For most of the sectors, foreign direct investment (FDI) is allowed in the company as well as LLP in India, under the automatic route of approval. When we say the automatic route of FDI, it means that the investment in the equity share capital of the company or as a contribution to an LLP is made without seeking any prior approval, however, after the incorporation of the company the share capital is to be remitted in the Bank Account of the company or LLP from the foreign bank of the investor/shareholder. Though there are some similarities in bringing FDI whether you incorporate a company or LLP which are as follows:

1. No difference in reporting requirements under FEMA

After the remittance is made the Indian company or LLP has to file Form FC-GPR to the RBI through AD Banker. On the contrary, if the investment is not available through the automatic route then before the incorporation of the company or LLP, prior approval is required from the Central Government.

There is no difference in reporting requirements, whether the investee entity is a company or LLP. After incorporation of the company or LLP, the capital amount should be paid by the investor by way of inward remittance through banking channels or out of funds held in NRE or FCNR(B) account maintained in accordance with the Foreign Exchange Management (Deposit) Regulations, 2016.

2. No difference in Accounting & Tax Compliances

From the compliance point of view, the LLP and company both have to comply with the same accounting & tax compliances in a similar manner.

However, if you are confused whether to incorporate a company or LLP, analyze the significant differences as mentioned below in formation of company & LLP before incorporating:

3. Significant Differences in LLPs & Companies

Reporting requirements under Companies Act, 2013

1. Annual Compliance in Case of a Company

All companies are required to maintain various statutory registers, file annual returns, conduct meetings for corporate actions, among other compliances as follows:

    • Statutory audit of the books of account
    • Prepare directors report and circulate to all the shareholders of the company along with a notice for calling of annual general meeting (AGM)
    • Held the AGM within its due date
    • Transact following business in the legally held AGM of the company
    • To present the financial statement along with audit report for adoption by the shareholders of the company and also to inform the shareholders about the key decisions taken by the management during the period beginning the last AGM to the current AGM,
    • To seek the consent of the shareholders for appointment or reappointment of the statutory auditor of the company for the period after the AGM and until the conclusion of the next AGM
    • To seek approval of the shareholders on the appointment of directors on rotation, and
    • To seek approval of the shareholders on the declaration of a dividend to the shareholders on the recommendations of the directors of the company.

2. After the conclusion of the AGM, the company has to file the following annual returns to the registrar of companies within its due date with the prescribed filing fee.

    • Form ADT-1:This is an intimation regarding the appointment of the auditor of the company within 15 days of the conclusion of AGM
    • Form AOC-4:This is an annual financial report of the company, wherein the financial data of the company is filed with the ROC within 30 days of the conclusion of the AGM.
    • Form MGT-7:This is an annual return to the ROC which needs to be filed within 60 days of the AGM
    • Form MGT-8: This is a report from the company secretary. this is applicable to select kinds of companies only.

3. Annual Compliance in Case of an LLP

An LLP is required to get their books of account audited only when the turnover during the previous year has reached INR 40,00,000 or the capital of the LLP is INR 25,00,000. In all other cases, the statutory audit is not required. apart from the statutory audit, the LLP following are the returns which have to be filed before the ROC

1. Form 11:This is the annual return of the LLP to be filed before 30th May for the    year ended on 31st March of the year.

2. Form 8:This is the report of the financial statement to be filed before the ROC before 30th October.

Conclusion

  • An LLP has over a company is the reduced level of compliances under the LLP Act. Barring some material compliances, an LLP has significant freedom to determine its operations in accordance with the agreement between its partners.
  • From above you would have noted that the setup and compliance-related requirements are almost similar to both the entities, however, in the case of the LLP the statutory audit is not required if the turnover is less than 40 Lakh or the capital is less than 25 Lakh.

4. Tax Benefits

Difference in Taxation in the hands of Shareholder/Partner-

LLPs enjoy a slightly beneficial tax regime compared to companies since share of profit paid to partners is not subject to tax in the hands of the partners (domestic or foreign). Whereas dividend paid by a company is subjected to tax in the hands of the shareholders. This is close to 20% savings when compared with the applicability of tax on dividends on foreign shareholders of companies.

Difference in Taxation of Company & LLP

LLPs are at a disadvantage with respect to tax on profits since they are taxed at a higher rate of 30-34% on their profits in India, compared to a company which is taxed in the range of 25-28%. But this seeming disadvantage could also be used to an FI’s advantage depending on its tax jurisdiction. Although Indian tax laws consider an LLP as a separate legal entity, in certain jurisdictions an LLP is considered as a pass-through vehicle for tax purposes. Due to this, any income earned by the LLP in India would be treated as the foreign controlling partners direct income. To that extent, the FI could also claim the tax paid in India on the LLP’s profits as a set off against their collective tax liability in their home jurisdiction. Hence, FIs should assess the tax implications in their home jurisdiction and preferably invest through a special purpose vehicle in a jurisdiction that offers the best tax advantage.

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