There are a variety of business structures foreign companies can choose when setting up their presence in India. Choosing well is an important decision for the executive team or owners as each structure comes with its own characteristics, such as the ability to trade publicly, being a separate legal entity or being a foreign company expansion.
In this guide, we have listed the different types of business structures available to foreign businesses in India.
- Companies are classified into four categories, which are size, number of employees, control and access to capital
- The most common type of business structure is the private limited company
- Foreign companies can set up a joint venture with an Indian company to conduct business activities in sectors that do not allow 100% foreign ownership.
The main types of business entities in India are:
- Private limited company
- Public limited company
- Joint-venture company
- Branch office
- Subsidiary company
There is also a one-person company, sole proprietorship & partnership available to foreign entrepreneurs, but we won’t focus on them in this article.
Private limited company
A private limited company in India is a separate legal entity that protects its shareholders’ personal assets. The net capital of a private limited company is the total shares held by each shareholder. Shares of this company type cannot be publicly traded or transferred.
According to the Companies Act, to be able to register a private limited company, the following criteria must be satisfied:
- A minimum of two and a maximum of 15 directors
- One director must be an Indian resident
- Minimum and maximum of two and 50 shareholders
- The authorised capital of a minimum of INR 100,000
- Must have a registered office address in India
A private limited company is divided into three categories:
- Company limited by shares
- Company limited by guarantee
- Unlimited company
Public limited company
Unlike a private limited company, a public limited company can be publicly traded and listed on the stock exchange. A public limited company must have a minimum of three directors, of which at least one director must be an Indian resident.
There must be a minimum of seven shareholders and no limit on the maximum number of shareholders. The authorised capital must be at least INR 500,000 and must have a registered office address in India.
A joint venture (JV) is a business entity where two or more people or companies share profits, losses, management and responsibilities. Foreign investors seeking to expand to or set up a company in India can set up a JV with an Indian partner.
In sectors that do not allow 100% foreign ownership, this structure is the best option for foreign companies wanting to enter the Indian market, as investors can share liabilities and jointly manage the risks associated with the business, limiting their individual exposure.
The branch office serves as an extension of the parent company and carries on the same business activities. Branch offices in India cannot directly conduct manufacturing activities unless those operations are carried out in a Special Economic Zone (SEZ) with the objective of exporting goods out of India. It can also subcontract manufacturing tasks to an Indian company.
Additionally, to be able to establish a branch office in India for the purposes of engaging in the following activities, a foreign company must be involved in manufacturing and trade activities in its home country:
- Exporting or importing goods
- Providing export or consulting services
- Conducting research
- Representing and serving as the parent company’s buying or selling agent
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Even though a subsidiary is not a structure on its own but merely indicates control, foreign businesses can own it as a holding company from abroad.
According to section 2 (87) of the Companies Act 2013, a subsidiary company or subsidiary in relation to any other company (that is to say the holding company), means a company in which the holding company:
- Controls the composition of the board of directors
- Exercises or controls more than one-half of the total voting power either on its own or together with one or more of its subsidiary companies
There are two types of subsidiaries in India:
- Wholly-owned subsidiary – the parent company owns 100% of the subsidiary’s shares but can only be formed in sectors that allow 100% foreign direct investment
- Subsidiary company – the parent company owns 50% of the subsidiary’s shares
How Acclime can help
Before setting up a business in India, investors should carefully research the different types of business structures to understand how they function and who or what is necessary for that type of structure, as each company has other benefits and drawbacks.
Contact Acclime for support and advice on registering a company in India. We have a team of market entry & expansion professionals who can help you throughout the process.
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