With a robust infrastructure and a highly educated workforce, India is an ideal location to expand your business. However, before you can begin operations, you must select a business structure. Learn about how to register a company in India and how New Horizons can help.
Importance of Choosing the Right Business Structure in India
Selecting the right company structure in India is an important aspect of running a successful company in the country. The proper business structure will allow your business to operate in an efficient manner and set your business up to achieve its stated objectives. Determining which business entity to register in India is critical for different reasons:
- The business structure you choose will have a direct impact on how your business will be taxed.
- The business structure you select will determine what steps you must take to remain compliant with the government in India.
- The type of business structure you select can affect the outside perspective of your company and whether an investor chooses to do business with you.
Types of Business Entities in India
Every business in India must register with the proper government authorities to comply with the laws of this nation. Before learning about how to register a company in India, it is helpful to have a basic understanding of the various types of business structures in India, as well as what is necessary for each business structure to remain compliant.
A sole proprietorship does not involve a separate legal identity for the company. It is run by one person who is personally liable for all debts of the company.
A sole proprietorship needs to file an income tax return each year. Sole proprietorships do not technically fall under company law.
It is easy to operate as a sole proprietorship. Compliance measures may be limited since there is no distinction between an individual and the business.
Investors may be hesitant to invest money in a sole proprietorship due to its lack of status as a separate legal entity.
One Person Company
A One Person Company is a relatively new form of business ownership. It allows a single owner to establish a separate legal entity for his or her business.
Business tax returns must be filed each year. There is limited ROC compliance with a One Person Company.
This is often the best way to establish a company if there is only a single owner. A sole proprietor can continue his or her work while having an official company that limits the owner’s liability. There is a tax exemption for the first three years of the business’s establishment. There are higher benefits on depreciation and no tax on dividend distributions.
Investors may not be as heavily invested with this type of entity as they are with larger companies that are required to be audited.
Limited Liability Partnership
A limited liability partnership is a separate legal entity. The liability of each partner is limited to the contribution that they make to the company. This type of entity is often ideal for service-oriented businesses or those with relatively low investment needs.
Business tax returns must be filed each year. Registrar of Companies returns must be filed.
There is a benefit on depreciation.
This option is only available if there are at least two interested owners, so if you are going solo, it will not be an option for you. Likewise, if one partner decides to leave the business, you might have to dissolve the business and create a new one.
Private Limited Company
A private limited company is considered a separate legal entity from its founders. This type of entity has shareholders and directors, each of whom is considered an employee of the company. This structure is often used for companies with a high turnover.
Business tax returns must be filed each year. Registrar of Companies returns must also be filed. Additionally, audits are mandatory.
There is a tax exemption for the first three years of the business’ establishment. There are higher benefits on depreciation.
Because this type of company is subject to a mandatory audit, businesses with this structure must often incur additional expenses to hire accountants and tax specialists.
Public Limited Company
A public limited company is a voluntary association of members. The company is incorporated and has a separate legal identity from its members. The liability of members is limited to the value of the shares they hold.
Business tax returns must be filed each year. Additionally, this type of business structure is subject to a mandatory audit.
This structure limits the liability of the members. Additionally, there are certain tax exemptions that can minimize tax liability.
Additional expenses are incurred to comply with the mandatory audit requirement.
There are other types of structures that may apply, such as partnership firms and Hindu Undivided Family, but these are not considered separate legal entities or subject to company law.
Considerations when Registering a Company in India
There are several important factors to consider when registering a company in India, including the following:
- Number of owners – The number of owners affects whether certain business entities are available. A One Person Company may be appropriate when there is a single owner. However, if the business has multiple owners, a Limited Liability Partnership or Private Limited Company may be more appropriate.
- Level of legal compliance – The business owner must carefully consider what steps will be necessary to remain compliant at all times. Some entity types require many more steps and obstacles to achieve compliance.
- Liability – A key consideration when registering a company in India is the extent that the owner wants to be liable for the company. Sole proprietors and partners have unlimited liability, so creditors can personally pursue them for unpaid company debts. Companies have limited liability, typically in the amount of contributions that they have made to the business or the value of their shares.
- Value of initial investment – If the owner wants to make a minimal initial investment, a Sole Proprietorship, Hindu Undivided Family or Partnership may be the best option. However, if the business owner is certain that he or she will be able to recuperate the setup and compliance costs, a Private Limited Company is also an appropriate selection.
- Tax structure – Sole proprietors are taxed at an individual rate and the business income is added to other income of the individual. A higher tax rate may be applied to companies.
- Investor contributions – It is difficult for unregistered businesses to obtain funds from outside investors. LLPs and Private Limited Companies are trusted more and may be more likely to receive investments than other types of businesses.
How to Register a Company in India with the Help of New Horizons
New Horizons is familiar with the various entity types in India. Our experts can discuss the pros and cons of each option as well as the factors that are relevant to your selection so you can choose the most appropriate structure. We then assist with all aspects of incorporation. Contact us today to get started on your registration process.