Choosing the right business structure is a pivotal decision for any entrepreneur or corporate entity, especially for foreign companies looking forward to enter India market. Every structure be it Limited Liability Partnership (LLP), Private Limited Company or a Branch Office has its own legal, operational, and financial implications impacting everything from tax efficiency to operational flexibility.
The motive of this article is to draw a clear comparison between different structures touching on key factors such as taxation, flexibility of funding, compliance obligations, operational scope, and profit repatriation in order to help the budding entrepreneurs in determining the structure that best suits their business needs.
| Criteria | Limited Liability Partnership (LLP) | Private Limited Company | Branch Office |
| Laws Applicable | Limited Liability Partnership Act, 2008 | Companies Act, 2013 | Foreign Exchange Management Act (FEMA) and Companies Act, 2013 |
| Minimum Share Capital | Minimum capital not prescribed | Minimum capital not prescribed | Minimum capital not prescribed but foreign parent should have registered profits |
| Members Required | Minimum two designated partners, no restrictions on upper limit | Requires at least two shareholders (members), maximum limit of 200 | Operates as an extension of the foreign parent company, no ‘members’ in the traditional sense |
| Directors Required | Two designated partners required of whom at least one must be an Indian resident. The term “resident” for the above purpose is defined as someone who has stayed in India for at least 120 days during the financial year. | Minimum two directors required, of whom at least one director must be a resident of India. Section 149(3) of the Companies Act, 2013 mandates that every company must have at least one director who has stayed in India for at least 182 days in the previous year (resident director). | A branch office does not require directors but must have an authorized representative, appointed by the Board of Directors, to carry out the activities of branch in India |
| Board Meeting Requirements | Not mandatory; Meetings can be scheduled as per LLP agreement | At least four board meetings per calendar year, with a gap of not more than 120 days between the two consecutive meetings | Not applicable; functions are carried out under the foreign parent entity’s directions |
| Statutory Activities & Compliance | Moderate compliance obligations, including annual filings for financial statements and solvency declarations with exemptions from certain filings and shareholder meeting requirements. | Relatively Higher compliance requirements as compared to LLP including annual returns, audited financial statements, and various filings with the MCA. | Minimal compliance requirements, annual reports and audited financials are to be filed with the MCA, along with strict adherence to RBI and Income Tax regulations. Registration of branch office is valid for three years and further renewal can be made for a term three years each. |
| Annual Filing Requirements | To stay compliant, LLPs must file annual returns and statements of accounts with the ROC: Form LLP-11 (Annual Return) within 60 days from the end of the financial year, and Form LLP-8 (Statement of Account & Solvency) within 30 days of six months from the end of the financial year. | Companies must hold their AGM within six months of the end of every financial year and file an annual return (Form MGT-7/7A) within 60 days of the AGM. Financial statements (Form AOC-4) and the annual income tax return must also be filed within their respective deadlines. | Branch offices must maintain audited accounts and file annual returns with the RBI, ROC, and Income Tax Department, including Form FC-4, Statutory Audit, Form FC-3, Annual Activity Certificate (AAC), Income Tax Return, and Tax Audit report (if applicable) |
| Exit Strategy & Transferability | Transfer of Ownership requires the consent of all partners, making it complex; | Shares can be transferred between shareholders, but restrictions may be placed in the Articles of Association, facilitating easier transitions | Transfer of Ownership is not applicable; fully controlled by the foreign parent company |
| Permitted Activities | Can engage in any legal business activities as per the LLP agreement | Can engage in any legal business activities as defined in the Memorandum of Association | Limited to the activities specified in the RBI approval; primarily for support, administrative, or marketing functions |
| Payment of Dividend | Profits can be distributed among partners as per the LLP agreement; It is not subject to tax in the hands of the recipient partners | Dividends can be paid to shareholders; subject to tax, which adds to overall tax liability. | No dividends can be paid; profits are repatriated to the foreign parent company, subject to RBI guidelines |
| Perpetual Succession | Yes, LLPs can continue to exist independently of partners’ changes | Yes, Private Limited Companies have perpetual succession, continuing even with changes in shareholders or directors | No, as a branch office is not a separate legal entity; its existence is tied to the foreign parent company |
| Ease of Formation | Relatively easy to form with fewer compliance requirements | Relatively easy to form with fewer compliance requirements | Requires RBI approval and compliance with FEMA, making it less straightforward to establish |
| Taxation Considerations | LLPs offer notable tax advantages, taxed at a flat 30% (subject to applicability of surcharge and Cess) under the Income Tax Act, 1961, solely on the LLP’s earnings, avoiding double taxation on partners’ profits. | Companies are taxed as separate entities. The rates currently applicable are 15%/22%/25%/30% (subject to applicability of surcharge and Cess). Unlike LLPs, companies face double taxation—profits are taxed in the hands of the company, and dividends are taxed in the hands of the shareholder. | Branch offices of foreign companies are taxed at 35% (subject to applicability of surcharge and Cess), Suited for limited activities in India, branch offices can be costly for profit-driven operations due to restricted tax benefits. |
