Choice of Business Entity, Registrations, the FDI Route and Not-for-Profit Organisations — Practice

Question 1

Which of the four common entity forms does NOT have a separate legal entity status?

Accepted Answer

Sole proprietorship and partnership — both lack separate legal entity status, unlike an LLP or a company.

Question 2

Under which FDI route is prior government approval required before the investment is made?

Accepted Answer

The government (approval) route.

Question 3

Under which Companies Act section is a not-for-profit company incorporated?

Accepted Answer

Section 8.

Question 4

State the minimum number of members required to form a private company, a One Person Company, and a public company.

Accepted Answer

Private company: 2. One Person Company: 1. Public company: 7.

Question 5

State two restrictions a Section 8 company is subject to, and one relaxation it receives in exchange.

Accepted Answer

Restrictions: it must apply its profits (if any) solely toward promoting its stated objects (charity, education, social welfare, etc.), and it is prohibited from paying any dividend to its members. Relaxation: it receives certain regulatory relaxations, such as exemption from some of the minimum-paid-up-capital-linked requirements applicable to an ordinary company.

Question 6

Name three registrations or licences a typical business may need beyond basic incorporation, and state what triggers each.

Accepted Answer

GST registration (triggered by crossing the applicable turnover threshold, or immediately for certain categories of supply); Shops and Establishments registration (a state-level requirement for most commercial establishments); a sector-specific licence such as an FSSAI licence (triggered by operating a food business) or an Import-Export Code (triggered by cross-border trade).

Question 7

A promoter is choosing between a partnership and an LLP for a professional services firm expecting moderate growth and wanting some protection from personal liability. Advise, comparing the two on liability, compliance burden and registration requirement.

Accepted Answer

An LLP is the better fit. A partnership under the 1932 Act carries unlimited, joint-and-several liability for the partners and registration is not mandatory (though recommended), with minimal compliance. An LLP under the 2008 Act caps liability at the partners' capital contribution, has a separate legal personality and perpetual succession, and mandatory MCA registration, at the cost of a moderately higher compliance burden than a partnership — a reasonable trade-off given the promoter's expectation of growth and desire for liability protection.

Question 8

An Indian company in a sector under the automatic route wants to raise foreign investment through compulsorily convertible preference shares. Explain how these instruments are typically treated under FEMA's non-debt instrument rules, and whether approval is needed.

Accepted Answer

Compulsorily convertible preference shares are treated as equity/FDI instruments (like equity shares and compulsorily convertible debentures) under FEMA's non-debt instrument rules, rather than as debt. Since the sector falls under the automatic route, no prior government or RBI approval is needed for the investment, subject only to the applicable sectoral cap and conditions.

Practice — Choice of Business Entity, Registrations, the FDI Route and Not-for-Profit Organisations

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