When it comes to NRI’s who want to start a business in India, the first thing they need to do is select the entity type for their company. Even though there are 5 major entity types in India an NRI will have to choose between LLP vs. Pvt Ltd.
Now you may ask why an NRI cannot start the other 3 entity types? Here is the answer to that
1. Why NRI Cannot Start A Proprietorship Firm In India?
A proprietorship firm is not a registered entity type in India. And only registered types of entities are allowed to receive foreign investment (FDI) in India. An NRI who is going to start a business in India, his investment in the firm is considered as FDI. Any investment made in spite of this restriction hence will not be treated as FDI and the investment will become non-repatriable.
2. Why An NRI Cannot Start A Simple Partnership Firm In India?
Same like a proprietorship firm, a simple Partnership firm is not a registered type of entity in India, and it cannot accept Foreign Direct Investment. Hence an NRI cannot start a simple partnership firm in India. Any investment made in spite of this restriction hence will not be treated as FDI and the investment will become non-repatriable.
3. Why An NRI Cannot Start A One Person Company (OPC)?
As per the Companies Law, an OPC can only be started by a resident Indians, which means a resident Indian can only be the shareholder of One Person Company. Even though OPC is a registered type of entity an NRI cannot start one.
So left with the only two options an NRI has to choose between an LLP and Pvt Ltd.
Comparison Of LLP Vs Private Limited In India
| Features | Limited Liability Partnership | Private Limited Company |
| Ownership | In a LLP, the LLP Partners hold ownership of the LLP and also hold powers to manage the LLP. | There is a clear distinction in a Private limited company between the owners of share and the management of the company. |
| Raising Funds | Raising Venture Capital and Equity funds in a LLP is hard as the ownership concept is complex | Raising Venture Capital and Equity funds and funding from banks in Private Limited Company is easier as compared to LLP. |
| Foreign Ownership | Foreigners and NRIs are allowed to invest in a LLP only in such sectors where the 100% FDI is allowed under automatic route. With prior approval of Reserve Bank of India (RBI) and Foreign Investment Promotion Board (FIPB) approval, LLP’s can avail FDI in certain sectors. | Foreigners and NRIs are allowed to invest in a Private Limited Company under the Automatic route in most sectors like software, technology etc. Some specific sectors require RBI / FIPB approval |
| Compliance | Tax compliances are similar for both. However, LLP enjoys significance advantage compliance relating to Ministry of corporate affairs (MCA) | A Private Limited Company has to file audited financial statements with the Ministry of Corporate Affairs each year. |
| Recognition | LLPs are not as recognized in India as Private Limited Companies, since it is a recently introduced concept in India. Rules, regulations and procedures are still not evolved. | Private Limited Companies have well established compliance and audit procedures these insure the companies stay in compliance regulations and enjoy widespread recognition in India and the world. |
| Taxation Structure | LLP is subjected to Income tax of 30%. However, Share of profit to Partner is not taxable in the hands of Partner. | A Pvt. Ltd. Company is subject to tax of 25%. New Manufacturing companies are subject to 15% tax. But, any share of profit by the shareholders (called Dividend) is taxable in the hands of individual shareholders depending on their slabs. |
| Transfer of Ownership | The transfer of ownership in a LLP is a complex process as LLP agreement needs to be restructured | Adding and removing a shareholder is an easy process. There is no need to restructure the MoA and AoA of the company. |
| ESOP | ESOP (Employee Stock Option Plans) is Not available in Limited Liability Partnerships. | ESOP (Employee Stock Option Plans) is available in Private Limited Companies. |
Conclusion:
Based on the above comparison Private Limited Company will be the best-suited entity type for an NRI who wants to start a business in India.
You may also like to read A Complete Guide for Setting up a Company in India for NRI and Foreign Citizens.
We at Wazzeer specialized in helping foreigners and NRIs Setting up and operating a business in India. If you need any support reach out to us at Wazzeer or write to us at enquire@wazzeer.com
FAQ
1. What are the basic requirements to start an LLP or Private Limited company in India?
The basic requirements to start an LLP and Private limited company are similar.
• A Pvt Ltd Co/LLP must have at least 2 shareholders/Partners
• At least 2 directors/partners required of which 1 director/partner must be a resident Indian.
• Please note that Shareholders and Directors can be the same people. ( for PLC)
• You will need an address that will act as your company address. You may or may not have your team working from this office/ address. (Rental agreement and NOC from the owner of the property is required)
2. What is the meaning of non-repatriable investment?
Non-repatriable investment means the return on investment or profit after the dividend share cannot be taken outside India and have to be retained in India.
3. Can an NRI become a shareholder by investing his Indian source of Income money?
Yes, an NRI is allowed to become a shareholder by investing his Indian income sourced money on a non-repatriation basis. This means the return on investment or profit after the dividend share cannot be taken outside India and have to be retained in India.