The process of establishing an export business would differ with each product and service. There is a set path that needs to be followed on your way to becoming an exporter. We have covered this path and its milestones in detail earlier. Some common steps for every exporter include the readying of personal documents, establishing a business entity, establishing the existence of the business with PAN, current account, IEC code and RCMC.
On the other hand, activities like selecting your entity type, product line, exploring export markets and arranging finances can be more dynamic in a real-life scenario. Choosing the type of entity, for instance, will depend on various factors.
We have case studies of two Exporters - Nandini Fashions & Orion Pumps operating in different industries. With the example of these two entities we will explain how an exporter can choose which entity to pick for his export business. We will also see how registering with an export promotion council relevant to the industry in which the export entity operates would benefit its business.
This is an entity in which a single person is the owner of the business and is personally liable for it. It needs no registration, and income tax compliance is relatively simple.
An aspiring apparel exporter can be of two types – a manufacturer or a trader. For Nandini Fashions, an apparel trader exporter, the suitable kind of business entity would be less complicated. It would not require a manufacturing unit and labor-intensive activities. So, for Nandini - the owner - a sole proprietorship firm makes perfect sense as it allows her to keep compliance and operations simple.
It is the coming together of two or more persons as business partners. In this case, registration is not mandatory, and the firm doesn’t need to have a separate legal identity. However, there can be no more than 50 partners, and the liability of the partners is unlimited.
*In a structure similar to Nandini Fashions, but with multiple owners or partners, a partnership can be a good fit. Let’s assume Nandini decides to continue her business with Jay and Anisha as partners. Let’s call this business set-up ‘New Age Fashions’; it would still not involve factory set-up, a lot of employees and investment in machinery. Consequently, it would not require any significant capital investment. Therefore, it rules out the need for complex structures like limited liability partnerships or companies. *
Limited Liability Partnership
In this set-up, the firm has a separate entity with mandatory registration and compliance. There is no ceiling limit for partners, and it is widely preferred as a business format by exporters worldwide.
If New Age Fashions felt the need to have a more internationally accepted type of business, it could choose to form an LLP. An LLP would let the three partners take in more partners or allow old ones to leave without disturbing the existence of the business, now known as New Age Fashions LLP. It may still be a simple operation, but with an LLP there is a better scope to expand and attract funds due to its higher compliance and credibility.
Export Promotion Council Membership and Beyond
While registering with the Export Promotion Council (EPC) for apparels - Apparel Export Promotion Council (AEPC), the above entities do not have to submit documents like SSI Certificate, Factory License and Industrial License, etc. This is because, in all three instances, it is a trader and not a manufacturer. AEPC passes on to its members the benefits and findings of market surveys, new market explorations, collecting market intelligence, trade delegations etc. The apparel exporter stands to gain these benefits from its membership.
*With the AEPC membership, Nandini Fashions, New Age Fashions and New Age Fashions LLP have been able to obtain a certificate of origin, export performance certificate and even training from the Institute of Apparels Management. They have also been able to benefit from market development assistance, exporter’s facilitation cells, skill assessment cells and market access initiatives provided by the AEPC. *
Private Limited Company
This type of business has a separate legal entity, perpetual existence and limited liability, like an LLP, but can also have shareholders. It gives the business a corporate presence and helps the business raise funds, build brand value and expand its volume.
Orion Pumps – engineering works enterprise - produces components for centrifugal pumps. European export opportunity lies in getting a supply subcontract from pump manufacturers for the supply of components. Orion Pumps has a ready set-up for its domestic market, which includes a plant and workshop and a skilled workforce. However, exporting machinery components to the developed European market involves more compliance and quality requirements. Documentation like the quality of materials used, test reports, traceability reports etc. are needed, apart from adherence to the high-quality material and specific packing and labeling requirements, energy efficiency etc.
Understandably, Orion will have financial needs to produce high-quality products and expand its existing production capacity. For an exporter looking to get bank loans or venture capitals, establishing a corporation is advisable. The importers are likely to be big corporations who expect their suppliers to be established organizations. LLPs and Companies, with their robust compliance requirements, satisfy these criteria. As such, the choice of entity for Orion Pumps will be commanded by customer expectations and capital needs.
Export Promotion Council Membership and Beyond
Orion registered itself with the Engineering Export Promotion Council of India. Accordingly, it now benefits from the infrastructure of the EPC. It will get information on global tenders, projects, live inquiries, government notifications, market reports, forex rates, raw material prices, apart from opportunities to participate in world-class exhibitions, access to statistical information, and most importantly, professional advice on quality and technology upgrades.
With its EEPC membership, Orion has been able to participate in the EPC’s prestigious International Engineering Sourcing Shows, INDEE exhibitions, other EEPC events, seminars, workshops and training programs. Apart from access to a host of data and information, it gets updated on the latest trade agreements, ECGC schemes, tenders etc.
To Sum Up
In the establishment of an export entity, the choice of the entity type decides the future course of action for the aspiring exporter. The decision on the choice itself is again guided by various factors which, as apparent from the above case studies, varies on a case to case basis. Once established, much of your efforts will be supplemented by your EPC’s framework – depending on the tenacity of the EPC to boost exports and its infrastructure.