Business

Starting a Business in Bangladesh: Common Legal Entity

As per the reports published by HSBC Bank, in the year 2016, Bangladesh was a country with a population stat of nearly 16 crores and had a strong corporate law providing favourable conditions for legally starting a business in Bangladesh. The ease of legally carrying out and setting up business operations within the nation is increasing daily. There are various reasons responsible for starting a legal entity in Bangladesh, such as:

1. Strong data protection laws like the Information & Communication Technology Act of 2006;
2. A business-friendly economy strongly supporting exchange control in Bangladesh;
3. Strong laws and international initiatives for regulating money laundering in Bangladesh;
4. Strong IP laws guarantee the protection of Intellectual Property to various new business units.

Starting a business in Bangladesh is an appealing opportunity for investment for new startups and other established business units. Even the government took various initiatives to encourage investors to set up a business in Bangladesh through its various regulations governing and offering tax benefits, establishing various Export Processing Zones (EPZs) and other Economic Zones (EZs), signing bilateral investment treaties with approx. 29 countries, etc.

Legal Forms of Businesses in Bangladesh: A comprehensive study

Starting a business in Bangladesh allows the institution of various legal provisions to establish the smooth operations of the business setups. The types of legal entities that led to set up a business in Bangladesh are:

Company:

The law governing the incorporation of companies in Bangladesh is the Companies Act of 1994, which states that a company is one that is formed and registered under the provisions of this Act or an already existing company of Bangladesh. The act not only deals with the incorporation of Companies in Bangladesh but also provides a clear vision regarding the status of shareholders, dissolution of the company, types of companies, other audit requirements, and provisions related to the registrar required in starting a business in Bangladesh. Section 4(1) specifies certain legal characteristics of a company (i.e., starting a business in Bangladesh) that must be fulfilled for its incorporation, such as being an artificial and separate legal entity distinct from its members and shareholders, having perpetual succession, common seal, right to transfer shares, separate property, and the capacity to sue and be sued in its name.

The categorization of various types of companies that may lead to legally carrying and starting a business in Bangladesh are:

Company limited by Shares:

The companies limited by shares generally partially restrict and hold the right of the members to transfer shares of the company. It is also known as a Limited Liability Company, which is further divided under 2 heads:

• Public Company:

A public company, also known as a public limited company, is a company that is required to have a minimum of 7 members, and there is no limit to the maximum number of members for starting a business in Bangladesh. There must be at least 3 directors; hence, it can raise capital by attracting the public to issue and hold the shares of the company. It is the prime duty of a Public Limited Company, i.e., PLC, to follow the procedure of auditing the annual accounts. There are two types of public limited companies: listed public limited companies (listed with Bangladesh Securities and Exchange Commission) and unlisted public limited companies. The documents which are required for the registration of a public limited company include obtaining the trade license, the tax identification number, i.e., TIN, certificate of VAT registration, Fire certificate, bank account, and other relevant certificates for the protection and sustainability of the environment. A private limited company can also be converted into a public limited company, and it shall set up a business in Bangladesh only after obtaining the certificate of commencement of business.

• Private Company:

A private Company, sometimes also known as a Project Company or a Private Limited Company, is a form of company that not only restricts the right of the shareholders to transfer the shares but also forbids the subscription of the shares and debentures of the company by the public at large. The number of members required for the formation of a private limited company is 2, and the maximum cap is 50. In a private limited company, the shareholders are only liable for the amount of contribution made to pay the company’s debts. A private limited company is a legal entity separate from its members, attracting minimum shareholdings of (1) Bangladeshi taka for each shareholder. The maximum number of directors required for a private company to set up a business in Bangladesh is 2, and hence, it is considered the most flexible and scalable form of starting a business in Bangladesh. The legal formalities that are to be covered for a private limited company to set up a business in Bangladesh include drafting a Memorandum and Article of Association for the private entity, opening a new bank account under the name of the private organization, obtaining Tax Identification Number, company license, VAT certificate and obtaining the certificate of incorporation after which the business shall commence. The time required to set up a fully foreign-occupied private limited company is nearly 4 to 8 weeks.

Company limited by Guarantee:

Starting a business in Bangladesh also implies the setting up of a Company limited by guarantee where all the investing members either buy a share and pledge for the amount of such share or simply pledge to pay a fixed amount called a ‘Guarantee amount’ following the liquidation procedure. Organizations that need a membership for their operation, sports associations, student bodies or associations, cooperatives or social enterprises, and NGOs are some of the companies limited by guarantee.

One-person Company:

Starting a business in Bangladesh also implies the incorporation of a one-person company, operated and run by a natural and legal person holding the capacity to run as the director and the manager of the company with the name of a nominee in the Memorandum of Association. Before 2020, there was no provision in the Company law of Bangladesh governing the incorporation and operation of a One-person company that stated the company’s name containing OPC at the end of the company’s name. The formation of a public or private one-person company requires a minimum of 25 lakh Bangladeshi taka, and the maximum cap is limited to 50 lakh Bangladeshi taka. Also, during FY 2021-22, the government of Bangladesh has set the lowest limit for tax to 25% to assist investors in investing in a promising business in Bangladesh.

