In this article, Reeja Elizabeth Varghese pursuing Diploma in Entrepreneurship Administration and Business Laws from NUJS, Kolkata, discusses what Structuring advice will you give a US entrepreneur who wants to expand his business in India.

For an aspiring entrepreneur, it is very important to be sure of the legal structure he is choosing for his company. Especially for a foreign national or entrepreneur, who is treading the unknown waters of the new business territory, to make a wise and well reasoned decision while zeroing his business structure. It is important to take critical legal advice and time to think, a wrong choice will significantly affect the fate of a potentially good business model.

Most viable Business structures available to a US Entrepreneur in India

Of late the Government of India has been making several lucrative pitches to foreign entrepreneur and investors to invest here. In this direction the government has tried to make several incorporation procedures for companies and entrepreneurs more relaxed and less cumbersome.

Essentially, the four types of business entity you can choose based on several factors such as liability, taxation and record-keeping are listed below.

Sole Proprietorship

It is one of the most basic and simplest forms of business structures available in India. The incorporation procedure is simple and gives maximum managerial control over the whole entity to a single individual who owns and runs the business. It is well suited for entrepreneurs who prefer to operate and work alone. Another aspect of this kind of business is the appealing taxing regime applicable to such entities because the income and expenses from the business are included on your personal income tax returns. This feature is especially attractive because any losses suffered as part of your business transactions can be offset the income earned under other heads.

However, there are few disadvantages while forming such an entity. As a sole proprietor of your business you will be personally liable for the company’s liabilities. In the event, there is a legal claim or commercial debt against your company, your personal assets shall be at risk to satisfy such claims. Another difficulty faced by sole entrepreneurs is raising capital to start the business. Banks are usually reluctant to provide financial assistance to sole proprietors.

Partnership

A partnership would usually involve at least two or more people who mutually agree to invest and share the profits and losses of the business. So if the business will be owned and run by several individual, then you can consider structuring your business in this manner.

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There are two kinds of partnership structures; General partnership and limited partnership. A General partnership would mean that the partners manage and operate the company and assume responsibility for its debts and liabilities. In limited partnership would have both general and limited partners. A General partner would have control and liability towards the company unlike a limited partner who would act only like an investor and have no managerial control over the company and would not have the same liabilities as a general partner. It is always convenient to have a partnership entity with active partners since it is more easy to form. A limited partnership could be a good option if you plan to have several investors otherwise for a new enterprise this could mean lot of paperwork and fillings.

A major advantage of structuring a partnership business is the taxing regime. A partnership entity doesn’t pay any tax but passes it on to the partners through profits or losses. Each partner will disclose and indicate his/her share of partnership income, deduction and profits while filing their individual income tax returns. Even though partnership pays no tax, it is required to submit its income and report it on a separate informational return.

Another feature of a partnership business is that each partner can act on behalf of all other partners such as taking loans and making business decisions that will affect and be binding on all the partners provided the agreement permits. Therefore, it is always advisable to enter into a very thorough and well drafted partnership agreement considering the personal liabilities of the general partners. Incorporating a partnership could be more expensive than sole proprietorship due to the requirement of extensive accounting and legal services.

Corporation

It is by far the most complex and expensive structuring model for incorporating a business in India. Incorporating a Company would mean that it is an independent legal entity recognized under law. There should be a minimum of two shareholders and one director to form a company. Unlike the previous business structure, this one draws a line between the liability of the shareholder and its directors. One of the biggest benefits is the protection from liability onto its shareholders and director. If you incorporate a company, you are not putting your own assets at risk.

It is more easy to raise capital for a company due to its stable structure. It can raise its own money through initial public offering and sale of shares. Also, investors find business structures such as corporations more stable and reliable. A business structure like this is more suited for a more farsighted business model and venture.

However, the major drawback while incorporating a company is the high cost in forming one under the laws due to too many formalities and paperwork. A company has to follow more rigorous procedure and regulations. Each company is duty bound under law to keep a proper accounting system to be more accountable to the shareholders and  public in general.

Limited Liability Partnership

If one uses a private limited company structure with a partnership model then one forms a Limited liability Partnership. This is also recognized as a separate legal entity like a corporation.

For a US entrepreneur, a Corporation or a Limited liability partnership is most suitable keeping in mind the intention of a long-term investment and return. It is always recommended for a prospective US entrepreneur to do his homework and proceed and make decisions based on proper advice that will help to take the business in the proper direction.