meet these obligations may lead to insolvency, exposing those in charge to unforeseen circumstances.
Another distinctive feature is that, unlike a company limited by shares, a company limited by guarantee lacks shareholders. Instead, it operates with one or more members. This structural difference reflects the unique nature of these entities, reinforcing their commitment to a non-profit orientation.
If you are interested, our company formation agents in India can offer you more information about the advantages of incorporating a limited liability company.
A company limited by shares in India
A company limited by shares allows public ownership through stock exchange transactions. Shareholders’ liability is confined to the nominal value of their shares, shielding them from losses beyond this amount. Regulatory oversight from the corporate affairs ministry and financial market authorities is crucial for governing business operations.
Regular submissions of reports to regulators and the corporate affairs department, encompassing annual financial statements, auditor’s reports, and Board of Directors’ statements, are mandatory. Public limited companies can issue shares to the public, facilitating capital infusion from various sources like portfolio companies, mutual funds, and institutional investors, enabling robust financial support for expansion, debt management, research and development, and corporate acquisitions.
Annual general meetings for shareholder approval of financials and resolutions on the meeting agenda are imperative for companies limited by shares. Transparency, material event disclosures in stock exchange filings, and open communication with shareholders are vital aspects. While listing on exchanges is optional, it can enhance shareholder liquidity and broaden access to capital markets.
Why choose a company limited by shares?
Starting an Indian company limited by shares offers several compelling advantages. Firstly, shareholders enjoy a significant tax advantage, as dividends from shares remain untaxed. Limited companies benefit from a more favorable tax structure, being taxed solely on profits, and exempt from the higher tax rates typically imposed on sole traders or partnerships. Additionally, the concept of a separate legal entity enhances the company’s longevity, existing beyond the lifespan of its members. This distinction contributes to the stability and enduring nature of the business.
Furthermore, the provision of limited liability not only shields individuals from personal financial risks but also enhances the professional standing and reputation of the business. This sense of dedication and reliability associated with limited liability can positively impact the perception of the company. Moreover, a company limited by shares in India provides a practical avenue for raising finance. By selling shares to other individuals, the business can secure funds while simultaneously safeguarding its name and brand. This dual benefit makes the limited company structure an attractive choice for those seeking financial flexibility and brand protection in the dynamic Indian business landscape. If you have questions on how to form a company in India, our agents are here to answer.
The sole trader in India
The simplest legal form under which a person can carry out an economic activity in India is the sole trader or proprietorship. This is not the same as a one-person company, as it has no legal personality and is usually employed by professionals, such as accountants and dentists, who do not want to register a company because of the small operations they complete.
In India, the sole trader is suitable for towns or regions with small markets. There are no share capital requirements, and the responsibility of the owner is unlimited. However, the person is entitled to all the profits of the business after paying the due taxes.
Foreign citizens interested in operating as sole traders in India require residence permits in order to create such ventures. We can also guide foreign entrepreneurs who need advice on choosing the best business form for their activities.
The partnership in India
One of the common ways of starting a company in India is partnership. This business form is usually employed by those who want to create small ventures, as it requires a minimum of two members who enter a partnership agreement in order to conduct their operations. The maximum number of participants in such a firm is 10.
There are no share capital requirements for setting up a partnership in India, however, the members have unlimited liability towards the debts and obligations of the company. The profits can be shared among the partners in the percentage established by them in the agreement.
If you want to open a partnership and need assistance, our agents in India can help you.
Small companies in India
In India, small businesses occupy a large share of the market, which is why the government has created a type of business with a special status called a small company. The legal form of such a business can be one selected from the Companies Code and is characterized by the following:
- It is not a publicly traded company;
- It has a share capital of a maximum 50 lakhs;
- Its annual turnover does not exceed 200 lakhs.
Small companies also enjoy various exemptions that are provided under the 2013 Companies Act. Starting a small company in India comes with various advantages that can be explained by our specialists in company registration.
Are there any legal forms for foreign companies in India?
Although foreign companies can easily establish a business through one of the above-mentioned legal entities, there are other types of structures that can be employed, as prescribed by the Indian legislation. Foreign companies can set up the below-mentioned business forms and our team of specialists in company formation in India can advise on how to register the following:
| 1. representative office | it is used only for non-commercial purposes and it can be set up by foreign companies only with the approval of the Indian government |
| 2. project office | it can be set up for a specific amount of time, in order to complete a certain project |
| 3. branch office | the branch office in India may enter most of the commercial sectors available here, but certain fields of activity may not be carried out through this business structure |
| 4. subsidiary | the subsidiary is an independent structure from its parent company abroad |
What are the characteristics of a private limited company in India?
