Choice of Business Entity, Registrations, the FDI Route and Not-for-Profit Organisations
Before any of the substantive law this syllabus covers becomes relevant, a promoter must first choose the legal form the business will actually take — and that choice cascades into liability exposure, compliance cost, access to capital and even tax treatment. This chapter covers Paper 3's Part A: comparing the four common entity types, the registrations and licences that follow from that choice, the route for foreign investment, and the legal forms available to a not-for-profit organisation.
1. Comparing the entity types
Four structures dominate Indian business formation, and a comparative table is the fastest way to hold their differences precisely.
| Feature | Sole Proprietorship | Partnership (1932 Act) | LLP (2008 Act) | Company (2013 Act) |
|---|---|---|---|---|
| Separate legal entity | No | No | Yes | Yes |
| Liability | Unlimited | Unlimited, joint and several | Limited to capital contribution | Limited to shares/guarantee |
| Minimum members | 1 | 2 | 2 partners | 2 (private), 1 (OPC), 7 (public) |
| Registration | Not mandatory | Registration recommended, not mandatory | Mandatory with MCA | Mandatory with MCA |
| Compliance burden | Minimal | Low | Moderate | Highest |
| Perpetual succession | No | No (subject to the partnership deed) | Yes | Yes |
| Access to external capital | Very limited | Limited | Moderate | Widest (public markets for a public company) |
The central trade-off a Company Secretary advises on is liability versus compliance cost: a proprietorship or partnership is cheap and simple to run but exposes the owners' personal assets to business liabilities without limit, while an LLP or company caps that exposure at the price of materially more ongoing compliance.
Recap of the two governing statutes covered elsewhere in this subject: the Partnership Act, 1932 governs unregistered and registered partnerships, while the LLP Act, 2008 created the Limited Liability Partnership as a hybrid — partnership-style internal flexibility combined with company-style limited liability and a separate legal personality.
2. Registrations, licences and start-up recognition
Whichever entity form is chosen, a business typically layers several registrations on top of incorporation, depending on its activity and scale. A GST registration is required once turnover crosses the applicable threshold (or immediately for certain categories of supply regardless of turnover). A Shops and Establishments registration is a state-level requirement for most commercial establishments.
Sector-specific licences follow the activity — an FSSAI licence for food businesses, an import-export code (IEC) for cross-border trade, and industry-specific approvals where the sector is regulated (pharmaceuticals, financial services).
Start-up recognition under the DPIIT (Department for Promotion of Industry and Internal Trade) Startup India framework gives an eligible entity access to tax holiday benefits (subject to conditions), simplified compliance, easier access to certain government tenders, and fast-track patent examination — recognition itself does not change the underlying entity type (a recognised start-up can still be a private company, LLP or partnership) but layers additional benefits on top of it.
3. The FDI route
Foreign investment into an Indian entity proceeds through one of two routes, and the distinction between them is this topic's most tested point. Under the automatic route, foreign investment is permitted without any prior approval from the government or the RBI, subject only to sectoral caps and conditions — most sectors today fall under the automatic route.
Under the government (approval) route, the investment requires prior approval from the relevant government ministry or department before it can be made, applicable to sectors considered sensitive (certain defence, media and multi-brand retail categories, among others).
Foreign investment is also structured through prescribed instruments and pricing rules under the Foreign Exchange Management Act, 1999's non-debt instrument rules — equity shares, compulsorily convertible preference shares and compulsorily convertible debentures are treated as equity/FDI instruments, while other instruments may be treated as debt, attracting a different regulatory regime (covered in this subject's FEMA-adjacent content elsewhere on this hub).
