India Entry & Business Startup Consultings

Business Incorporation in India - A Complete Guide to Company Formation

Doing business in India is becoming a focal point for many international companies. With a significant contribution to global trade and economics, the rise in the Make in India initiative, India is moving faster than ever in becoming the manufacturing as well as a business hub for the world. There has been a paradigm shift after the Covid-19 pandemic and it opened new doors for the expansion of business in India. This is further supported by the Startup India scheme where the government provides support to qualified startups through various incentives thus making a market entry in India easier.

Things to consider while doing business in India

The following points will help you guide through some of the important aspects of Indian markets:

A. Legal Structure

Following four legal structures are most prevalent in Indian markets for doing business:

1) Proprietorship
[Governed by: NA]

It is the simplest form not requiring any mandatory legal registration. It is not considered a separate legal entity from its proprietor and the proprietor is personally responsible for all the liabilities.
Legal Compliances: Apart from compliances with specific laws applicable, no other legal compliances are mandated. Such laws may include Income Tax Act, 1961, Goods and Services Tax Act, 2017, etc. Proofs such as Shop and Establishment act as business proof for such entities.

2) Partnership
[Governed by: Partnership Act, 1932 | Registrar of Firms]

A partnership is the association of two or more persons with common intent to run a business and share profits in a pre-determined ratio. It involves more compliances than sole proprietorship but lesser than companies.

Legal Compliances: Partnership firm involves registering the firm with Registrar of Firms. Although it’s optional to register the firm, doing so is recommended otherwise it will attract the following disqualifications:

  • No power to file court case by a partner against the firm or other partners
  • No power to file a court case by an unregistered firm against 3rd parties
  • No power to claim set-off of balance receivable and payable to a party.

Apart from registration with the registrar of firms, other specific laws like Income Tax Act, 1961, GST act, etc. may attract compliances.
Opening a partnership firm requires a notarized partnership deed. As an identity proof of its legal existence, a PAN card needs to be applied for.

3) Limited Liability Partnership (LLP)
[Governed by: Limited Liability Partnership Act, 2008 | MCA]

As the partners of the partnership firm have unlimited liability, to reduce the financial risk upon them, the LLP concept was introduced. It ensures that the liability of a partner is limited only up to the amount of capital contributed by him.

Legal Compliances: Following are the steps to incorporate LLP:

  • Application for DIN or DPIN
  • Registration of DSC
  • Registration as a user on LLP portal
  • Incorporation of LLP by filing Form 2
  • Filing of LLP Agreement within 30 days of LLP incorporation

4) Private Limited Companies
[Governed by: Companies Act, 2013 | ROC, and MCA]

This is one of the most formal and regulated business structures. This structure is the most preferred option for those looking to expand and enter the Indian business market with its own legal existence.

Legal Compliances: Following are the steps to incorporate a private limited company

  • Obtaining DSC 
  • Selecting, applying, and getting name approval from ROC
  • Drafting, vetting, and printing of Memorandum of Association (MoA) and Articles of Association (AoA), including stamping and signing [e-MoA (INC-33) and e-AoA (INC-34) can also be used]
  • Filing the Form SPICe+ (INC-32)
  • PAN-TAN application
  • Once incorporated, annual compliances need to be ensured like Statutory Audits, ROC filings etc. for timely reporting to governmental authorities.

B. Taxation

Taxation is an important aspect while opening a business. Basic taxation applicable in India is as follows:

Parameters

Proprietorship

Partnership

LLP

Company

Tax Rate*

Slab Rate

30%

30%

30%

[25% if turnover or gross receipts does not exceed Rs. 400 crores in the PY 2018-19]

Other Tax Aspects

Various provisions are incorporated to further reduce the tax rates. For eg: Section 115 BAA/ 115BAB etc.

 

* These are subject to levy of surcharge, cess, interest, penalties, etc.

Startup India Scheme

Startup India is the initiative launched by the Government of India for building a strong ecosystem to support startups and entrepreneurs. If any entity satisfies the criteria of being a startup, then it becomes eligible to avail of the benefits of this scheme.

Startup India Scheme Eligibility

Your entity must satisfy the following criteria:

  • Constitution: Registered Partnership Firm, Limited Liability Partnership or Private Limited Companies
  • Age: The entity’s period of existence and operations should not exceed 10 years from the date of its incorporation.
  • Original Entity: Your entity should not be formed by reconstructing or splitting up an already existing business.
  • Annual Turnover: Annual turnover should not have exceeded Rs. 100 crores for any of the financial year since its incorporation
  • Scalable and Innovative: The entity should work towards the improvement or development of a product, process, or service. It should have a scalable business model with the potential to generate employment and create wealth.

Benefits of Startup India

Startup India Scheme provides the following incentives:

  • Self-certification for compliances under various laws
  • Startup Patent and IPR application and assistance along with rebates
  • Tax Exemption under section 80IAC and 56(2) (viib) of the Income Tax Act, 1961
  • Easier winding up of company
  • Relaxations in public procurement norms

Bottom Line

Startups in India are a great tool for economic development. This decade is of startups and businesses with proactive government support. If you are planning to start a new business in India or planning to launch a startup, feel free to contact the professional for assistance and support.

Also read: Guide to Company incorporation in Singapore

 

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