If you are planning to start an export business, you have to first create a business entity which is legitimate in the eyes of the law. There are different types of businesses entities related to the export sector that include: Sole Proprietorship, Partnership, Companies, and many more.
Let’s look at the various export business entities you can potentially create:
A Sole Proprietorship is the easiest business entity to establish and operate, and its compliance, too, is relatively easy. As the owner of the business, you will be responsible for its liabilities, however you can also avail of the benefits of Sections 80C to 80U of the Income Tax Act.
Your business will be taxable once its total income crosses the minimum threshold to fall under the various income tax slabs. To register for this particular business entity, you will need a PAN Card for the business and Aadhaar Card, which is also the documentation required for compliance and tax purposes. You will have to apply for the IEC Code and GST registration—both of which are compulsory.
Partnership firms have a 20-partner limit and are a convenient entity to form when more than one business partner plans to come together for business purposes. However, similar to a Proprietorship, as a partner, you will remain personally liable for the company, unless it is a Limited Liability Partnership.
A Partnership deed is the primary document required for a Partnership firm, and its submission is compulsory for registration of the firm. Depending on the size and type of business, Partnership firms need to comply with a few regulations such as GST, TDS, ESI, PF norms, and others. Partnership firms will also have to undergo income tax assessment and audits.
LLP is one of the most popular business entities adopted by export houses, primarily because of its universal acceptance and the dual benefits of a company setup and partnership that it offers.
There is no limit on the maximum number of partners in an LLP, unlike the 20-partner limit in a Partnership or 200-member limit in Private Limited Companies. The opportunity to spread the liability across all the partners makes the LLP a popular business entity across the world and is well-suited for export businesses.
The income tax applicability for an LLP is the same as a Partnership. The audit of LLP accounts is not compulsory up to a specific turnover or contribution. However, as LLPs are closely monitored by the Ministry of Corporate Affairs, the compliance norms for LLPs are stricter. The income tax rate is also higher in the case of LLPs as compared to Companies.
Below, we take a look at the steps to start an export business as a registered LLP:
Fig. 1: e-form DIR-3
Digital Signature Certificate: All filings done by an LLP must use Digital Signatures. A Digital Signature Certificate (DSC) can be acquired from a licensed certifying authority.
MCA Registration: The obtained DSC has to be registered with the LLP application in the portal of the Ministry of Corporate Affairs.
Form 1 & 2: To register the name of the LLP, you have to fill Form 1 (Fig. 2 below). Post this, you need to fill the Form 2 (Fig. 3 below) to get the LLP incorporated. Once approved on the system, the status of the form will appear as “Approved”.
Fig. 2: Form 1 for LLP name registration.
Fig. 3: Form 2 for LLP incorporation.
Fig. 4: Form 3 - Initial LLP Agreement
Operational requirements like PAN card, GST registration, and Current Account (with export-specific services) have to be acquired/set up in the name of the firm. The IEC Code (IEC) has to be obtained from the Director-General of Foreign Trade.The Registration cum Membership Certificate has to be obtained from the relevant Export Promotion Council/Commodity Board/other authorized agency like the Federation of Indian Export Organizations.
Post the completion of these steps, the LLP is ready to start functioning as an export business.
Private Limited Companies are separate legal entities with perpetual existence and limited liability. For large export houses with a good volume of sales, registering as a Private Limited Company is a natural progression. A Pvt Ltd Company has to have at least two directors and a maximum of 200 members. A Pvt Ltd Company can have a large number of shareholders and the power to own material goods, enter into a contract, borrow, and even fight legal disputes as an entity in itself. With a Pvt Ltd Company you can also raise funds from investors instead of relying on banks for financing.
The minimum capital needed to establish a Pvt Ltd Company is Rs. 1,00,000, while there is no such requirement for establishing an LLP. Pvt Ltd Companies need to abide by various guidelines such as a quorum for meetings and a cap on maximum managerial remuneration, amongst others.
Following are the steps to start a Private Limited Company:
The listing of a company on a stock exchange paves the way for higher fundraising opportunities by having unlimited members and inviting the public to purchase shares. This is beneficial if the company produces capital-intensive goods or services, and hence requires a significant amount of funds.
A Public Limited Company has compulsory statutory meetings and a higher minimum share capital requirement of Rs 5 Lakhs. Furthermore, a public company has high compliance requirements. Public Companies must have minimum 7 Shareholders and 3 Directors which is higher than a Pvt Ltd Company.
Following are the steps to start a Public Limited Company:
Establishing a cooperative society is ideal for exporting certain types of products such as agricultural products, handicrafts and other cottage industry-related items. Government departments such as the Maharashtra State Agricultural Marketing Board often support farmer’s cooperative societies.
Cooperative societies are taxable under the Income Tax Act, however, they are eligible for various deductions and exemptions. Cooperative societies carrying out business activities are required to maintain books of accounts and get their accounts audited annually.
If your export business is being promoted by you and your family, the Hindu Undivided Family (HUF) is an option worth exploring. With a HUF, the business is kept within the control of the family. Additionally, by opting for a HUF instead of a proprietorship, you can get additional tax exemptions.
The Karta -- the oldest male who is the head of the family -- is assessed for income tax as the head of the HUF. The HUF is a separate legal entity and can get a tax exemption of Rs. 1.8 lakh per year.
As mentioned above, the type of business entity you choose will depend on various factors that include the size of the business, number of stakeholders, compliance costs and effort and acceptability in targeted markets.
Whichever type of business entity you decide to establish, once you have a legally recognized entity with a Current account, IEC Code, and other mandatory documents and registrations in place, you are ready to start your export business.
Also Read: How to Select Product for Export
Consider the types of business and their feasibility for your needs thoroughly before picking one.
Consider the manpower you have and the compliance cost and effort required.
Conventional wisdom says that PLC and LLP formats are more popular because of their international prevalence and relative ease of running.
Remember, you can always change your business type -- from a Partnership to LLP or from a PLC to a Public Company -- as your business grows and evolves.
Check the merits and challenges of being personally liable for your business, and what it means, before choosing the Proprietorship or Partnership models.
Keep your target geography in mind -- for example, will your importing country understand the HUF model?
Make sure you don’t miss out on export-related benefits because of not choosing one business type over another. Check government sources and websites thoroughly and be sure to take professional legal advice before finalizing the right business form for your needs.