Subsidiary Company:

A subsidiary company means starting a business in Bangladesh that is also known as a limited liability company, i.e., an LLC operated by a foreign company in Bangladesh, hence 100% controlled and managed by the parent business entity, allowing approx. 51-100% foreign investment. The minimum number of shareholders required to form a subsidiary company is two, with at least 1 USD paid-up capital required to start a business in Bangladesh. Some of the examples explain the subsidiary company is Instagram, LLC, a subsidiary of Meta, and other examples explaining the subsidiary companies in Bangladesh are Airtel Bangladesh and Standard Chartered Bangladesh. The documents required for the incorporation of a subsidiary company in Bangladesh are:

1. The facsimile of passports and photographs of all the directors & shareholders of the company;
2. The facsimile of the Certificate of incorporation, like the Memorandum and Article of Association of the parent company;
3. Board Authorization documents for a specific member of the parent company to sign necessary subsidiary documents on its behalf;
4. Opening a bank account in Bangladesh with the consensus of the company board;
5. Drafting the relevant documents like the Memorandum and Article of Association of the Subsidiary Company;
6. Seal all the relevant documents under the name of the Subsidiary Company.

Unlimited Liability Company:

Starting a business in Bangladesh includes the association of unlimited liability companies that may or may not attract any share capital for its formation. The past members are also liable for any debts before their resignation. Shareholder’s liability is not fixed and unlimited. Registering the Articles of Association (i.e., AOA) of the company is mandatory to set up a business in Bangladesh.

The benefits of managing, operating, and starting a business in Bangladesh leading to the formation of a legal Company are:

1. The shareholders are not personally liable for any company’s business obligation;
2. Limited liability of the shareholders up to their shareholdings in the company;
3. The company itself carries the taxes and other relevant debts;
4. Easy to attract investment opportunities from local and foreign investors;
5. A platform for foreign investors to invest for their shareholdings in the company.

Co-Operative Society:

The co-operative societies in Bangladesh are a legal form to set up a business in Bangladesh that are leading to the development of various sectors like:

1. Contributes towards the improvement of health care in Bangladesh;
2. Renders better medical support by providing wide options for medical equipment;
3. Renders the supply of food and proper diet plans to the unorganized sector of Bangladesh;
4. Improving the laundry and canteen services;
5. Sustaining the rainwater by establishing various rainwater harvesting plants throughout the nation;
6. Providing less expensive grocery shops and fulfilling other emergency requirements;
7. It also campaigns for public awareness of different social matters;

A cooperative society is a form of voluntary association or an enterprise formed by the public to fulfil some common social, cultural, and other economic needs, working to follow the concepts of equity, equality, solidarity, self-help, and responsibility.

Sole Proprietorship:

A proprietorship means legally starting a business in Bangladesh and is considered to be the simplest form of business operation witnessed in Bangladesh. In a sole proprietorship, the owner of the business is the sole and only holder of all the liabilities and assets of the business entity. It does not carry as a separate legal entity or business unit in Bangladesh; hence, it is personally liable for all the debts and liabilities that arise from starting a business in Bangladesh. The legal requirements necessary for the sole-proprietorship setup of a business in Bangladesh are:

1. A person responsible for the sole proprietorship business in Bangladesh must be at least 18 years of age or above;
2. A person responsible for starting a business in Bangladesh must be a citizen of Bangladesh;
3. There must be a local commercial address for carrying any business communication and other relevant communication required for starting a business in Bangladesh;
4. As the entity is solely owned, the profit earned will be the income of the person starting the business;
5. Taxes must be deducted from the share of profit owned by the sole owner of the business in Bangladesh;
6. There is no obligation to audit the accounts of the business setup;
7. Starting a business in Bangladesh requires obtaining and renewing the trade license;
8. There are certain other sets of documents required for the Sole-proprietor to set up a business in Bangladesh, such as the name of the proprietorship firm in Bangla language, as it is strictly prohibited by foreigners to set up a sole-proprietorship, lease agreement, or title deed for supporting the provided office address, and the facsimile of national ID card of the member responsible for starting a business in Bangladesh.

The advantages of starting a business in Bangladesh (i.e., Sole-Proprietorship business) are as explained below:

1. It is carried by the legal heirs of the owner even after his death;
2. Sole ownership of the owner over the profit earned by the business;
3. No compulsion to gather and submit the annual audited reports to the authorities;
4. Easy and effective to set up a sole proprietorship as it does not attract incorporation; hence, it is considered to be a business;
5. The owner alone holds all the assets of the proprietorship firm;
6. The termination or dissolution of the proprietorship firm is not a complex procedure.

