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Note on establishing legal entities:

Background:

Three friends based in Middle East is exploring the possibility of co-producing a movie which for which
they have developed a script. The friends are planning to pool their money and form an appropriate
legal entity in India structure and this legal entity will co-produce the movie along with a lead producer
who will invest substantial part of the production cost.

The friends would like to continue their script writing/production business with other co-
producers/production houses in future and in all the ventures, the proposed legal entity will be investing
in which the three friends are shareholders/owners.

This note intents to analyse the multiple options available for incorporating a legal entity.

Analysis - Legal entities:

1. Governing Law:

Company Companies Act 1956/Amended 2013

Partnership Indian Partnership Act

Limited liability Limited Liability Partnership Act 2008

partnership

2. Basic Distinctions

Company Liability of shareholder is limited to the extent of capital contributed in the

Company. In a situation where the business has incurred losses and has
liquidity issues and eventually result in liquidation or winding up, the liability
of the shareholders is limited to the amount of capital contributed. The assets
will be sold and the sale proceeds will be distributed to creditors and any
shortfall will be loss to creditors.

Partnership Even though partnership is a separate legal entity, the liability of partners
are unlimited. In scenario of losses, the partners should bring in funds to
settle all creditors’ claims.

Limited liability LLP is a more regulated partnership where liability of partners are limited.
partnership (LLP)

# Concept of public company is not relevant and hence not discussed.

Even though shareholders have limited liability in case of a Company, in practical scenario, especially
bank loans, the lenders take personal guarantee of shareholders and hence even though liability is
limited, banks can proceed against shareholders.

Disclaimer: This is a high-level document to give an idea based on input received, please consult a
professional with your specific requirements before deciding the way forward.
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3. Other salient features

a) Company

Incorporation Register with Ministry of Company Affairs (MCA)Government of India and

start operations only after approval of MCA

Governing document Companies Act and Memorandum of Association.

Name of Company Approval required from MCA, may not get if our preferred name is already
existing

Number of  Minimum of 2 and maximum of 200 members.

members/shareholders  Members means shareholders and all shareholders and
shareholders can be NRIs or Resident. All shareholders can be
NRIs and no need of resident shareholder.

Directors  Minimum 2 directors and maximum of 15 directors.

 One director should be resident director (Non NRI)
 Director need not be shareholder. Ie, no requirement for a director
to hold any shares
 Directors should hold digital signature which are to be renewed
annually.

Fund management  Restriction of fund transfer for shareholders or directors, possible

only as permitted by companies Act.
 Shareholders approval required for transaction with related
parties.
 Cannot take any loan from individuals unless they are
directors/shareholders. Penal provisions for violation include
imprisonment.
 No restriction for bank loans

Share of profit  Share of profit is by way of dividends, not allowed to draw any other
additional funds.
Compliance  Annual audit and filing of necessary annual returns and other
requirements returns are mandatory.
 Audit required under two statutes- one under Companies Act, 2013
and other under Income Tax Act, 1961. This potentially increases
compliance cost.
 Non filing will result in disqualification of directors and such
directors are not allowed to be director in any other company in
India for 5 years. Director’s DIN is publicly visible.

 Strict format for maintenance of books of accounts- only under

accrual basis.

Disclaimer: This is a high-level document to give an idea based on input received, please consult a
professional with your specific requirements before deciding the way forward.
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Taxation  Income Tax @ 22% (with restrictions on deductions) or 30%.

 Dividend taken by share holders is taxable @ 30% in individuals
shareholder’s name if income in India exceed individual tax slab.
 Although company has the option of being taxed at a lower rate of
22%, money while transferred to shareholders/ directors as salary,
commission, dividend or by any other means is taxed at 30% in the
individual’s name.
 PAN required.
 GST registration if turnover exceed prescribed limit.

Incorporation cost and  MCA fees ~ Rs 10,000 and professional fee of consultant which
time may vary from Rs 10,000 to Rs 20,000.
 2 months for incorporation after submission of documents.

Winding up  Elaborate procedures and need National Company Law Tribunal

(NCLT)

b) Partnership

Incorporation Partnership as per Indian Partnership Act 1932

Governing document Partnership deed, to be registered. Rights and duties of designated

partners are governed by the partnership agreement
It is advisable to register both the partnership document (document
registration) as well as firm registration separately, subject to local state
laws.
Name of Firm No restrictions, need to check if there is any violation of registered
trademark.

Number of Partners Minimum 2 partners and maximum of 50 partners. No need of resident

partners, all partners can be NRIs

Fund management No restrictions, partners can take share of profit or additional drawings
with approval of other partners.

