LLP vs subsidiary vs liaison office: choosing an India entity

1. The five structures, in one frame

India offers foreign investors five practical structures. Two of them are Indian entities with their own legal personality: the private limited company, usually held as a wholly owned subsidiary, and the limited liability partnership. Three of them are extensions of the foreign company itself: the liaison office, the branch office and the project office. That distinction drives almost everything that follows, because an Indian entity ring-fences liability, pays domestic tax rates and can act freely as an employer and contracting party, while an extension of the foreign company does not and cannot.

The second variable is permitted activity. A liaison office may not carry on commercial activity at all. A branch office may carry on a defined list of activities but not manufacturing on its own account. A project office exists for a specific contract and expires with it. A subsidiary and, subject to sector conditions, an LLP can do whatever their objects and the applicable FDI policy allow.

The third variable is the growth path. A subsidiary can issue shares, grant options, take investment, be merged, be carved out or be sold. An LLP cannot issue shares or options. An office is not a saleable business at all. If there is any realistic prospect of external investment, employee equity or a future transaction, the entity choice narrows immediately.

Ask what the business must be able to do in year three. The answer usually eliminates three of the five options in a single sentence.

2. The private limited subsidiary: the default answer

A private limited company incorporated under the Companies Act, 2013 and wholly owned by the foreign parent is the structure most global groups end up with, and for good reason. It permits full commercial activity, allows 100% foreign ownership under the automatic route in most services, software, engineering and business-services sectors, limits the parent's liability to its investment, is taxed at domestic corporate rates rather than the higher foreign-company rate, and is a clean party for employment contracts, leases, customer agreements and intercompany arrangements.

The requirements are manageable: a minimum of two shareholders and two directors, at least one of whom must be resident in India, a registered office in India, a memorandum and articles, digital signatures and director identification, and statutory registers and filings once incorporated. There is no minimum paid-up capital requirement, though the capital should be sized to fund operations without repeated small remittances, each of which carries its own reporting.

The trade-off is compliance load. A private limited company files annual returns and audited financial statements, maintains statutory registers, holds board and general meetings, appoints an auditor and complies with related-party and director-disclosure requirements. For a group of any size this is routine and outsourced, and it is a small price for a structure that does not have to be replaced when the business grows.

3. The LLP: right for some, wrong for most growth plans

A limited liability partnership combines limited liability with partnership-style internal flexibility and a lighter compliance regime than a company. It has no requirement for board meetings or share capital mechanics, and profit distribution to partners avoids the dividend layer that applies to company distributions. For professional services businesses, joint ventures with a small number of participants and holding structures with stable ownership, it can be an efficient choice.

Foreign investment in an LLP is permitted under the automatic route only in sectors where 100% FDI is allowed under the automatic route and no FDI-linked performance conditions apply. That eliminates a meaningful set of regulated sectors and means the sector analysis has to be done before, not after, the structure is chosen. Downstream investment by an LLP is also subject to conditions.

The decisive limitation for most groups is capital. An LLP has partners and contributions, not shares. It cannot grant employee stock options, cannot issue preference or convertible instruments to investors, and does not fit standard venture or private-equity documentation. Converting an LLP to a company later is possible but carries tax, stamp and administrative consequences. If employee equity or external funding is on the roadmap, the LLP is usually the wrong starting point.

4. Liaison, branch and project offices

A liaison office is a representative presence. It may act as a communication channel between the parent and Indian parties, undertake market research, promote the parent's business and coordinate activity, and nothing more. It cannot invoice, trade or earn income in India, and it is funded entirely by inward remittance from the parent. Approval is routed through an authorised dealer bank, the permission runs for a defined period subject to renewal, and the office files an annual activity certificate confirming it stayed within permitted limits. It suits a genuine exploration phase and nothing beyond it.

A branch office may carry on a defined set of activities, including export and import of goods, professional or consultancy services, research, technical support and representation of the parent, but not retail trading or manufacturing on its own account. Because the branch is the foreign company operating in India, the parent bears direct liability and the profits attributable to the branch are taxed at the rate applicable to foreign companies, which is higher than the domestic corporate rate. Branches suit specific fact patterns, particularly where a group must contract as the foreign entity.

A project office is the narrowest structure: permitted where a foreign company has secured a contract to execute a project in India, funded in line with the project's terms and wound up when the project completes. It is a project vehicle, not a market-entry strategy.