Partnership:

A partnership is a legal entity that leads to starting a business in Bangladesh, requiring a minimum of 2 or more persons for its formation. It must not exclude the maximum cap of 20 persons with the main objective of sharing all the profits and losses incurred while carrying out the operations and starting a business in Bangladesh. The rules and laws regulating the formation and organization of a partnership firm in Bangladesh are in the Partnership Act of 1932. For the incorporation of the partnership, a deed is signed by all the members holding the partnership right in the firm, commonly known as the Partnership Deed, which further facilitates acquiring the trade license and opening a bank account for operating a legal business in Bangladesh. There are further 3 different forms of partnership firms, as explained:

• General partnership:

Starting a business in Bangladesh attracts various forms of partnership business setups, such as general partnership that attracts similar attributes to a sole proprietorship wherein it is a legal business entity with all the partners holding the liability and any debt of the firm, irrespective of the fact of their involvement in the business.

• Limited liability partnership:

Limited Liability Partnership, commonly known as LLP, is a form of starting a business in Bangladesh that works as a partnership and a company simultaneously, wherein the liability of the partners is distributed according to their involvement in the operations of the business. The partners involved in an LLP are authorized to pay a personal income tax at a rate of 0 to 22% for the income they receive.

• Limited partnership:

It is a form to set up a business in Bangladesh which operates with a minimum of 1 general and 1 limited partner as it classifies two types of partners involved in the partnership firm as holding the capacity to work as a general partner and a limited partner who has a fixed and limited liability as per the terms of the partnership Agreement.

The legal requirements that must be fulfilled before registering a partnership firm are:

1. Deciding a specific name for the partnership firm;
2. Drafting and signing of the partnership agreement by all the partners;
3. Lastly, register the partnership agreement under the provisions of the Registrar of the Joint Stock Companies and Firms.

The benefits attributed to the partnership firm because of starting a business in Bangladesh are:

1. It is not mandatorily required to register a partnership agreement;
2. Easy process of dissolution of the firm;
3. Easy to realize and settle the assets and liabilities among the partners;
4. No requirement for any legal formalities for running the firm.

Liaison and Branch Office of Foreign Companies:

The Liaison and Branch office are the business entities that regulate its operations under the Bangladesh Investment Development Authority (BIDA).

Liaison Office (LO):

The Liaison Office, also known as the Representative Office, is not authorized to carry out any commercial activities within the country and hence establishes a channel for communication between headquarters and subsidiaries established in Bangladesh and also provides an inexpensive mode for new startups to set up a business in Bangladesh. There is no provision for taxation of the Liaison office in Bangladesh. The required areas of operation of the Liaison Office in Bangladesh are:

1. Conducting the market research to aid the new companies;
2. Assisting the customers by analyzing the data of the companies incorporated in Bangladesh;
3. Bridging the gap and working with both the parent company and the local company;
4. Ceases its operation in the field of manufacturing;
5. Mandatorily fill out the company’s annual audit report.

It takes 6 long weeks to start a liaison office in Bangladesh with a minimum shareholding of 50 thousand USD, unlimited legal liability, and at least 1 director holding the operations of the business in Bangladesh.

The legal requirements for incorporating a liaison office are:

1. Same name as the name of the parent company;
2. No separate Memorandum of Article of Association is needed;
3. There must be a local office address in Bangladesh;
4. No shareholders or paid-up capital are required for its registration;
5. Certain documents must be fulfilled before the establishment of the liaison office, such as a facsimile of the passport of the directors, a Memorandum of Article of Association of the parent company, and approval of the board for opening a bank account and liaison office in Bangladesh.

Branch Office (BO):

Starting a business in Bangladesh requires the setting up of a Branch Office that is not a separate legal entity from its head office; on the contrary, it is a branch or an extension of the foreign parent company operating in Bangladesh that replicates the operations of the parent company in Bangladesh as stated in the Letter of endorsement. It takes 7 long weeks to set up a branch office with the approval of the Bangladesh Investment Development Authority (BIDA) in Bangladesh with at least 50 thousand USD. It is taxed over the profits earned with a minimum cap of 0% and a maximum of 32.5%. Even the Branch office is liable to file the tax return in the country of its operation. It is also termed as the legal extension of the parent company.

The main aims of focus of the Branch office in Bangladesh are:

1. Indulging in the export and import of goods;
2. Conducting research work for the parent company;
3. Establishing a face for the parent company in Bangladesh;
4. Providing the services targeting the professional or consultancy technicalities;
5. Bridging the gap between the parent company and Bangladeshi companies;
6. Providing a roadmap for the technical usage of the products supplied by the parent company;
7. Helping in the services to develop various new software and other information technology required in Bangladesh;
8. Strictly prohibiting from carrying the manufacturing activities in Bangladesh;
9. 100% attracts foreign direct investment opportunities.

Conclusion

Starting a business in Bangladesh means establishing a distinct legal entity, leading to exposure to various sectors like the private sector, public sector, cooperative society, partnership firm, etc. The result of starting a business in Bangladesh is alarming factors that provide a liberal economic approach towards the growth and development of society, attracting various investors, leading to an export-oriented business model, and further expansion of the service sector.

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