Share of profit Share of profit in ratio of partnership deed

Compliance  Audit required only if turnover exceeds prescribed limits or

requirements presumptive taxation sections.
 No need of audit report to be submitted to registrar of Partnership
 No other compliance requirements
 Books need to be maintained only if turnover exceeds 10 lacs an
annum and can be maintained either on cash or accrual basis.
Cash basis allows the assessee to pay tax only on moneys
received.
 Above point collides with GST law which indirectly mandates
accrual basis of accounting but legally and practically can file

Disclaimer: This is a high-level document to give an idea based on input received, please consult a
professional with your specific requirements before deciding the way forward.
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returns under income tax under cash basis whereas GST can be
paid on accrual basis to manage taxes.

Income Tax  Income Tax @ 30%

Incorporation cost and
time
Winding up/liquidation
 Salary is allowed as expense in the firm upto the limits prescribed
under the income tax act, beyond which is taxable. However, this
is tax neutral since, either the partner or the firm suffers tax.
 Share of profit taken by partners is not taxable in hands of
partners unlike in companies, dividend is again taxable in hands
of shareholders. So effective tax is case of Company is not just
22% or 30%
 PAN required.
 GST registration if turnover exceed prescribed limit.
 Partnership deed Rs 50,000 and minor fee for deed preparation
 Immediate (Tamil Nadu stamp act, partnership deed cost is only
Rs. 300 stamp duty. Please check whether Rs. 50,000 is correct,
again whether being specific on cost is required?)
 Draft and register partnership deed – 1 day
 Obtain PAN– takes 1-2 weeks.
 Open bank account – 1-2 days
 Start operating
 No need of any approval, once liability of creditors is settled,
partnership can be easily wound up.

c) Limited Liability Partnership

Incorporation Limited Liability Partnership Act 2008

Governing document LLP agreement and LLP Act. Rights and duties of designated partners are
governed by the LLP agreement, to be filed with MCA.

Name of Company Name approval required from MCA.

Number of Minimum 2 partners who are individuals and no maximum limit. One
members/shareholders individual partner should be resident in India

Directors No requirement of directors.

Fund management No restrictions, partners can take share of profit or additional drawings
with approval of other partners.

Share of profit Share of profit in ratio of partnership deed

Compliance  Audit required only if turnover exceeds prescribed limits or

requirements presumptive taxation sections.
 Audit mandatory and file with MCA
 Additional compliance requirements than partnership.

Disclaimer: This is a high-level document to give an idea based on input received, please consult a
professional with your specific requirements before deciding the way forward.
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Income Tax  Income Tax @ 30%

 Share of profit taken by partners is not taxable in hands of
partners unlike in companies, dividend is again taxable in hands
of shareholders. So effective tax is case of Company is not just
22% or 30%
 PAN required.
 GST registration if turnover exceed prescribed limit.

Incorporation cost and  MCA fees ~ depending on capital, lesser than Company and
time professional fee of consultant.
 Upto 1 months for incorporation after submission of documents.

Winding up/liquidation  Need approval, documents to be filed with Registrar of

Companies.

Conclusion:

 Ultimate decision depends on who owns the rights to the movie. From our understanding the
producer and the friends will jointly own the movie rights for each movie.
 For each movie the three friends can form a partnership which will function as a JV between
the friends and the producer with the agreed profit-sharing ratio. They can additionally pay
themselves professional fee or salary for the script, apart from the profits of the movie sale.
 After the project is completed, the partnership can be wound up, unless the movie rights are
sold outright. If the movie is given on long term lease with bullet payment at the beginning of
the sale period, the partnership can pay the taxes and remain dormant until a new lease or sale
happens at the end of the lease period.
 Our suggestion - If the friends have any income generation between themselves, they can
consider forming either a partnership or a private limited company among themselves based
on the pros and cons listed above. If they have no transaction between themselves, this can
be avoided.

 If the funding partner becomes a financier instead of a producer, the friends can consider
forming a partnership or company between themselves and treat the funding as a loan and
repay as per agreed terms. This helps in retaining control over the movie which can be
monetized in the future.

 Each movie will be separate project (SPV), a partnership can be formed with other investor,
one partner can be the abovesaid company. This is mainly to address the issues in winding up
once a project is complete. If we expect to have continued association with an investor in
multiple movies, a company can be incorporated in which the aforesaid company can be a
shareholder.

 LLP is a midway between partnership and company, initially the compliance requirements were
less, now a days MCA is increasing the compliance requirements. LLP can be avoided at this
stage.

Disclaimer: This is a high-level document to give an idea based on input received, please consult a
professional with your specific requirements before deciding the way forward.
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 If three friends plan to test the waters on an experimental basis, they can form a partnership
and that partnership can be a partner in the partnership with investor.

Disclaimer: This is a high-level document to give an idea based on input received, please consult a
professional with your specific requirements before deciding the way forward.