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Legal and Accounting Outsourcing to India: Appendix III: Incorporating a Company: USA and India

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Types of Business Entities in USA

There are four main types of business entities in the United States:
1. Sole Proprietorship
2. Partnership
3. Limited Liability Company
4. Business Corporation – S Type and C Type

Table: Comparison between different entities in USA

Characteristics	Sole Proprietorship	General Partnership	C Corporation	S Corporation	Limited Liability Company
Formation	No state filing required	Agreement between two or more parties. No state filing required	State filing required	State filing required	State filing required
Duration of Existence	Dissolved if sole proprietor ceases doing business or dies	Dissolves upon death or withdrawal of a partner unless safeguards are specified in a partnership agreement	Perpetual	Perpetual	Dependent on the requirements imposed by the state of formation
Liability	Sole proprietor has unlimited liability	Partners have unlimited liability	Shareholders are typically not personably liable for the debts of the corporation	Shareholders are typically not personally liable for the debts of the corporation	Members are not typically liable for the debts of the LLC
Operational Requirements	Relatively few legal requirements	Relatively few legal requirements	Board of directors, officers, annual meetings, and annual reporting required	Board of directors, officers, annual meetings, and annual reporting required	Some formal requirements but less formal than corporations
Management	Sole proprietor has full control of management and operations	Typically each partner has an equal voice, unless otherwise arranged	Managed by the directors, who are elected by the shareholders	Managed by the directors, who are elected by the shareholders	Members have an operating agreement that outlines management
Taxation	Not a taxable entity. Sole proprietor pays all taxes	Not a taxable entity. Each partner pays tax on his/her share of income and can deduct losses against other sources of income	Taxed at the entity level. If dividends are distributed to shareholders, dividends are also taxed at the individual level	No tax at the entity level. Income/loss is passed through to the shareholders	If properly structured there is no tax at the entity level. Income/loss is passed through to members
Pass Through Income/Loss	Yes	Yes	No	Yes	Yes
Double Taxation	No	No	Yes, if income is distributed to shareholders in the form of dividends	No	No
Cost of Creation	None	None	State filing fee required	State filing fee required	State filing fee required
Raising Capital	Often difficult unless individual contributes funds	Contributions can be made from partners, and more partners can be added	Shares of stock are sold to raise capital	Shares of stock are sold to raise capital	Possible to sell interests, though subject to operating agreement restrictions
Transferability of Interest	No	No	Shares of stock are easily transferred	Yes, but must observe IRS regulations on who can own stock	Possibly, depending on restrictions outlined in the operating agreement

(Source: http://www.bizfilings.com)

The time taken to incorporate an entity would vary depending on type of entity and the state chosen. Each state has its own procedures and requirements. The state of Delaware is a popular choice with more than half the Fortune 500 companies incorporated here. www.bizfilings.com mentions the following reasons for its popularity.

1. The cost to incorporate in Delaware is one of the lowest in the country.
2. There is no corporate income tax for corporations incorporated in Delaware but not transacting business in the state.
3. Delaware maintains a separate corporate law court system, called the Delaware Court of Chancery that does not use juries, but only uses judges appointed for their knowledge of corporate law.
4. One person can hold all officer positions of the corporation - president, secretary, and treasurer-and serve as the sole director. These names are not required to be listed in the articles of incorporation.
5. Shareholders, directors, and officers of the corporation need not be residents of Delaware.
6. Shares of stock owned by persons outside of Delaware are not subject to Delaware taxes.

Time taken to incorporate in Delaware

It would take one day to reserve the name of the entity with the State. After this, the certificate of incorporation or organization needs to be prepared and filed. The State approves filings within 5 to 7 days for expedited filings and can take between 4 to 6 weeks for regular filings. Once the filing has been approved, the entity has been formed and can begin its existence.

Types of Business Entities in India
The Indian Companies Act, 1956 is the governing law for companies in India. The following are the types of business entities you can have in India.

