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A guide to Business Setup in India

Business set-ups in India by Indian Entities or Indian Residents are regulated by the provisions of Companies Act, 1956. The Registrar of Companies (ROC) and the National Company Law Tribunal (NCLT) both working under the Ministry of Corporate Affairs have been entrusted with the responsibility of ensuring compliance with the companies Act.

Setting up business in India by an Indian Entrepreneur involves all crucial decisions including regulatory requirements for formation of a company, powers and responsibilities of the directors and managers, raising of capital, holding company meetings, maintenance and audit of company accounts and winding up of a company.

With a huge practice of anti competitive business practices, and abuse of dominance by an organization, Government ensures a fair and healthy competition by setting up the Competition Commission of India in the economy by enactment of the Competition Act, 2000

Besides, various challenges and restrictions that Indian company faces, Government at both the Central and State level has taken several steps towards developing a growing economy that attracts plenty of businesses – and with good reason. Given this, some of the benefits of doing business in India are as follows:

  • Stable political environment and responsive administrative set up.
  • Well established judiciary to enforce rule of law.
  • Land of abundant natural resources and diverse climatic conditions.
  • Cost competitiveness and low labour costs.
  • Huge untapped market potential.
  • Reduction in import tariffs.
  • Strict Compliance with World Trade Organization (‘WTO’) norms.
  • Healthy banking and financial institutions.

BUSINESS FORMS IN INDIA
The various forms of business that can be formed in India are as follows:
 
1. Company
  • Private Limited Company
  • Public Limited Company
  • Section 25 Company
2. Partnerships / Proprietorships
  • Limited Liability Partnership (LLP)
  • Sole Proprietorship
  • Partnership Business


PRIVATE LIMITED COMPANY

A private limited company is a type of company incorporated under the laws of Companies Act and is one of the most popular forms of business entities. It has shareholders with limited liability and its shares may not be offered to the general public, unlike those of a public limited company.

Unlike business entities such as a Sole Proprietorship and Partnership, it has a separate legal status from its shareholders and directors who have limited liabilities for the debts and losses of the company. It has the rights to own properties. It usually has the words 'Private Limited' at the end of its name.

Important Features of Private Limited Company

  • Formed and registered by complying with the prescribed formalities prescribed under the Act.

  • Legal person in the eyes of law distinct from its members.

  • Separate Person having its own rights and obligations.

  • Restriction on right of transfer of shares.

  • Can sue or be sued in its own name.

  • Enjoys the benefit of perpetual succession. Death or insolvency of shareholder(s) does not effect the continuity.

  • Foreign Direct Investment is permissible.


PUBLIC LIMITED COMPANY

A public limited company is a type of company incorporated under the laws of Companies Act and is another form of business entities. It has shareholders with limited liability and its shares can be offered to the general public, unlike those of a private limited company.

Unlike business entities such as a Sole Proprietorship and Partnership, it has a separate legal status from its shareholders and directors who have limited liabilities for the debts and losses of the company. It has the rights to own properties. It usually has the words 'Limited' at the end of its name.

Important Features of Public Limited Company

  • Formed and registered by complying with the prescribed formalities prescribed under the Act.

  • Legal person in the eyes of law distinct from is members

  • Separate Person having its own rights and obligations

  • shares are freely transferrable

  • Can sue or be sued in its own name

  • Enjoys the benefit of perpetual succession. Death or insolvency of shareholder(s) does not effect the continuity

  • Foreign Direct Investment is permissible


SECTION 25 COMPANIES

An association having objects to promote commerce, art, science, religion, charity or any other useful purpose and not having any profit motive can be registered as nonprofit company under section 25 of the Companies Act, 1956. This section empowers the Central Government to grant a license directing that such an association may be registered as a company with limited liability, without the addition of the words `Limited’ or `Private Limited’ to its name.

Important Features of Section 25 Company

Section 25 empowers the Central Government to issue a license to a company which is proposed to be incorporated provided it complies with conditions, as to its objects, application of its profits/income and distribution of its profits, enumerated as under: -

  • It is being formed for promotion of commerce, art, science, religion, charity or any other useful object.

  • It intends to apply its profits or other income in promotion of its objects.

  • It intends to prohibit payment of dividend to its members.


LIMITED LIABILITY PARTNERSHIP

A Limited Liability Partnership, popularly known as LLP combines the advantages of both the Company and Partnership into a single form of organization. An important feature of LLP compared to that of an unlimited partnership is that one partner is not responsible or liable for another partner's misconduct or negligence. In an LLP, all partners have a form of limited liability for each individual's protection within the partnership, similar to that of the shareholders of a corporation. However, unlike corporate shareholders, the partners have the right to manage the business directly. An LLP also limits the personal liability of a partner for the errors, omissions, incompetence, or negligence of the LLP's employees or other agents.

Important Features of Limited Liability Partnership

  • LLP shall be a body corporate and a legal entity separate from its partners.

  • Mutual rights and duties of partners of an LLP inter se and those of the LLP and its partners shall be governed by an agreement between partners or between the LLP and the partners

  • The LLP will be a separate legal entity, liable to the full extent of its assets, with the liability of the partners being limited to their agreed contribution in the LLP

  • Every LLP shall have at least two partners and shall also have at least two individuals as Designated Partners, of whom at least one shall be resident in India

  • The LLP shall be under an obligation to maintain annual accounts reflecting true and fair view of its state of affairs


SOLE PROPRIETORSHIP

Being the oldest forms of business in India, Sole Proprietorship also stands to be the most common form. This form has the merit of being relatively no compliances and formalities free. It is a one-man organization where a single individual owns, manages and controls the business. A Sole Proprietorship is run and managed by its owner and he is primarily responsible for its success and failure.

Important Features of Sole Proprietorship

  • Capital required by the organization is supplied by the owner himself

  • Owner has complete control over all aspects of his business

  • Owner alone enjoys the benefits or profits of the business

  • The firm has no legal existence from its owners

  • The liability of the proprietor is unlimited.


PARTNERSHIP

Partnership is defined as a relation between two or more persons who have agreed to share the profits of a business carried on by all of them or any of them acting for all. A partnership is formed by an agreement, which may be either written or oral. When the written agreement is duly stamped and registered, it is known as "Partnership Deed". Ordinarily, the rights, duties and liabilities of partners are laid down in the deed. But in the case where the deed does not specify the rights and obligations, the provisions of the Indian Partnership Act, 1932 remain applicable.

Important Features of Partnership

  • Two or more natural persons are required to form a Partnership

  • Partners share profit and loss as per Partnership Deed

  • Liability of Partners is unlimited

  • Registration of Partnerships is not required

  • Partnership is governed by the Partnership Deed entered into between the Partners.