In this blog post, Harsh Moorjani, a student pursuing his final year LLB at Government Law College, Mumbai and a Diploma in Entrepreneurship Administration and Business Laws from NUJS, Kolkata, provides structuring advice to an US Entrpreneur who wants to expand his buisness to India.
Introduction
The 21st century has changed the dimensions of the world; we are now experiencing the dawn of a new age that is “The Start-up Age”.
Not long ago businesses were carried out in the domestic market, and the ultimate aim was to penetrate the local market to maximize profits. With the advent of “Globalisation”, businesses and individuals have gone cross-border, exploiting the plethora of opportunities on territories beyond their jurisdictions.
With new businesses and ventures cropping up every minute, the threat and pressure faced by existing companies have quadrupled. Existing businesses are turning to untapped and unexplored territories to maximize profits, the recent visits by CEO’s of giant technological companies like Apple, Dell, Microsoft to India is a testament to it, whereas start-ups are pushing the industry standards beyond limits and imaginations giving the business leaders a run for their money. As businesses are expanding and emerging at a rapid pace, it is imperative to structure them appropriately for their future viability.
The author will first discuss the different Business Structures in India available to the US entrepreneur coupled with their benefits and drawbacks. Based on the observations, the author will give suitable advice to the US entrepreneur and will cater to his business needs. Finally, the author will give an appropriate conclusion as to his opinion on the ideal way to expand business in India.
Business Structures Available to an US Entrepreneur in India
As the current government promotes India as a Global hub for business via “Make in India” campaigns and by relaxing bureaucratic procedure &norms, thereby minimizing the legal hurdles faced by foreign investors, it is natural that entrepreneurs look at India to expand their business as they once did in China.
There are three main business structures in India and two new hybrid structures that have emerged in India. An overview of each are as follows:-
Sole Proprietorship: This is the most rudimentary and easiest form to carry out a business, where the person who carries out the business is the sole owner. This is an unincorporated form of business without separate legal existence. In other words, it does not differentiate between the business and the sole owner. An US entrepreneur starting out as a small business setup with his capital and minimal debt can consider this form of legal structure. This model is used to start-up a business where one person showcases the key talent, skills, and experience.There are many benefits to this form of business as there no legal formalities or registration, the entrepreneur being the sole owner has complete control and has multifarious tax benefits. The owner benefits wholly from the profits.
Raising capital for business expansion remains a difficulty in this model. There is no perpetual succession in this form as death or insolvency dissolves the business. The main drawback is an unlimited liability and the risk of attachment of the sole owner’s personal property to satisfy the business claims. Based on the above observation this model is not suited where there are two or more founders. A classic example of the sole proprietorship model is eBay, which started out as a small online set up in 1995 and later became a mega online corporation expanding its roots in India.
Partnership: This is a concept of partnership where two or more individuals come together to carry on business for the motive of profit sharing. A partnership deed is required to be signed and registered with the Registrar of partnerships, making it a little more structured than a sole proprietorship.
The cap limit on the number of partners is 20 and partnership deed governs their duties, liabilities, base remuneration, etc. In the eyes of the law, a partnership is not a separate legal entity, however, for the purpose of the tax, the firm name can be used. Cost-Effectiveness, Structuration and easy winding up processes are the benefits of this model.
The drawback is the unlimited liability of the partner to the creditors’ claims the firm defaults on their debts then the partners are liable personally since a partnership firm cannot be sued, but only its partners can be sued. Investors are not keen to invest in this kind of model with such liabilities.The general route taken is to convert to a Limited Liability Partnership (LLP).
Corporation: An US entrepreneur who has a clear vision for his organization should opt to form a private limited company, which is the most sought after structure as it checks all the legal norms and procedures and gives the organization a distinct identity.In India, the Companies Act, 2013 governs this model. A corporation draws a distinction between the shareholders and directors of the company, unlike the previous models. The cap limit on the number of shareholders in a private limited company is 200 and incorporation requires minimum two shareholders and directors.
The benefits of this model are the capacity to raise capital as investors keep a check on their investments and can sell their stocks if the business fails. The liability of the directors and shareholders is limited except when the court lifts the corporate veil to analyze who is responsible for the wrongful act. Perpetual Succession is also a feature of this model.
The drawback is the cumbersome legal pre-requisites and the tedious winding up procedure. A corporation is not meant for experimentation. It is for those who have farsightedness and possess clarity as to their business goals. In recent times American Companies like Microsoft, Levis have heavily invested in India, whereas start-ups like ZoomCar are also paving the way for American start-ups in India.
Limited Liability Partnership (LLP): If one uses a Private Limited model with a Partnership model, it results in an LLP. Like a company an LLP is a separate Legal Entity and the Limited Liability Partnership Act, 2008 regulates this model.
More or less its characteristics are that of a private limited company, although certain obligatory compliances like maintaining registers etc. have been relaxed for an LLP and the winding up procedure is less cumbersome compared to a private limited company.
One Person Company: Lastly, the Companies Act, 2013 introduced a concept called One Person Company which allows a single person to run a private limited company with a single shareholder or a single director and possesses major characteristics of a private limited company.
Road Map for the US Entrepreneur
The ultimate decision of choosing the appropriate business structure vests with the entrepreneur. He can take a suitable decision bearing in mind certain key factors such as:
Liability: If the entrepreneur wants minimum personal liability than sole proprietorship and partnership have to be struck off the list. Corporation, OPC, and LLP then seem a viable option.
The degree of Control and Experimentation: If the entrepreneur is the sole owner or wanting a maximum degree of control and lacks clarity as to the business goals then sole proprietorship would be ideal, the partnership would also seem a viable option with two or more co-founders. OPC is also an alternative but at the cost of complying with certain statutory norms.
Raising Capital and Borrowing Loans: Now if the entrepreneur wishes to raise capital and borrow loans, then LLP and Corporation seem the ideal preference since investors can conduct due-diligence and as these models require strict compliance with statutory norms, giving certain confidence to the investor about the safety of his investment.
The analysis gains further impetus on foreign loans, as they are prohibited in partnership and proprietorship models. However, for a company, foreign investment is allowed whereas in the case of an LLP approval is required for the same.
It i s strongly recommended to opt for a ‘ private limited model’ as opposed to an LLP which is a relatively new concept, holding the investors back due to lack of clarity resulting in hesitancy to invest.
Taxation and Legal Formalities: Lastly, rigid legal norms need to be followed by an LLP, OPC, and Corporation. The tax levied upon them is at a higher rate as compared to proprietorship and partnership models wherein compliance with statutory norms is less obligatory.
Conclusion
Although an LLP or Corporation model appears most viable for a US entrepreneur, it finally depends on the entrepreneurs business needs and prevailing circumstances.
If the entrepreneur’s goal is to expand his business and is seeking investment for the same, the ideal model would be to opt for an LLP or a Corporation.
One can only recommend, not compel. It is the entrepreneurs business vision that will help him choose the appropriate model.
