The Pros and Cons of Setting up a Private Limited Company in India

For foreign investors looking to enter the Indian market, setting up a subsidiary in the form of a private limited company is often the simplest and most preferred business structure. A private limited company in India is a company which is held by a small group of people, with a minimum of 2 (two) and a maximum of 50 (fifty) members. A minimum of 2 (two) directors are required to set up a private limited company in India, with at least 1 (one) director being an Indian resident. A private limited company in India is governed by the provisions of the Indian Companies Act, 2013 and the rules thereunder. Setting up a private limited company in India offers a host of advantages for foreign investors, especially medium and large enterprises. We have identified below some of the key pros and cons with respect to setting up such a company in India for your consideration.

Pros of a Private Limited Company:

1. Simple And Easy Set Up: No specific approval of the Government of India is required for a foreign investor to set up a private limited company in India, unless the sector in which the foreign investor is looking to invest is a part of the restricted list of the Foreign Direct Investment Policy of India[1]. A private limited company can be 100% owned by foreign shareholders. There is no minimum capital that is required to set up a private limited company in India and such a company can be set up within a period of 2 (two) weeks.

2. Minimum Risk: The liability of each shareholder in a private limited company is limited to the number of shares held by such a person in the company as a private limited company has a separate legal identity. Therefore, in the event of an outstanding debt against the company, a shareholder can only be held liable to the amount invested by him/her in the company and his/her personal assets shall remain untouched.

3. Easy transferability of shares: Unlike other forms of legal entities that can be set up in India, shares of a private company can be easily transferred as its existence is not dependent on its shareholders or directors. This gives more flexibility and added liquidity to foreign investors.

4. Tax Advantage: Setting up a private company is more tax advantageous than other forms of legal entities that can be set up in India. Recently, there have been various subsidies introduced by the Government of India to reduce the corporate income tax payable by a private limited company in India. In general, the rate of corporate income tax in a private limited company in India ranges from 15%-30% which is dependent on the turnover and business sector of the company.

Cons of a Private Limited Company:

1. Compulsory registration: Prior to commencing business, it is compulsory to register a private limited company in India under the provisions of the Indian Companies Act, 2013. However as mentioned above, the process is simple and not time consuming.

2. Periodic Regulatory Compliances: A private limited company is required to complete several regulatory compliances, inter alia, appointing a statutory auditor within 30 days of its incorporation, conducting a minimum of 4 (four) board meetings in a year, conducting an annual general meeting on or before the 30^th of September of every year and maintaining several statutory registers such as register of members, directors, etc.

3. Winding up: Compared to an unregistered partnership firm which can be terminated by the partners merely entering into a dissolution agreement, the process to wind up a private limited company in India is more complex, time consuming and costly as several regulatory requirements need to be fulfilled.

We at D’Andrea and Partners Legal Counsel have a team of experts who can advise you on any query that you may have with respect to your business investment in India. Please do get in touch at info@dandreapartners.com.

[1] Under the recent amendment to the Foreign Direct Investment Policy of India, any direct or indirect foreign investment by a country sharing land borders with India, will require the prior approval of the Government of India (please refer to our article https:https://dandrea.flow-project.com/recent-amendment-in-the-fdi-policy-of-india-due-to-covid-19/  for more details)