In this article, Brinda Dubey pursuing Diploma in Entrepreneurship Administration and Business Laws from NUJS, Kolkata, gives structuring advice to an Indian Entrepreneur who wants to expand to Africa.
Expanding one’s business is a desirable object for diversification of its commercial activities beyond national borders to venture into new markets. Logistics, place of Manufacture, marketing and governing policies, financial flows of such entities can be done by construing the entire world as a single market for optimum profitability.Selection of the most appropriate markets is one of the primary, most important initial steps to be taken by an entrepreneur.
Some common modes from which an entrepreneur can choose are Exporting,Licensing and Franchising Management,Contracting,Turnkey Contracts (are common in international business in the supply,erection and commissioning of plants like in the case of oil refineries, steel mills, agreement by the seller to supply a buyer with a facility fully equipped and ready to be operated by the buyer’s personnel, who will be trained by the seller), fully Owned Manufacturing Facilities, Assembly Operations, Joint ventures, Mergers and acquisitions, strategic alliance and counter trade and buying out an existing concern to name a few. It is always open to the entrepreneur to test the international waters through any of these modes before firmly establishing a foothold in the market by establishing a business.
The next important decision is ascertaining the business structure. For deciding upon a business structure your financial position currently and the type of business structure in which on which one is operating assumes great significance.
The type of business structures prevalent in India
- Sole proprietorship
- Partnership
- Public or Private Company
- One Person Company
- Limited Liability Partnership
In addition to these the type of businesses, structures prevalent in Africa are –
- Business Trust
- Personal Liability Company
when one is setting up their business, one of the first decisions they’ll have to make is what kind of legal entity to register. Structure of my business should be keeping mind the potential regulatory issues, tax issues, intellectual property issues that might come up at the same time being mindful about the exit strategy if need be.Tax issues are instrumental in determining the framework of a country’s overseas operations aside from being crucial in the management of the capital and product pricing along with currency control, Understanding how to repatriate money generated overseas.Each business entity has its own pros and cons, in-depth knowledge of all structures is vital and hence is discussed in detail.
Sole proprietorship
Is when a single owner operating and owning the enterprise.It is simple to set up and manage and generally not requiring legal registration. If an entrepreneur plans on working alone, he can start trading in his own name immediately and this type of business structure has appealing tax aspects as one is taxed according to personal income tax rates.However, one runs the risk of their personal assets being seized for a debt or a claim and in this structure hence incurs personal liability. Financial institutions are also often reluctant and vary to advance loans or any financial help. Also, the needs of the business might evolve requiring a much more elaborate structure.
Partnership
A partnership is defined as a relation between two or more persons who have agreed to share the profits of a business carried on by them or any of them acting for all.If a business will be owned and operated by several individuals, an entity can take a look at structuring your business as a partnership., the partners manage the company and assume responsibility for the partnership’s debts and other obligations. In addition, each general partner can act on behalf of the partnership, take out loans and make business decisions that will affect and be binding on all the partners.Establishing Partnerships is a more expensive affair than sole proprietorships as it is more in along the lines of a company in terms of legal compliances and accountability but the personal liability of the partners subsists even if the Partnership has been sequestrated and all assets sold, a creditor can claim against the personal assets of the individual partners.Even if the partnership firm is a more inexpensive and easier way to set up, this kind of structure whether viable or not depends on the needs of the business.
Types of Partnership in Africa
General/ordinary Partnership: partners liable jointly and severable for the debts of a Partnership.
Anonymous (sleeping) Partnerships: the anonymous partner is not known to the public and liable to the partners for the pro rata share.
Commanditarian Partnership: the partner commandite is purely a financial participant with a restricted liability-similar to a shareholder in a company. He shares in the profits and losses, but his liability is restricted to his specific contribution or an agreed amount (En commandite partnership, similar to limited liability partnership)
Private Company
Mostly for foreign investors a private company is the most suitable option as includes the least amount of annual compliances. The directors do not need not be African residents or nationals. Even though it is Compulsory to register and complex and expensive if a business venture with a potentially high annual turnover and consists of shareholders, a Private Company may be the best option. A private company is seen as a separate juristic person with its own legal identity in the eyes of law which serves as its biggest advantage.Shareholders can not be held personally liable for any debt the company might incur during the course of doing business, or should the business fail.