5. FDI routes, sectoral caps and approvals

Foreign investment in India runs on two routes. Under the automatic route, no prior government approval is needed and the obligations are reporting obligations. Under the government route, prior approval is required before the investment is made. Most services, software, engineering, research and business-process activities sit on the automatic route at 100%, while sectors such as insurance, defence, broadcasting, print media, multi-brand retail and certain financial services carry caps, conditions or approval requirements.

Two further filters matter. First, investment from entities of countries sharing a land border with India, or where the beneficial owner is situated in such a country, requires prior government approval regardless of sector. Second, some sectors carry FDI-linked performance conditions, which among other things affect whether an LLP is available as a vehicle.

Whatever the route, the reporting is mandatory and time-bound: the inward remittance is reported through the authorised dealer bank, share allotment is reported on Form FC-GPR within the prescribed period, transfers between residents and non-residents are reported on the applicable form, and an annual return on foreign liabilities and assets is filed. Pricing must comply with the applicable valuation rules. Late filings are regularised through a compounding process, which is avoidable and rarely convenient.

6. Tax, transfer pricing and getting money out

A domestic company is taxed on its worldwide income at domestic corporate rates, with concessional regimes available to companies that meet the applicable conditions. A branch of a foreign company is taxed on India-sourced profits at the higher rate applicable to foreign companies. That differential alone often settles the branch-versus-subsidiary question for a services business.

Repatriation differs by structure. A subsidiary returns value through dividends, which are taxable in the shareholder's hands with withholding at the applicable rate, subject to treaty relief, and through arm's length payments for services, royalties or interest, each carrying its own withholding and, where relevant, transfer-pricing scrutiny. An LLP distributes profits to partners. A branch remits post-tax profits subject to documentation. A liaison office has nothing to remit because it earns nothing.

Where the Indian entity transacts with the group, transfer pricing applies. Intercompany service arrangements need a written agreement, a defensible pricing method, contemporaneous documentation and, above prescribed thresholds, an accountant's report. The most common and most avoidable failure is beginning delivery and invoicing before the intercompany agreement exists, then producing it later to fit the numbers.

The entity determines the tax rate. The paperwork determines whether the rate is the only thing you argue about.

7. What the ongoing compliance load actually looks like

A private limited subsidiary runs a familiar annual cycle: statutory audit, annual financial statements and annual return filings, board and shareholder meetings, maintenance of statutory registers, director disclosures, income-tax return and tax audit where applicable, GST returns, withholding-tax returns, provident fund and employees' state insurance returns once staff are hired, professional tax, shops-and-establishments renewal, and the FEMA annual return on foreign liabilities and assets.

An LLP carries a lighter version of the same cycle, without meeting and share-related formalities. A liaison or branch office files an annual activity certificate and its own returns, and remains subject to periodic review by the authorised dealer bank and the regulator.

The practical point is that none of this is heavy for a group of any scale, provided it is owned by someone with a calendar. Compliance failures in India rarely come from difficulty; they come from a launch team that dissolves after incorporation without handing the recurring obligations to anyone.

8. The setup sequence that avoids the usual delays

Whatever structure is chosen, the order of operations decides the timeline. Apostilled parent documentation, director identification and bank KYC gate everything else, so they should start in week one rather than after the entity name is reserved. Sector and route analysis should be settled before any money moves, because pricing and reporting depend on it.

9. Exit, conversion and closure

Every structure should be chosen with its exit in mind, because closing an India presence is slower than opening one. A private limited company can be wound up voluntarily where it has no outstanding liabilities, or struck off where it never commenced or has been dormant, subject to conditions and to tax clearances. Alternatively, and more commonly for a healthy business, it can simply be sold, merged or transferred, which is precisely the flexibility the structure was chosen for.

An LLP can be wound up or struck off on comparable principles, but converting an LLP into a company to accommodate an investor or an option pool involves tax, stamp duty and administrative consequences that should be modelled before the LLP is chosen rather than after an investor asks the question.

Closing a liaison or branch office is a documented process routed through the authorised dealer bank, involving final activity certificates, tax clearance and remittance of residual funds. Groups that used a liaison office as a stopgap typically run its closure in parallel with the new subsidiary's launch, which is manageable but consumes attention at exactly the point the business is trying to accelerate.

Frequently asked questions