4. Not-for-profit organisations
A not-for-profit entity in India can take one of three principal legal forms, each with a different registering authority and governing statute.
| Form | Governing law | Registering authority |
|---|---|---|
| Trust | Indian Trusts Act, 1882 (for private trusts); state-specific Public Trusts Acts for public/charitable trusts | State Charity Commissioner / Registrar, as applicable |
| Society | Societies Registration Act, 1860 (with state amendments) | State Registrar of Societies |
| Section 8 Company | Companies Act, 2013, Section 8 | Registrar of Companies (MCA) |
A Section 8 company is the corporate route to not-for-profit status: it is formed for promoting commerce, art, science, sports, education, research, social welfare, religion, charity, protection of the environment or similar objects, applies its profits (if any) solely toward promoting those objects, and is prohibited from paying any dividend to its members.
In exchange for accepting these restrictions, a Section 8 company benefits from certain regulatory relaxations (such as an exemption from the minimum-paid-up-capital-linked requirements that apply to ordinary private/public companies) that do not apply to an ordinary company.
Worked Examples
Example 1. A promoter wants a structure that limits personal liability but keeps the informality and internal-management flexibility of a partnership, without needing to comply with the full disclosure regime of a public company. Which entity form best fits this requirement?
A Limited Liability Partnership (LLP) — it combines partnership-style internal flexibility and management structure with company-style limited liability and separate legal personality, without the fuller disclosure and governance regime applicable to a company (particularly a public company).
Example 2. Two individuals run a small retail business as an unregistered partnership. One partner incurs a large business debt that the business cannot repay. Can the creditor recover the shortfall from the partners' personal assets?
Yes — a partnership under the Partnership Act, 1932 does not have limited liability; the partners are liable jointly and severally, without limit, including from personal assets, for the debts of the firm.
Example 3. A foreign investor wants to invest in an Indian company operating in a sector that falls under the automatic route. Does the investor need prior government approval before making the investment?
No — under the automatic route, foreign investment is permitted without prior government or RBI approval, subject only to applicable sectoral caps and conditions.
Example 4. A foreign investor wants to invest in an Indian entity in a sector classified under the government (approval) route. What must happen before the investment can be made?
The investment requires prior approval from the relevant government ministry or department before it can proceed — this is the defining feature that distinguishes the approval route from the automatic route.
Example 5. A group of individuals wants to set up a not-for-profit entity with a formal corporate structure, limited liability for its members, and the ability to apply its profits solely toward charitable objects, with no dividend distribution. Which legal form fits, and under which Companies Act section?
A Section 8 company under the Companies Act, 2013 — it is formed for objects like charity, education or social welfare, applies its profits solely toward those objects, and is prohibited from paying dividends to members, while offering the corporate structure and liability protection of company form.
Example 6. A start-up wants to access simplified compliance and fast-track patent examination benefits. Does obtaining DPIIT start-up recognition change the entity's underlying legal form (say, from a private company to something else)?
No — start-up recognition under the DPIIT Startup India framework layers additional benefits (tax holiday eligibility subject to conditions, simplified compliance, fast-track patent examination) on top of the existing entity form; the entity remains whatever it was incorporated as (a private company, LLP, or partnership, as applicable).
Example 7. A society wants to register under a state-specific process rather than through the Ministry of Corporate Affairs. Which governing statute and registering authority apply?
The Societies Registration Act, 1860 (as amended by the relevant state), registered with the state Registrar of Societies — distinct from a Section 8 company, which is registered with the Registrar of Companies under the Companies Act, 2013.
Summary
Choosing between a sole proprietorship, partnership, LLP and company is fundamentally a trade-off between liability exposure and compliance cost, with LLPs and companies offering limited liability and separate legal personality at the price of materially higher ongoing compliance than a proprietorship or partnership.
Registrations (GST, Shops and Establishments, sector-specific licences) and DPIIT start-up recognition layer additional obligations and benefits on top of the chosen entity form without changing that form itself, and foreign investment proceeds either through the automatic route (no prior approval, subject to sectoral caps) or the government approval route (prior ministerial approval required) depending on the sector.
Not-for-profit organisations can take three legal forms — a trust, a society, or a Section 8 company — each governed by a different statute and registering authority, with the Section 8 company offering a corporate structure combined with a profit-application restriction and a dividend prohibition in exchange for certain regulatory relaxations.