As mentioned at the beginning of the article, the private limited company is the most popular business form registered in India, as it offers numerous advantages to its founders. Those who want to open a company in India under this business form should know that the founders (who have the quality of shareholders) are not allowed to transfer their shares. This business form may be set up with a minimum of two members and a maximum of 200 and it may be registered as a private company limited by shares or as a private company limited by guarantee. During the registration procedure, its founders should also conclude the following: the measures for VAT registration in India, registering for social security, obtaining the required permits and licenses, and other similar steps.
Each founder becomes a shareholder after acquiring shares in the company, which will provide ownership rights. The main advantage of this type of company is that the legal entity offers separate liability, as the shareholders will only be liable for the business’s debts in the amount to which they have subscribed to the company’s capital. Our team of agents in company registration in India can offer further information on the characteristics of the private limited company.
The branch office – an option for foreign companies in India
India is one of the largest markets in the world which is why many foreign companies choose to service it. One of the best ways of doing that is by registering branch offices. Just like in any other country, the branch office will have the same characteristics in India, which include:
- The parent company will be the only decision-making entity;
- The branch office will complete the same activities as the foreign entity;
- It has no responsibility or obligations, as these fall on the parent company;
- The parent company must provide accounting information on its own activities, but also on the branch offices at the end of the financial year.
The creation of a branch office in India is simple and can be completed in a few weeks.
If you decide to open a company in India and need guidance, you can rely on our advisors.
The public company in India
Another type of company in India is the public one which also offers limited liability to its shareholders. However, it is used for large operations or for trading shares on the Stock Exchange. Among its features, we mention the following:
- The minimum number of shareholders is 7 and there is no maximum number of members;
- The shares can be freely transferred or traded on the Stock Exchange;
- It must have an audit committee;
- It can invite public subscribers to participate or buy shares.
More information on this type of company can be provided by our India company formation agents.
The one-person company in India
One of the simplest types of companies in India is the one-person business. This is a combination between the sole proprietorship and the limited liability company. In terms of registration, it will follow the same steps as the limited liability one, while the responsibility of the member can be limited by shares or guarantees. The name of the company must include the words “one-person company” and the owner must appoint a nominee agent to act on its behalf. There are also several requirements in management that need to be respected and among these, we mention that it can have a maximum number of 15 directors who do not need to give up their function by rotation.
Owners of small businesses must constantly monitor their accounts if they are to flourish. We can offer accounting services so you may concentrate on your main responsibilities. Our accountant in India is at the disposal of tailored solutions for small enterprises that have different needs than large ones.
How to register a Section 8 company in India
The Section 8 company in India refers to a non-profit business form, which can be used to promote culture, arts, sports, research, charity, and other types of activities that are prescribed under the Companies Act. Those who want to open a company in India as a Section 8 company should know that this business structure does not allow the payment of dividends to its members.
Choosing a suitable legal entity in India
One of the first steps when deciding to start a business in India is choosing a legal vehicle. Considering the Companies Act provides several options that can make the decision a little hard, it is important to establish a few criteria under which the operations will be run. Among these:
- The size of the business – a large business will require a company with larger share capital;
- The market it addresses;
- If the company operates in a specifically regulated industry only certain business forms can be used;
- The timeframe and documents required for incorporation;
- The number of shareholders in the company.
You can also rely on us for information on how to choose a legal entity for opening an Indian company.
How to register a company in India
After choosing the business form, the formalities to complete with the Trade Register are usually the same, however, different requirements apply in terms of documents to be drafted. In the case of sole proprietorships and partnerships, for example, the paperwork is simpler, and so is the registration procedure.
Opening a bank account and registering for tax and GST purposes must also be completed when setting up a company in India. Also, depending on the industry to operate in, one or more business permits are required.
If you need advice or assistance in starting a business in India, you can rely on the expertise of our company formation representatives.
Why start a business in India?
India is one of the largest consumer markets in the world if we are to consider its population. However, there are many other reasons to consider starting a business here. Among these:
- As of December 2023, the gross domestic product of India stands at $3.73 trillion;
- India is the 3rd largest start-up base in the world with more than 9,000 such businesses, out of which 1,300 were incorporated in 2019;
- By the end of 2020, the country’s workforce is expected to reach 160-170 million employees;
- India is expected to become one of the 3 largest economies in the world in the next 10 to 15 years.
Our experts can also help you with other matters related to opening a company in India. For business operations, partnering with a skilled Indian accountant is crucial for navigating complex financial regulations and maintaining compliance. Our proficient accountant can streamline processes of payroll in India, and ensure accurate and timely disbursement of wages, thus contributing to the overall financial efficiency of the organization.
Investors are invited to contact our team of consultants in company formation in India for further information on the business forms.