8 Common Mistakes to Avoid When Setting Up a Company in India

If you're planning on starting a business in India, take note of these tips and reminders to make sure the process goes smoothly.

Starting a business is already a difficult task and starting a business overseas is even harder. When you fail to prepare, you could make some mistakes when setting up your company in India.

To help you avoid them, we’ve listed some of the most common mistakes foreign investors make when opening a company in India.

Table of contents

    1. Choosing the Wrong Business Activity

    In India, direct investments from foreigners enter either through the Government Route which requires approval from the Indian government, or the Automatic Route where funds enter without needing approval. 

    The route depends on the industry of the business. That being said, you should not choose a business activity because it allows investments via Automatic Route. Your business classification should match what you actually do to prevent legal issues and other problems down the line.

    2. Not Finding the Right Resident Director

    Foreigners cannot own sole proprietorship companies or one-person companies. Private and public limited companies, as well as limited liability partnerships, need at least one resident director

    As such, one of the first things you should do is look for a reliable and trustworthy resident director. It would be wise to do a background and criminal check before nominating a person as your company’s resident director.

    You shouldn’t think of the resident director just as a legal requirement. You must select someone who is experienced and can help you understand the local market and bring in business connections. Emerhub’s recruiters can help you find the right person to fill this role.

    3. Failing to Keep Records of Initial Expenses

    You will start making business expenses even before completing company registration or before beginning operations. It is very important to keep records of all these expenses because you will need them when it is time to report taxes. You must take these expenses into account or you could end up paying higher taxes when your company begins making profits.

    4. Not Understanding Local Market Conditions

    India is very diverse and is home to a lot of different languages and cultures and foreign investors may find it difficult to grow accustomed to local market conditions. Foreigners may face issues, particularly when getting services or purchasing raw materials.

    This circles back to the earlier point about finding the right resident director. Your nominated resident director should guide you and help you understand the local market conditions.

    5. Incorrect Tax Planning

    India has a number of direct and indirect tax laws at the federal, state, and municipal levels. It is very important to know and understand all relevant tax laws and to take all applicable taxes into consideration when reporting taxes. 

    Incorrect estimations and computations could negatively impact your company’s profitability. Get in touch with Emerhub and we will advise and help your company plan and report your taxes.

    6. Not Understanding Employment Laws

    Similar to tax laws, there are also a few employment laws on federal and municipal levels. Business owners can find themselves in hot water if they fail to comply with employment laws. To ensure compliance with Indian laws, it would be good for foreign employers to seek expert help from an organization like Emerhub.

    7. Repatriating Funds Without Approval

    Before investing in India, you must know how to repatriate profits earned in the country. Repatriating dividends is fairly easy, but is subject to payment of relevant taxes and approval. However, directors repatriating personal income can be quite difficult.

    Regulations on repatriating funds are under the Foreign Exchange Management Act, 1999. Violating regulations will result in penalties.

    8. Setting Up a Company When You Don’t Need One

    There are other ways to do business in India without starting a company and in some cases, it may be a better option for you.

    If you’re looking to hire employees in India, you can opt to use an Employer of Record service instead. An employer of record hires employees on your behalf. This means you can recruit and hire workers without setting up a legal entity in India. As your employer of record, Emerhub will handle HR activities like hiring and payroll management for your company.

    You may also opt to open a liaison office or branch office depending on your business activities. A liaison office is a great option if you want an office to represent your company in India or perform other business functions that will not earn revenue for the parent company locally. A branch office, on the other hand, may earn revenue locally and is suitable for companies involved in importing, exporting, and consultancy.

    Emerhub can help you start your business without making any of these mistakes. Fill out the form below and we will get in touch with you.

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