Key Takeaways:
- Setting up a legal entity in India allows companies to hire employees and operate locally, but it comes with a multi-step registration process and ongoing compliance requirements.
- The best legal structure for your business depends on your goals, but most foreign companies prefer a private limited company. Branch and liaison offices serve narrower purposes.
- Companies that are testing the market or hiring a small team can use an Employer of Record like RemoFirst to hire in India without setting up a legal entity.
India is widely known as a top market for global expansion, especially for companies seeking access to a large, skilled, and cost-effective workforce. But before hiring employees or generating local revenue, you’ll need a legal way to operate in the country. One approach is to establish a local entity.
However, opening an entity in India involves multiple steps, including regulatory approvals, tax registrations, and ongoing compliance obligations, which can be complex for businesses without local expertise.
Before deciding how to proceed, consider whether establishing a legal entity in India aligns with your company's objectives. While establishing an official presence offers advantages, in some situations, exploring alternative approaches may be a better fit.
Why Companies Expand in India
Foreign companies choose to hire in India for a few key reasons.
For one, India offers a deep bench of talent. The country produces millions of graduates each year, particularly in STEM fields, making it a global hub for tech and back-office operations.
Some cities that are particularly popular for companies hiring Indian talent include:
- Bengaluru is widely considered India’s tech capital, and a top choice for companies hiring software engineers, product teams, and startup talent.
- Hyderabad, a major IT and business hub, attracts global companies thanks to its modern infrastructure and low operating costs.
- Mumbai, India's financial center, is ideal for companies hiring for roles in finance, banking, and corporate operations.
- Delhi NCR is home to talent with skills in a variety of industries and offers proximity to government and regulatory bodies.
- Chennai is known for its skilled workers in manufacturing, engineering, and IT services, as well as its well-established industrial base.
Cost efficiency is another major factor. Companies can access highly skilled workers at significantly lower cost than in North America and Western Europe, especially in fields such as engineering, customer support, and finance.
India also has one of the largest consumer markets in the world, along with a rapidly growing middle class, which makes it an appealing location for companies experimenting with global expansion.
Choosing the Right Type of Legal Structure in India
There are three primary options for foreign businesses opening an entity in India. The best choice depends on the company’s goals.
Private Limited Company (Subsidiary)
This is the most common structure chosen by foreign companies entering the Indian market.
A private limited company is a separate legal entity from its parent company, limiting liability to the company itself. It enables full commercial operations: generating revenue, hiring employees, and signing contracts locally, offering a broader operational scope than other entity types.
This setup is typically preferred for long-term expansion because it offers flexibility, scalability, and stronger credibility with customers and partners.
Branch Office
A branch office is not a separate legal entity but an extension of the foreign parent company. Unlike a private limited company, a public limited company has more restricted permitted activities, and the parent company bears full liability for all operations in India.
This option is a good fit for companies that want a presence in India without going through full incorporation, but still need the ability to carry out certain revenue-generating activities within a more limited scope.
Liaison Office
A liaison office, also known as a representative office, is the most restricted option, even more so than a branch office. It cannot generate revenue, conduct commercial activity, or sign contracts — focusing solely on market research and developing relationships.
It cannot generate revenue and is restricted to activities like market research, promoting the parent company’s business, and building relationships.
This entity is typically chosen by companies exploring the Indian market before deciding whether to establish a branch office or a private limited company for permanent operations.
Key Requirements Before Incorporation
Before you can officially register a company in India, there are a few foundational requirements to take care of. Think of these as the basic building blocks you’ll need in place before the incorporation process can move forward. These include:
Company Name Approval
First, you’ll need to choose a company name and get it approved by the Ministry of Corporate Affairs. The name must be unique and can’t be identical to or too similar to an existing registered business.
It’s a good idea to have a few backup options ready in case your first choice isn’t available.
Directors and Shareholders
A private limited company in India must have at least two directors, and at least one must be an Indian resident.
You’ll also need at least two shareholders, who can be individuals or corporate entities, including foreign entities. In many cases, directors and shareholders can overlap, but both roles must still be clearly defined.
Digital Signature Certificate (DSC)
All directors are required to obtain a Digital Signature Certificate. This is essentially a secure digital key that allows them to sign documents electronically.
Since most of the registration process is completed online, having a DSC is essential to keep it moving forward.
Director Identification Number (DIN)
Each director must also apply for a Director Identification Number. This is a unique ID issued by the Indian government that tracks a director’s involvement across companies and is required for all official filings.
Registered Office Address
Finally, you’ll need a registered office address in India. This must be a physical location, not a P.O. box, and it will be used for all official correspondence and legal notices. Even if your team is remote, having a valid local address is a non-negotiable requirement for incorporation.
Steps to Create a Legal Entity in India
Setting up a company in India follows a fairly structured process. While the steps are straightforward on paper, each one requires accurate documentation and attention to detail to avoid delays.
1. Choose the Business Structure
Start by deciding which type of entity best fits your goals. Most foreign companies choose a private limited company because it supports full operations, offers limited liability, and is better suited for long-term growth.
2. Obtain DSC and DIN
Before you can register the company, all directors need to obtain a Digital Signature Certificate (DSC) and a Director Identification Number (DIN). These are required to sign documents electronically and to be officially recognized in government records.