Business trust
A business trust is defined as a trust where the trustee uses the trust assets to do business for profit in order to benefit the trust beneficiary or to further the aims of the trust. It might just be beneficial to conduct one’s business in this framework as trust protects your assets against personal creditors because the assets of the trust belong to the trust alone. This means that creditors can not claim against your personal assets.The cost of administering a trust is also lesser as less legal requirements have to comply with as opposed to a company, a trust is not required to appoint an auditor, disclose financial statements, pay annual fees to the Registrar, and so on it is even cheaper and easier to dissolve. Taxes are also less complicated.
Personal Liability Company
Advantageous for persons such as attorneys, doctors and accountants, being statutorily prohibited from enjoying limited liability, often incorporate a personal liability company to manage their affairs.As an entrepreneur, the scope is lesser.
Essentials to be kept in mind
Strategy to be employed is radically different due to non-discountable differences in the business environment such as the political environment,nature of the government,legal system,cultural differences (Factors such as language, religion, customs, traditions and beliefs, tastes and preferences, social stratification, social institutions come under this ambit) and most importantly the economic environment including but not limited to nature and level of development of the economy, economic resources, size of the economy, economic systems and economic policies, economic conditions,trends in various economic indicators like national income, per capita income, foreign trade, inflation rate, industry production, etc.
Legislative Provisions governing such expansion in India
In India economic reforms has opened up important avenues for promoting global business by Indian entrepreneurs. The most important legislation is the Foreign Exchange Management Act (FEMA) which has changed the entire perspective on foreign exchange particularly those relating to investment abroad.
In order to make their investments abroad.Indian entities need funds to meet their various capital requirements; to make equity participation in overseas ventures as well as to acquire foreign companies or businesses. Under the Foreign Exchange Management Act (FEMA) and the various notifications issued by the Reserve Bank of India therein, the investments in overseas JVs/WOSs may be funded out of one or more of the following sources:- withdrawal of foreign exchange from an authorized dealer; capitalization of exports and other dues; external commercial borrowings and foreign currency convertible bonds raised abroad as well as through American Depository Receipts (ADRs) and Global Depository Receipts (GDRs).
Safeguard against expansion
Indian entrepreneurs while investing abroad face various commercial and political risks. To ensure safe and successful overseas expansion plans it would be expendient for them to obtain a comprehensive insurance cover against all such risks the same can be obtained from Export Credit Guarantee Corporation of India Limited (ECGC).
Moreover ‘the Arbitration and Conciliation Act, 1996‘ provides a statutory provision for settlement of all commercial disputes of an enterprise without having recourse to the court of law. In India, the relief against the problem of double taxation faced by an entrepreneur while expanding his/her business abroad has also been provided through schemes of bilateral and unilateral relief in the same.
Conclusion
Obtaining the requisites permits, getting the business registered in Africa with its developing economies,investor-friendly policies, vast amount of resources spells out lucrative business opportunities for entrepreneurs looking to supplement their businesses.Countries like Rwanda and Mauritius with its business friendly regulations on getting credit, strengthening minority investor protections,changing labour legislation, easier enforcement of contracts, credit facilities and ease, simpler tax payment, registration of property, can be approached for establishment as well as expansion as they offer huge benefits due to their business attracting regulations with view and subject to the factors as spelt out above in addition to others to orient and guide such businesses.
References
- https://www.entrepreneur.com/article/38822
- http://www.esupportkpo.com/images/Learning%20Pages%20-%20Articles%20-%20Types%20of%20Business%20Structures%20in%20India.pdf
- http://www.archive.india.gov.in/business/doing_business/oversea_opp.php
- http://mg.co.za/article/2010-05-17-the-best-structure-for-your-business
- http://southafrica.smetoolkit.org/sa/en
Informative blog. Thanks for sharing such a nice & informative blog.