Identifying the right structure for an Indian subsidiary

When planning to expand your business into India, one of the first and most crucial decisions is identifying the right structure for your Indian subsidiary. This decision will determine how your business operates in India, how you engage with local talent, and how compliant you will be with local laws and regulations. But before jumping into the types of subsidiary structures available, it’s essential to answer one fundamental question: What are the activities you plan to pursue in India?

In this blog, we’ll guide you through the factors that should influence your decision on the right structure and explore the various options available.

Step 1: Define Your Business Activities in India

The type of subsidiary you choose depends largely on the activities you intend to undertake in India. Understanding your business goals in the country will help you identify which structure aligns best with your needs.

Key questions to ask:

• Are you looking to tap into the Indian talent pool? If yes, you may require a structure focused on hiring and managing employees.
• Are you targeting the Indian market for sales or marketing purposes? This will determine whether you need a full-fledged subsidiary or a simpler operational setup.
• Are you planning for manufacturing in India? If you intend to manufacture products locally, a specific setup for manufacturing may be more appropriate.
• Is your goal to source raw materials or other resources from India? This could influence your decision towards a sourcing-focused structure.

These activities will help you understand the level of operations you need in India, which will, in turn, guide your choice of subsidiary structure.

Step 2: Choose the Right Structure for Your Indian Subsidiary

Once you have clarity on your business objectives, it’s time to explore the various structures available for setting up your Indian subsidiary. Here are the most common options:

1. Private Limited Company (Pvt Ltd)

The Private Limited Company is the most popular and commonly used structure for foreign companies looking to establish a subsidiary in India. This structure allows you to operate independently, raise capital, and engage in a wide range of business activities. The key benefits include:

• Limited liability protection for shareholders.
• The ability to raise funds and attract investors.
• Greater control over your business operations and strategic direction.

For most businesses aiming for long-term growth and significant operations in India, the Private Limited Company is usually the best fit.

2. Limited Liability Partnership (LLP)

An LLP is a hybrid structure that combines the benefits of a partnership with limited liability protection. This option is ideal for businesses that want to maintain flexibility in operations but still enjoy the advantages of limited liability. The LLP structure is suitable for small to medium-sized businesses and service-oriented firms.

Benefits include:

• Flexibility in profit-sharing and decision-making.
• Limited liability for the partners.
• Less formalities compared to a Private Limited Company.

However, an LLP might not be the best choice for businesses looking for large-scale operations or significant external investments.

3. Liaison Office

A Liaison Office is primarily for companies that wish to establish a presence in India without engaging in direct business operations. A liaison office can act as a communication channel between the parent company and its clients in India. This setup is ideal for market research, promoting products, or managing local operations without actively selling or producing goods.

The limitations of a Liaison Office include:

• It cannot generate income in India.
• It can’t conduct business transactions or sign contracts.

Liaison Offices are best for companies that want a minimal presence in India to explore the market.

4. Branch Office

A Branch Office is suitable for businesses that want to carry out business activities in India, such as providing services, manufacturing, or processing. However, it has its limitations:

• It must comply with strict RBI (Reserve Bank of India) guidelines.
• It’s not a fully independent entity, as it operates under the parent company’s name.
• Setting up a branch office requires approval from Indian authorities and can be a complex, time-consuming process.

5. Project Office

A Project Office is generally established for companies involved in specific, time-bound projects in India, such as construction or research. It is limited to working on a single project and cannot carry out any ongoing business activities. This structure requires special approval from the Indian government and is ideal for international companies looking to execute a specific project in India.

Step 3: Weigh the Pros and Cons

When choosing the right structure, it’s important to weigh the pros and cons of each option, considering factors such as the level of operational control you need, tax implications, and the time and cost required to set up the structure.

• A Private Limited Company offers the most flexibility and legal protections but can be costly and time-consuming to set up.
• An LLP provides operational flexibility but might not be suitable for larger businesses or those seeking external funding.
• Liaison and Branch Offices are easier to set up but come with restrictions on the type of business you can conduct.

Conclusion

Choosing the right structure for your Indian subsidiary is a critical decision that will shape your company’s operations in India. Whether you opt for a Private Limited Company, an LLP, or a more restricted setup like a Liaison Office or Branch Office, each option has its own set of advantages and limitations. The best approach is to align your subsidiary structure with your business goals in India—whether that’s tapping into the talent pool, exploring the market, manufacturing locally, or sourcing materials.

Understanding the different options available and their implications will help you make an informed decision and set the stage for a successful venture in India.

For more insights on setting up an Indian subsidiary and the various structures available, check out our YouTube video, where we dive deeper into the pros and cons of each structure and provide practical guidance to help you navigate your expansion into India.