A checklist for incorporating your LLP

Here's a checklist for you if you want to incorporate a Limited Liability Partnership ("LLP") in India.

Step	Description	Accompanying documents required
1	Director Identification Number (DIN/DPIN)	Self-attested* copy of PAN card** Self-attested copy of residential proof Photograph (.jpeg file) Verification by the applicant
2	Digital Signature Certificate (DSC)	Attested application Form with self attested photo. Self–attested copy of PAN card Self-attested copy of residential proof
3	Form 1: Name Approval	Proposed name of LLP State in which LLP is to be registered Proposed business activities of the LLP
4	Form 2: Incorporation Document and Subscribers’ Statement	Electronic/scanned copy of LLP on stamp paper of appropriate value
5	Form 3: LLP Agreement	Scanned copy of LLP agreement on stamp paper of appropriate value
6	Form 4: Consent of the Partners	Signatures of partners consenting to act as partners in the LLP

* Self-attested copies are photocopies of the original signed by you or the person submitting them.

**PAN is a Permanent Account Number issued by the Government of India that is used to track your taxable activity.

Setting up in India? LLP or Corporation?

Here's a quick comparison between the two structures under the Indian law.

Category	LLP	Corporation
Suitable for	LLPs are suitable for organizations providing services by professionals  like consultancies.	Corporations are suitable for start-ups that want to scale up rapidly.
Prevailing law	The Limited Liability Partnership Act, 2008.	The Companies Act, 1956.
Registration	Registration of a LLP with the registrar is required.	Registration of a company with the registrar of companies is required.
Ownership	LLPs are owned by the partners.	Corporations are owned by shareholders.
Cost	The minimum cost of formation of a LLP is INR 800 only, comparatively much lesser than the cost of formation of a company.	The minimum statutory fee for incorporation of a private company is INR 6,000 and that of a public company is INR 19,000.
Managed by	LLPs are managed by the partners.	Corporations are managed by the directors.
Perpetual Succession	LLPs have perpetual succession and partners may come and go.	Companies also have perpetual succession and members may come and go.
Documents	The LLP agreement defines the scope of operation and rights and duties of the partners.	The scope of operation is defined in the memorandum and the articles of association.
Number of partner/members	An LLP should have a minimum of 2 partners and there is no limitation of maximum number of partners.	A private company should have between 2 to 50 members and a public company should have a minimum of 7 members.
Ease of operation	Operating a LLP is relatively easier than a corporation.	Operating a corporation is considerably more difficult than operating a LLP.
Rights, duties, obligations of the partners/directors	Rights, duties, obligations of the partners are governed by the LLP agreement.	Rights, duties, obligations of the directors are governed by the articles of association and resolution passed by shareholders or directors.
Foreign participation	Foreign nationals can be partners in a LLP.	Foreign nationals can be members in a company.
Liability of partners/members	The liabilities of a partner are limited, to the extent of their contribution towards the LLP, except in the case of intentional fraud or wrongful act of omission or commission by the partner.	The liabilities of shareholders in a company are generally limited to the amount required to be paid up on each share.
Transfer of partnership rights/shares in case of death	In case of death of a partner, their legal heirs will not become partners, unless specified in the LLP agreement.	In case of death of a member, the shares are transmitted to the legal heirs.
Admission as partner/member	A person can be admitted as a partner as per the LLP agreement.	A person can become a member by buying shares in a company.
Voting Rights	The voting rights shall be as decided as per the terms of the LLP agreement.	The voting rights are decided as per the number of shares held by the members.

Managing operational issues with international subsidiaries

Managing the annual filings of your international subsidiaries can be a big pain if the local authorities in those jurisdictions have to be told (and have to give permission to) each and every thing that you did (or more likely) did not do with the company in your home jurisdiction.

If:

Your company want to change its name or merge with a company

because

You brought in a new investor, you merged with the competition or you simply wanted to move to a more tax efficient structure.

You MAY assume that there is no need to inform the local authorities in country X, Y, Z, because:

a) The identity of the owner entity did not change (tax ID/other government ID remained the same)

b) There was no change of control.

c) It was a merger so technically speaking the resulting entity has the same as the original entity.

AND

You may be right.

However you may not actually know that until:

You use up valuable time and money, providing all the details of your transaction (and the kitchen sink) to all possible governmental authorities in x, y, and z countries, each or all of which may demand that a) some documents be notarised, b) some be originals, and c) some be signed in person in the local office.

And all along you are burning time and money trying to figure out what the operational or regulatory penalties might be to getting, or not getting these approvals.

Because:

It was the parent company of the subsidiary that received the investment, or did the name change, or did the merger. And whatever you were doing in to the parent company in your home jurisdiction really had nothing to do with the small itsy-bitsy teeny sub you maintain in a particular country, on the off-change business takes off there.

The moral of the story/ answer to all the hassle is:

If you have international subsidiaries, for regular operational issues or for special events, to reduce local "gotchas," you should consider incorporating a company below your main holding company. 

That "blocker entity" doesn't have to be in another jurisdiction. It can be in your home jurisdiction. Then all the small changes you do with its parent may not be required to be communicated to all the subsidiary jurisdictional authorities. 

