In this blogpost, Sristy Ghosh, Student of University of Calcutta and the Diploma in Entrepreneurship Administration and Business Laws by NUJS, writes about the four types of legal structures, important elements for choosing the business structure, Some requirements from the Foreign Company as per the Indian Companies Act and the procedure for Winding up of a Foreign Company.
One of the most pivotal choices of an Entrepreneur, in a Business, is to choose the legal structure of his business, and not just choose the business structure, but choose correctly. While a wise decision might adorn an entrepreneur’s fate, a wrong one might nip the business, right in the bud.
There are four types of legal structures that one can choose from before starting up their business, namely;
- Self Proprietorships and One Person Companies (OPCs): It is the simplest structure and involves an individual who owns and operates his enterprise. It is best one intends to work alone and suitable for small start-ups.
- Partnerships: It is when two or more persons agree to share the profits of a business carried on by all or any of them, acting for all. It is best suited for two or more friends trying to open their start up.
- Limited Liability Partnerships ( LLPs ) : It is a standard structure recognized internationally which seeks to incorporate the operational flexibility of a partnership with the benefits of limited liability and separate legal identity of a company.
- Companies: Depending upon the minimum prescribed share capital, a company may be Public, Private or a One person Company. A company may also be Limited, Unlimited or Limited by Guarantee in terms of their Liability.
The selection of a correct or an incorrect structure of business will be affected by these five main elements:-
- Registration of the Business : The procedure of registering the business is the first step towards the formation of the business, and every structure has a different approach towards the registration. While in a sole proprietorship the terms and conditions are easy, it a bit more complicated in the other structures.
- Liability of the Business : How much liable or to what extent the entrepreneur wants to liable to the shares of his business will be determined by this tenet after selecting the structure of business wisely.
- The expense of the Entrepreneur : With how much budget the entrepreneur has come to start off his business has to be kept in mind before selecting the structure of business, as financing and funding from other sources are possible only in Public Companies.
- Taxation System : Every business structure has its own taxation system, the sole proprietors and partnership firms has to pay lesser tax than the Private and Public Companies. That is however because of our Tax system of the country. The richer one is, the more tax he has to pay.
- Time taken : A sole proprietorship, being a small project will emerge as a successful identity in a short while a Company will need time and patience to reach the epitomes of success.
However, there are other things as well that would be synonymously dynamic with the change in the business structure such as the legal entity status, perpetual succession, audit reports and finance.
These are some of the basics; one need to keep in mind before initiating any kind of entrepreneurship. As for a European entrepreneur who wishes to expand his business in India, certain other things are to be kept in mind. Before setting up the business in India, he should be asking himself the following questions:
- Am I expanding my business to India or setting up a different branch of business altogether?
- How shall I conduct the business of India from Europe?
Another thing to be kept in mind certainly would be that the European already has an established business in a foreign country.
Considering everything regarding these matters and all possible situations, the legal structure that would be best suited for the European, who wants to expand his business in India would be a Foreign Company vide section 2(42) of the Companies Act, 2013.
As per Section 2(42) of the Companies Act, 2013, a “foreign company” means a company or a body corporate incorporated outside India which,
- Has a place of business in India whether by itself or through an agent, physically or through electronic mode, and
- Conducts any business in India in any other manner.
We must keep in mind that the European, who wishes to expand, has a structured entrepreneurial set up in Europe, he is just expanding it further to India, and that is why we are not considering the other structures of entrepreneurship which would require a start up from the very beginning.
Section 380 of the Companies Act, 2013 lays down that every foreign company which establishes a place of business in India must, within 30 days of the establishment of such place of business, file with the Registrar of Companies for Registration some of the following documents mentioned later.
Documents to be filed with the Registrar of Companies within 30 days of the establishment of business:
- A certified copy of the charter, statutes or memorandum and articles, of the company or other instrument, constituting or defining the constitution of the company and if the instrument is not in the English language, a certified translation thereof in the English language.
- The full address of the registered or the principal office of the company
- A list of the directors and the secretary of the company containing such particulars as may be prescribed.
- The name and the address or the names and the addresses of one or more person resident in India authorized to accept on behalf of the company service of process and any notices or other documents required to be served on the company.
- The full address of the office in India which is deemed to be its principal place of business in India.
- Particulars of opening and closing of a place of business in India on earlier occasion or occasions.
- Declaration that none of the directors of the company or the authorized representative in India has ever been convicted or debarred from formation of company and management in India or abroad
- Any other information as may be prescribed.
It is the duty of the foreign company to ensure that the name of the company, the country of incorporation, the fact of limited liability of members is exhibited in the specified places or documents as required under section 382.
Some requirements from the Foreign Company as per the Indian Companies Act
As per Section 381, a Foreign Company needs to maintain books of Account and a file a copy of balance sheet and profit and loss account in prescribed form every year. These accounts should also be accompanied by a list of place of business established by the foreign company in India.
Winding up of a Foreign Company
Vide section 376 of the Companies Act, 2013, it is provided that when a Foreign Company, which has been carrying on business in India, ceases to carry on such business in India, it may be wound up as unregistered company, even though the company has been dissolved or ceased to exist under the laws of country in which it was incorporated.
Another provision suggests where not less than 50% of the paid-up share capital of a foreign company is held by one or more citizens of India or by one or more bodies corporate incorporated in India, whether singly or in the aggregate, such company shall comply with the provisions of this act as may be prescribed by the Central Government with regard to the business carried on by it in India, as if it were a company incorporated in India.
“ Carrying of business” or “Business carried”
Having a share transfer office or share registration office will constitute a place of business. In a decided case of Tovarishestvo Manufacture Liudvig Rabenek , it was held that where representatives of a company incorporated outside the country frequently sojourned in a hotel in England from where they looked after their business. As it was a continuous process and important decisions were regularly being taken from that same place, it was held that the company had a place of business in England.
In another case, it was held that having a mere property will not amount to a place from where business is carried on.
The following activities do not constitute “carrying on of business”
- Carrying small transactions
- Conducting meetings of shareholders or even directors
- Operating bank accounts
- Transferring of shares or other securities
- Operating through independent contractors
- Procuring orders
- Creating or financing of debts, charges on property
- Securing or collecting debts or enforcing claims to property of any kind.
At last, but not at the least, I would like to wish the European entrepreneur All the very Best in his endeavour to expand his business in India!