Any individual or entity intending to establish its business in India is required to undertake a meticulous assessment of the plausible legal structures for setting up its business.

Incorporation of a multifaceted corporate entity within any jurisdiction must primarily be navigated through an understanding of a plethora of regulatory obligations, statutory compliances, tax consequences, and liabilities to achieve a viable commercial presence within such jurisdiction.

With the ease of restrictions and relaxations under the foreign exchange laws and the policy framed thereunder, the Indian economy has witnessed a significant boom in the infusion of foreign direct investments through foreign entities. Therefore, it is even more imperative for such foreign companies who are seeking to establish their existence in India to opt for the most appropriate legal structure for smooth operations and management.

The choice of a foreign entity to incorporate a new subsidiary in India, or to acquire or invest in an existing Indian entity, will have substantial implications for its ability to conduct business operations, gain market knowledge, develop business relationships, and implement financial strategies within India’s regulatory environment.

This article discusses and scrutinizes the factors to be considered by a foreign or a domestic entity, requirements for the establishment of a preferred business setup in India, various obtainable business structures, and legal and regulatory nuances involved with newly incorporated and pre-existing businesses.


With specific emphasis on foreign entities seeking to establish a business presence in India, numerous legal structures can be proceeded with, depending on factors such as the scope of intended operations, the desired level of control, and the regulatory landscape governing the specific industry. For instance, foreign companies may incorporate a liaison office, branch offices, and project offices in India to achieve objectives subject to activities permitted by the Reserve Bank of India (“RBI”) and the Foreign Direct Investment policy (“FDI Policy”) read with Foreign Exchange Management Act, 1999 (“FEMA”) and rules framed thereunder. Foreign direct investments in India may be structured indirectly by foreign entities through the establishment of an entity in India. For foreign investors with a previously established presence in India who seek to diversify their investments or expand their operations through acquisitions, downstream investment may present a more favorable proposition since investments and acquisitions undertaken through an Indian subsidiary generally entail comparatively less compliance requirements, in comparison to foreign direct investments. Such frameworks ensure adherence to applicable regulations and the protection of all involved stakeholders’ interests, including the investors, promoters, and the investee company.

An appetite for comprehensive and prosperous commercial operations steers foreign entities to opt for wholly owned subsidiaries as private limited companies under the Companies Act, 2013, offering lesser protection against liabilities, or public limited companies with higher fundraising potential, a one-person company under the Companies Act, 2013. Entities must thoroughly research the regulatory requirements, taxation implications, and potential repatriation of funds and their restrictions pertinent to their preferred legal structure to ensure successful and compliant operations within India’s evolving business environment.

An optimal legal structure can be achieved through comprehensive assessment, due diligence, and identification of business overview, directors and number of partners/owners/members/trustees, control over business and business objectives, the ability to advance loans and raise investments, repatriation of funds, tax benefits, residential and citizenship status along with the change thereof affecting the structure, and long-term objectives, applicable laws, and compliance requirements. The volition of a desired business setup in India would demand acquaintance and selection of the place of establishment of business, the feasibility of it’s operations, cost of the incorporation, and availability of funds, amongst other factors.

Additionally, while deciphering a probable business structure, an in-depth analysis needs to be undertaken of the legal, financial, tax, and secretarial restrictions and limitations, including but not limited to the guidelines laid down under the FDI Policy, FEMA, and the Companies Act, 2013, and the rules made thereunder.



Selection of an appropriate legal framework demands a detailed evaluation of factors appropriate to the entity’s scale, business structure, investments by stakeholders, potential liability exposure, and operational and compliance requirements. Sole proprietorships represent the most basic structure wherein ownership of the company, business plan, decisions, and all or any liabilities lie solely on a single individual, facilitating ease of establishment while exposing personal assets to business-related risks. From small retail stores to freelance consulting services, sole proprietorships remain favored for their ease of business setup and minimal regulatory compliance requirements, however, the proprietors remain personally liable for all business debts and obligations, exposing personal assets to business risks.

Companies, both private or public, are the most prevalent structure for businesses as they establish a separate legal entity distinct from its owners, thus limiting their liability and allowing for capital acquisition through the issuance of share capital following the provisions of the Companies Act, 2013. Private limited companies offer shareholders limited liability protection, perpetual succession, and access to the share capital of the company through voting rights and transfer of shares as per terms under the definitive agreements and the applicable laws. Subject to regulatory compliance requirements, private limited companies are preferred as structures for business setup in India by medium scale to large scale businesses seeking to establish a robust corporate structure with a focus on long-term growth scalability and sustainability. Public limited companies, on the other hand, offer access to a more exhaustive investor base and greater liquidity for shareholders. However, such companies are subject to heightened regulatory compliance obligations and market volatility, additional vantage of raising investments through public offerings.