It is important to note that you may not always escape the hassle of the local regulatory filings. In many jurisdictions, to set up things like banking, you will have to give detailed information, all the way up to the identities of the shareholders etc., and the local rules may specify that major changes to "beneficial"shareholders need to be disclosed in a timely manner. 

But it is unlikely there will be ongoing shareholding disclosure requirements two entities up the holding structure and even if there are those sometimes, by having a blocker entity, within your own juridiction, some of the administrative obligations can be reduced.

So, to reduce hassle (and for other liability reasons that this blog post does not get into) this is what you should consider doing:

AS ALWAYS:

To discuss this more and for actual professional advice pertinent to your situation, ping me for a referral to a lawyer/accountant who can help you. 

Setting up an international subsidiary

Consider this issue:

You are an company looking to hit a major market on this or the other side of the world.
You've been attending trade shows in that market, pitching to customers, following up on referrals, and now ... there on the horizon, a RFP beckons, or even better, a fully formed, real life customer.

Should you be setting up a subsidiary in that country?

Consider the following:

Factors in favour of a local sub:
1. You need to station long standing employees in that company (especially to the extent you sell face to face services.)
2. You need to collect payments and remit taxes locally (don't slip into the easy thought that if you don't have a local presence a "Permanent Establishment" doesn't exist and you are free from tax. That's a detailed examination and not always conclusive, even if you don't have a PE under that country's rules- for example state and city taxes in the US.)
3. You're worried about getting sued by customers, partners, employees, or  the local government for all the rules you don't know about in a country where you have three employees working out of their bedrooms.

Factors against:
c. You don't know how much real business there actually is (for you) in that location.
d. You don't have the money to set up a subsidiary.
d. You don't have the money to pay for the expertise to maintain the subsidiary (annual corporate filings, bank account setup, payroll setup, understanding and preparing documents complying with local laws on employment, tax, etc.)
e. You don't have the organisational bandwidth to set up local management.

Doing business across multiple countries is an exercise that is high-risk, high-cost (especially if you want to manage liability risk.)

If you are small, you may want to consider a variety of models of international expansion.
You may want to decouple elements of your operation and contract them out to arm's length third parties in your target countries (rather than your own entities) until you are large enough to absorb them back and deal with the complexity. These, depending on what you sell, will be functions like local sales, local distribution, and licensing.

Now, keep in mind, even if you don't set up a subsidiary in a foreign country, to address point 3. you should consider channelling your overseas activities through local subs in your own country (that you can manage in a more cost-effective manner.)

And if it is about hiring, stationing and paying people locally, you may simply be forced to get a local sub to manage operations and risks.

Hiring employees and consultants Internationally

The question inevitably arises:

What issues will I face when I have an employee based abroad?

I'll share some of the concerns that light up my head whenever someone discusses such an activity:

You will have to consider what type of agreement (employment agreement, consulting agreement, business to business services agreement) you will want to enter into with the person X who is going to provide you service.

When you hire someone as an employee and he/she is sitting in some other country, you could be affected by:

a) local laws related to employment and taxation

b) foreign laws related to employment and taxation

The odds of being governed by local employment laws increases if you hire them locally and then send them abroad. But the most important considerations for you as an employer will be the laws in the location where the service is being provided.

So, should you choose to base an employee in a particular location, you should consult a local employment lawyer on the terms and conditions governing the employment relationship in that jurisdiction. 

Then you should consult a good local accountant/tax lawyer in that jurisdiction, on what your tax withholding obligations are. 

Finally you should consider whether you will have any duplicate legal obligations in your local jurisdiction. 

[If you do, you will probably want to terminate the relationship locally and set up an independent contractor relationship- more on that below ....]

Now, if you have person X, employee of your company "here"/locally, sitting and working out of the office of your company's subsidiary, parent, or affiliate, in some other jurisdiction, you will need to account in taxation terms for some sort of transfer of benefit between the two companies (X, after all, is a representative of your local company, and by sitting there working, is resulting in benefit either moving from there to here or here to there)

Suppose you don't want to avoid all these headaches, you will come up with the bright idea of making person X an independent contractor, and have that person bill you either directly or through a corporate entity.

This will naturally clear things up a little.

However, then you should check with your local lawyer and tax accountant to make sure:

a)  the contracting relationship with X doesn't turn out to be an employment relationship under the local law, dumping you back into your earlier conundrum (making sure someone is an independent contractor varies in terms of difficulty in different jurisdictions.)

b) that you have identified all the taxation obligations in that jurisdictions that may exist under the local laws in that jurisdiction.

Often there are withholding obligations under taxation laws when you are taking money out of a particular country. Tax authorities will impose a withholding tax against money owed to non-residents because non-residents are presumably not as easily to get hold of (to extract money from!) However, sometimes when you pay money into a jurisdiction to independent contractors, you may have tax remittance obligations on those consulting agreements even if you specify that those independent contractors have the obligation to pay their own taxes.

Finally, the easiest, (from the limited employment and tax perspective in this blog entry) will be a business to business services agreement between you and a company in that jurisdiction that will, in turn, pay person X.

In conclusion, if you are planning to hire overseas in a jurisdiction, setting aside sales, marketing issues, for just the hiring decisions, you should consider both local employment and tax advisers. 

And when you come up against tough questions like these, call me and I can point you to the right experts.