| Stamp duty | LLPs incur lower stamp duty on capital contributions and agreement filings, making them suitable for businesses with higher Capital infusions. The business which raises funds from close circles or foreign holding company can opt for LLP. LLPs are not suitable to raise funds from VC, AIF etc | Companies face variable stamp duty on share issuance, depending on state, especially for businesses seeking significant growth capital. Companies can issue shares to foreign parents, Private Limited Companies support FDI but incur higher stamp duties compared to LLPs or branch offices, making them suitable for businesses with high funding needs. | Branch offices can avoid stamp duty by not issuing shares, relying instead on capital remittances from the foreign parent for operations. Focused on administrative or low-scale activities, they benefit from simpler regulatory requirements and are suited for businesses prioritizing compliance ease over investment-driven expansion. |
| Access to Debt | LLPs can borrow from local banks without restriction, but banks may view LLPs as less favourable than Private Limited Companies due to their structure. | Private Limited Companies have broader access to debt, including ECBs, loans from financial institutions, and inter-corporate loans. | Branch offices cannot raise loans from domestic markets and rely solely on their foreign parent for funding. |
| Capital Withdrawal | Withdrawals are generally easier and less restricted, as partners can withdraw capital contributions according to the terms set in the LLP agreement. | Capital withdrawal in is complex, as significant equity reductions require board and shareholder approval, adding to overall complexity of the process. | Branch offices operate under the financial framework of the parent company and cannot withdraw capital, facing restrictions on profit remittance according to RBI guidelines. |
| GST registration and Labour Compliance | GST registration is required for turnover above ₹40 lakh (₹20 lakh for services), different limits are prescribed for special category states. Labor compliance requirements are moderate and typically align with the number of employees. | GST registration is required for turnover above ₹40 lakh (₹20 lakh for services), different limits are prescribed for special category states. Labor compliance is more extensive, including PF, ESI, and gratuity provisions based on employee count and statutory mandates. | GST registration is mandatory regardless of turnover as it operates under a foreign entity. Labor compliance is similar to companies, with strict adherence to local employment laws for Indian employees. |
| Import of goods and services | LLPs can import permitted goods and services within the scope defined in the LLP agreement, though certain imports may require government approval | Companies can freely import goods and services under FEMA but must comply with applicable sector-specific FDI norms and licensing requirements. | Branch offices can import goods and services strictly within the scope of their approved activities under RBI authorization and FEMA guidelines. |
| Export of goods and services | LLPs can export goods and services as per the LLP agreement, ensuring alignment with their approved business activities. | Companies have greater flexibility in exporting goods and services without specific activity restrictions, allowing for streamlined export operations under standard compliance and FEMA regulations. | Branch offices can export goods and services only within the scope approved by the RBI, typically limited to the foreign parent’s primary business activities, and must adhere to FEMA guidelines |
| Remuneration | Partner remuneration is flexible, based on the LLP agreement and tax efficient, often structured as a share in profits without limits under tax law. | Directors can receive a remuneration as per board approval, but shareholder dividends are restricted by profit availability and attract tax. | Remuneration is limited to salaries for local staff, as profits cannot be distributed; any repatriation must comply with RBI and tax guidelines. |
Choosing the Right Structure; Conclusion:
LLP
Tax Efficiency: An LLP may be advantageous for minimizing tax liabilities since the share of profits drawn by the partners is exempt.
Operational Flexibility: LLPs allow for straightforward management with fewer compliance requirements, making them suitable for firms with low compliance needs and domestic funding sources.
Private Limited Company
Capital Raising: For businesses planning significant growth and requiring external funding, a Private Limited Company offers better avenues for raising capital through equity.
Growth Strategy: Although requiring higher compliance, Private Limited Companies provide flexibility for Foreign Direct Investment (FDI) and access to debt, making them suitable for businesses with long-term growth ambitions.
Branch Office
Foreign Operations: A branch office is practical for foreign entities looking to establish a presence in India without forming a separate entity. However, it comes with limitations regarding local borrowing and profit repatriation, making it ideal for administrative or support roles without heavy investment or profit repatriation flexibility.
Selecting the ideal structure depends on the scale, objectives, and growth strategy of your business. LLPs are best for low compliance and domestic funding, Private Limited Companies for strategic expansion and external funding, and Branch Offices for foreign entities focused on support operations.
Engaging an advisory firm like BCL India is crucial for determining the optimal business structure—be it an LLP, Private Limited Company, or Branch Office. Their expertise in regulatory compliance, tax implications, and funding options ensures informed decision-making. BCL India can guide you in aligning your business objectives with the most advantageous structure, helping to mitigate risks and maximize growth opportunities.