3. Reserve the Company Name
Next, submit your proposed company name through the Ministry of Corporate Affairs portal. The name must be unique and compliant with naming guidelines, so it’s smart to have a few alternatives ready. Approval usually takes a few days if there are no conflicts.
4. Prepare Incorporation Documents
You’ll then need to gather and prepare the core incorporation documents, including:
- Memorandum of Association (MoA)
- Articles of Association (AoA)
- Director and shareholder details
- Registered office information
These documents lay out how the company will operate, including its business activities, ownership structure, and internal governance.
5. File for Incorporation
Once everything is ready, you can submit the incorporation application through the MCA system. If all documents are in order, approval typically takes a few days to a couple of weeks, after which you’ll receive a Certificate of Incorporation confirming that the company is officially registered..
6. Register for Tax and Compliance
After incorporation, there are a few final setup steps to complete in order to be fully operational. Companies need to apply for a Permanent Account Number (PAN), register for Goods and Services Tax (GST) if required, and open a corporate bank account. These steps ensure you can run payroll, handle transactions, and stay compliant from day one.
Ongoing Compliance Requirements
Once your company is up and running in India, there are ongoing responsibilities you need to be aware of.
For one, companies must file annual financial statements and returns with the Ministry of Corporate Affairs. Businesses are also required to maintain proper accounting records and comply with auditing requirements, depending on size and structure.
In addition, companies must comply with corporate tax regulations, GST filings (if applicable), and other local labor and employment laws.
Note: Ensuring compliance can be time-consuming and often requires local legal and accounting support.
Costs and Timeline
Costs
Common entity incorporation costs include:
- Government registration fees
- Legal and consulting fees
- Accounting and compliance services
While India is cost-effective for hiring, the administrative cost of maintaining an entity can add up over time. And if you eventually want to close it down, that will incur its own costs.
Timeline
Company registration in India typically takes anywhere from a few weeks to over a month, depending on document readiness and approval timelines.
Bank account setup and tax registrations can add additional time, especially for foreign-owned entities.
Hiring Employees Through an Indian Entity
Once your entity is established, you’re ready to start hiring. However, it can be challenging to ensure you meet all requirements if this is your first time hiring Indian talent.
Beyond issuing offer letters, you’ll need to ensure your hiring practices, contracts, and policies align with local employment laws.
Employment Contracts and Labor Laws
Employment contracts in India aren’t something you can simply copy and paste from a generic template. They need to reflect local legal requirements, which cover everything from working hours and overtime to leave policies and termination practices. On top of that, those rules can vary by state and industry.
Because of this, details like notice periods, probation terms, and termination clauses need to be clearly defined and aligned with local expectations. It also means paying attention to where your employees are based, since requirements can differ across regions.
Payroll and Tax Obligations
As you know, running payroll isn’t just about paying salaries. Employers are also responsible for calculating and withholding income tax from employee wages and making any required contributions to statutory benefits.
This includes the Employees’ Provident Fund (a retirement savings scheme) and Employee State Insurance (a health and social security program), depending on salary thresholds and company size.
Managing these deductions correctly is key to staying compliant, and it can get complex quickly, especially if you’re hiring across different states.
Mandatory Benefits
In addition to payroll taxes, employers are required to provide a set of statutory benefits under Indian labor laws. These typically include:
- Paid annual leave, which varies based on company policy and state regulations
- Public holidays, which differ slightly by region
- Sick leave, with minimum requirements set by law
- Provident fund contributions for eligible employees are shared between the employer and employee
- Gratuity payments, which are owed to employees who have completed a minimum tenure (usually five years)
While these benefits are fairly standard, the exact requirements can vary by state and employment type, so it’s important to understand local rules before hiring.
When Setting Up a Legal Entity in India Makes Sense
Opening an entity in India is a big commitment, so it’s important to get clarity on when it’s the right move.
It typically makes sense when a company plans long-term expansion in India and expects to build a sizable team or local operations.
If you’re planning to generate revenue locally, sign contracts with Indian customers, or establish a physical presence, an entity is often required.
Companies may also need a local entity to meet regulatory or licensing requirements, especially in industries like finance, telecom, or manufacturing.
When Opening an Entity May Not Be the Best Option
On the other hand, setting up an entity isn’t always the most practical choice. For example, it may not be practical/worthwhile if you’re only hiring a few employees or testing the market. The cost, time, and compliance burden can outweigh the benefits, and the compliance burden can slow you down.
There’s also the ongoing cost of maintaining the entity, even if your operations remain small.
For companies that fall into those categories, the best option is often to work with an Employer of Record (EOR).
Hire Compliantly in India With RemoFirst
With an Employer of Record, like RemoFirst, you can hire employees in India without opening a local entity.
An EOR handles employment contracts, payroll, benefits, and compliance with local labor laws, so you don’t have to manage the administrative overhead. Meanwhile, you still manage your employees’ day-to-day workload.
When you partner with RemoFirst, we handle all the details of compliance, including:
- Drafting contracts
- Running payroll and making any necessary deductions
- Managing employee benefits, including optional private health insurance coverage
- Onboarding employees
- Equipment provisioning
We can also assist with background checks and applying for visas and work permits.
If you want to start hiring in India (or 185+ other countries) without the delays and complexity of incorporation, schedule a demo to see how RemoFirst can help.