Alternatively, business entities may further delve into the creation of a partnership firm which is governed by the Indian Partnership Act, 1932. In the case of a partnership firm, 2 (two) or more individuals/entities act as partners in a business venture and share profits and losses, having flexibility in management and operate in the form and manner as outlined under their partnership deed thereby covering the inter-se rights and obligations amongst the partners of the firm. A general partnership refers to the kind of partnership wherein partners have unlimited liability over the debts and obligations of the business and a limited liability partnership offers partners limited liability protection, safeguarding their assets from business liabilities to only a certain extent. A structure based on partnership potentially leverages combined expertise but is privy to potential conflicts and joint liability concerns.

Another structure that could be considered by entities is establishing a joint venture company which offers foreign investors an opportunity to tap into the country’s vast market. Since the decision of a suitable legal structure plays a decisive part in the business undertaking’s long-term success, thorough regard of aspects like the joint venture’s scope, duration, investment levels, and exit strategies is essential. Partaking in a joint venture with an Indian partner entity provides various strategic benefits to a foreign entity that intends to establish it’s footprint in India, such as utilizing its pre-existing distribution market within the designated territories in consonance with applicable laws; increased access to the Indian partner entity’s financial resources for plausible co-investments; and facilitation of networking opportunities, to expedite the establishment of operations in India.



To establish and operate a business in India, one must traverse through the legal frameworks and requirements to be fulfilled as specified under applicable laws. As conferred in this article, determining an appropriate business structure is the foremost step towards establishing a business setup in India. Besides the entire structuring or restructuring of the proposed entity(ies), negotiation of the investment terms, inter-se rights, and obligations of shareholders of the entity, along with the drafting and finalization of definitive agreements, play a crucial role in determining the most appropriate business structure. In furtherance, the Indian entity is required to draft it’s articles of association and the memorandum of association as part of the incorporation process.

Additionally, the company directors are required to obtain an identification number referred to as the ‘DIN’.

Once the structure is finalized, the said entity shall also be required to obtain the applicable registrations and licenses such as the goods and services tax registration under the Central Goods and Services Tax Act, 2017, permanent account number, the tax account number, certain employment centric registrations such as employee provident fund registration under Employees Provident Funds and Miscellaneous Provisions Act, 1952, and the employee state insurance registration under Employees State Insurance Act, 1948 depending upon the number of employees along with additional licenses depending on the business, such as the state-specific Shops and Establishments Act, consent to establish, consent to operate, and the registration of micro, small, and medium enterprise under the Micro, Small and Medium Enterprises Development Act, 2006.

While necessary consents and licenses are necessarily required to be obtained, the newly incorporated/acquired entity must also adhere to other restrictions and limits laid down under the applicable laws whilst operating the company, raising investments, or repatriating funds. Further, the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019 (“NDI Rules”) also impose certain restrictions upon downstream investments, i.e., investments made by an Indian entity that has received foreign investment or an investment vehicle in the equity instruments or the capital, as the case may be, of another Indian entity. Indian entities are required to comply with the pricing guidelines as specified under the FDI Policy, which apply to both indirect and direct investments in India.


The criterion of deciphering a reasonable business structure within India is a multifaceted decision with far-reaching ramifications for the long-term trajectory of any entity. Each business setup in India demands a meticulous balancing of the management of risks and liabilities, taxation issues, regulatory compliances, directors or partners of the to-be-incorporated entity or the target entity, and intent for operational flexibility. The foreign and domestic entities, both need to navigate and establish a business landscape where considerations such as the desired scale of operations, the ownership structure, potential funding requirements and investments, and industry-specific regulations and norms.

To ensure a smooth and successful business setup in India, Indian entities must adhere to regulatory guidelines formulated under the applicable laws in India to avoid legal and tax implications. However, it is crucial to note that the success of any entity rests upon informed decision-making. All forthcoming businesses can significantly reduce legal and financial risks and enhance their likelihood of success by understanding the nuances of the various available business structures, the risks attached to each structure, and the compliances and licenses required to be obtained in the Indian commercial ecosystem, facilitating informed navigation of its complexities. Upon thorough assessment and evaluation of the advantages and restrictions of each available legal business structure, a foreign entity or previously existing Indian entity can expand and establish a robust foundation for enduring success in the Indian ecosystem.

Authors: Shramona Sarkar  and Isha Agrawal 

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