1. Private Limited Company
2. Public Limited Company
3. Unlimited Company
4. Partnership
5. Sole Proprietorship

Private Limited Company and Public Limited Company

A Private Limited Company is a Company limited by shares in which there can be maximum 50 shareholders, no invitation can be made to the public for subscription of shares or debentures, cannot make or accept deposits from Public and there are restriction on the transfer of shares. The liability of each shareholder is limited to the extent of the unpaid amount of the shares face value and the premium thereon in respect of the shares held by him. However, the liability of a Director / Manager of such a Company can at times be unlimited. The minimum number of shareholders is 2.

A Public Limited Company is a Company limited by shares in which there is no restriction on the maximum number of shareholders, transfer of shares and acceptance of public deposits. The liability of each shareholder is limited to the extent of the unpaid amount of the shares face value and the premium thereon in respect of the shares held by him. However, the liability of a Director / Manager of such a Company can at times be unlimited. The minimum number of shareholders is 7.

Private Limited Companies have fewer compliance requirements compared to Public Limited Companies.

Procedure for incorporating a company in India

An application for registration should be submitted to the registrar of companies with the following documents:

1. Memorandum of Association;

2. Articles of Association;

3. a declaration signed by a person named in the articles of the proposed company as a director, manager, or secretary of the company, or by an advocate of the Supreme Court or High Court, or by an attorney entitled to appear before the High Court, or by a chartered accountant practicing in India stating that all the requirements of the Companies Act 1956 and the applicable rules with respect to the registration and other matters have been complied with;

4. A list of persons who have consented to act as directors of the company.

5. If the proposed company is a public company, consent of every person prepared to act as a director must be submitted in a prescribed form;

6. Information about directors, managing directors and managers and secretary must be submitted in a prescribed form;

7. Information about the registered office in a prescribed form;

8. Power of attorney in favor of one of the promoters or any other person, authorizing him/her to make corrections in the documents submitted to the registrar of the companies, if it becomes necessary; and

9. Applicable registration fee payable to the registrar of the companies.
Foreign investors are required to seek approval from the Government before investing in India.

There are also a number of other formalities and legal requirements that need to be carried out for establishing a business in India. Following is a table showing the steps involved in setting up a private limited company.

Procedure Number	Nature of Procedure in India	Duration (days)
1	Filing the proposed name of company for approval to the Registrar of Companies (ROC); Get the Memorandum and Articles of Association vetted by the ROC and printed	7
2	Make an application to the Superintendent of Stamps or an authorized bank requesting for stamping of the Memorandum of Association and Articles of Association.	1
3	Present the required documents along with the registration fee to the Registrar of Companies to get the certificate of incorporation	9
4	Obtain a company seal	3
5	Visit the UTI Investors Services Limited to obtain a Permanent Account Number	7
6	Obtain a Tax Account Number for income taxes deducted at source from the Assessing Office in the Income Tax Department	7*
7	Register under Shops and Establishment Act	2*
8	Register for value added tax (VAT) before the Sales Tax Officer of the ward in which the company is located	12*
9	Register for Profession tax	2*
10	Register with Employees' Provident Fund Organization	2*
11	Register with ESIC (medical insurance)	1*
12	Filing for Government Approval before RBI/FIPB for Foreigners and NRI's	15*
	Total number of days	35

Note: Procedures sometimes take place simultaneously. Instances of this are marked with an asterisk (*). The above procedures are for a typical big city in India. The time and procedure may vary with city and state and the nature of business.

(Source: Madaan & company)

The information in this document is intended for the sole use of the recipient only and may not be used for any commercial purpose. Failure to abide by this rule will be considered a violation of copyright.

The analysis is based on information derived from external sources and the most reliable and authentic sources for information have been referred. Chillibreeze makes no representation regarding the accuracy of the information, as they have not verified the same independently.

Chillibreeze recommends due diligence and will not be responsible for any liabilities incurred by the recipient or any third party as a result of reliance upon this work.

Publisher’s Note

This Chillibreeze publication looks at the legal and accounting systems in India and the United States.

It is meant to be an informative document which lists out important differences and requirements in legal and accounting systems as well as setting up of business operations.

We hope readers will find it useful.

In case of any suggestions, enquiries or feedback, please mail epublishing@chillibreeze.com

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Legal and Accounting Outsourcing to India: Appendix III: Incorporating a Company: USA and India

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