r2i forum

Friends,

I am setting up a IT telemarketing company in India with majority stake of an American national. I am currently considering 2 options for the entity - either as a Pvt Ltd co. or as a proprietorship firm (suggested by my accountant)

The only reason my accountant suggested proprietorship firm is the ease with which the ops can get started and second is easy tax laws. In a PVt LTd set-up we have to end up paying a total of 50% taxes on profits (incl income tax, service tax etc.) and also taxes on company expenses.

However, I am still in favor of a PVt LTd company since our business will be with US companies and credibility will be an issues with a proprietorship firm. Also, I am finding out taxes relief for export ($) revenues.

I am looking for some advice and pointers from members on the forum who have gone thru this situation or have a good understanding of Indian corp taxation structure. What would your suggestion be - PVt Ltd co. or proprietorship?

I am not seeking an easy way out and compromise the long term objectives of our company.

Thanks very much.

I would agree with your accountant and go with Sole or Joint Proprietership. Ultimately, credibility is at the personal level, and it sounds like you have an American company already willing to co-invest with you. For an unknown Indian company wanting to establish a partnership with U.S. firm, your point about Pvt. Ltd. being better than Proprietarship is valid because no credibility is established yet.

Given that you have a willing co-investor, go with a company structure that gives you the max. tax advantage and minimal regulatory burden in the Indian context.

when considering type of entity to incorporate, whether in US or India or any other common law country, you have to consider two issues:
1. limited liability protection
2. pass through taxation benefits (means the income of the firm is taxed as your personal income)
3. Ease of issuing equity and expanding

An S-corp (or its equivalent in India, a joint or sole prop) provides you with pass through taxation benefits but at the cost of not providing you limited liability (which means, if you take a loan on the company you could personally be liable to pay it off). An LLC or LLP equivalent in India will be able to solve the liability issue and preserve taxation benefits. A corporation (pvt. ltd.) is harder to set up, but offers maximum liability protection, ability to go public, be bought out etc. but will come under the purview of corporate taxation over and above personal taxes.

Check your liability exposure of your line of business before making the decision.