Basic Corporate Laws You Need To Know For Your Indian StartupAugust 12, 2022 By Dinesh Parmar
Research, planning, budgeting, consulting, infrastructure, hiring, there's so much a business aspirant has to do to commence a startup journey. But, the most important one on the checklist for a startup to have its identity and prove its existence is its legal aspects which only an established corporate lawyer can explain in detail. Hence, we present to you the basic Indian corporate laws every startup owner must be aware of straight from our experts.
The Population of Startups
The birth rate of startups in India is hitting high. According to the Economic Survey 2021-22, due to the sustained government efforts, the number of startups in India recognized by the Department for Promotion of Industry and Internal Trade (DPIIT), has reached the count of 65,861 with at least 14,000 recognized during fiscal 2022.
By government efforts, we mean to say is with the introduction of the game-changing initiative “Startup India” - which was formed to build and strengthen the startup ecosystem of India for nurturing the startup culture that would further drive economic growth, support entrepreneurship, and enable large-scale employment opportunities, a lot of business ideas have now developed into big brands.
Moreover, with "The Startup India Seed Fund Scheme (SISFS) in it, starting a business has become more than just a dream for many small business owners as they get the necessary financial assistance for proof of concept, prototype development, product trials, market-entry, and commercialization under it which is why recently Rs 945 crore has been allocated by the government for a period of four years starting from 2021-22. In fact, even amid a downturn in global markets, Indian startups snagged record investments of up to $3.5 billion across 130 deals through January, marking a decadal high.
So, if you are inspired enough to start your Indian startup, before laying the foundation of a new business, allow us to take you through the essential corporate laws you must abide by to make your startup legit in the eyes of the law.
1. Map Out a Legal Business Structure and Prepare Founders and Co-Founder’s Agreement
Undoubtedly, you have to be clear about the nature and type of the business before rolling the ball for it because not just the rules and regulations for each business vary but everything from its registration, short and long-term goals, marketing, and funding too are applicable depending upon what business you are planning to do.
Next, the most important step is to figure out your specific business type – whether it's going to be a sole proprietorship, private limited, public limited, partnership, limited liability partnership, etc.
After that, you must move on to frame your Founders and Co-Founder’s Agreement defining the roles, responsibilities, exit clauses, operative clauses, and executive compensation of the company’s founders so as to avoid any chances of disputes in case of disagreements between the founders.
2. Obtain All Necessary Business Licenses
A business license is proof that you have been granted the right to run your business by the government. Thus, for a business to operate legally, it must possess all necessary licenses required for that particular nature of the business which means if you are opening a restaurant, then you must have a Food Safety License, Certificate of Environmental Clearance, Prevention of Food Adulteration Act, Health Trade License, etc. which are not required for a garment shop. But, there are a few common licenses like the:
- Shop and Establishment Act - issued by the labor department of the respective state.
- GST Registration - a mandate for every business whose annual turnover surpasses Rs 40 lakhs (Rs 10 lakhs for Northern east & hill states.
- NBFC Registration - issued by the Reserve Bank of India that covers private lenders, fintech companies, and non-banking financial institutions.
There are also certain additional licenses like Professional Tax, BIS Registration, MSME Registration, etc. which are not mandatory but you can secure them to boost growth. Acquiring licenses may seem a tiring task but remember if you are found running your business without relevant licenses, be ready to face costly lawsuits and unwanted legal battles hence, better understand from a corporate law firm what licenses are required for your business to run legally to prevent the government from putting a shutter on it.
3. Safeguard Your Intellectual Property Rights
Not necessarily the business idea or anything related to your business like the logo, color, and design, is unique and will stay forever unique to you until you make it officially yours. Confused? For example, there are hundreds of car companies which means the business idea is the same but each has its own identity that makes them different from the other and also prevents them from forgery which is possible only by securing one’s Intellectual Property Rights.
Like every other business, if you too have a secret that makes your business special, or have an innovative product that has never been made, a formula that you discovered, your brand’s name, logo, designs, even your unique selling proposition, all must be protected using the Intellectual Property Rights which includes patent, copyright protection, trademark registration, etc., that will prevent anyone from stealing, counterfeiting, or even damaging what is solely yours.
The good news is that the Startup India program also has a provision for IPR protection. Its Scheme for Startups Intellectual Property Protection (SIPP) helps startups to protect and commercialize all their intellectual property as well as seek advisory services in filing and disposing of the patent application from the panel of facilitators impaneled by the Controller General of Patents, Trademarks, and Design. Although one can directly e-file their patents on the IPR portal, it is better to consult a corporate lawyer to avoid any loopholes in your application that will lead to rejection later.
4. Don’t Forget the Labour Laws
Just as much as customers are important for a business, without labor, there’s no business to run. Hence, adhering to labor laws is integral to every organization, small or big. Since employees spend most of their time in your company, as an entrepreneur you are duty bound to take care of them and make sure they are getting the aid and protection they deserve.
Labor laws provide protection regarding minimum wages (Minimum Wages Act, 1948), insurance (The Employee’s State Insurance Act, 1948), gratuity (The Payment of Gratuity Act, 1972), PF payment (Employee Provident Fund Scheme, 1952), weekly holidays, maternity benefits (Maternity Benefit Act, 1961), sexual harassment (The Sexual Harassment of Women at Workplace (Prevention, Prohibition and Redressal) Act, 2013), payment of bonuses, and so on for employees, and breaching any of them can harm the reputation of your business as well as cost you a hefty amount.
Startups incorporated under the Startup India Program can make a self-declaration via Shram Suvidha Portal for nine labor laws within one year from the date of incorporation to be exempt from the labor inspection and they are
- The Industrial Disputes Act, 1947
- The Trade Unit Act, 1926
- Building and Other Constructions Workers’ (Regulation of Employment and Conditions of Service) Act, 1996
- The Industrial Employment (Standing Orders) Act, 1946
- The Inter-State Migrant Workmen (Regulation of Employment and Conditions of Service) Act, 1979
- The Payment of Gratuity Act, 1972
- The Contract Labour (Regulation and Abolition) Act, 1970
- The Employees’ Provident Funds and Miscellaneous Provisions Act, 1952
- The Employees’ State Insurance Act, 1948.
Note: To continue the exemption under this scheme, startups will have to file a self-certified return for the second and third years.
Since labor laws are crucial and sensitive, it is best to consult a corporate law firm to assess the laws applicable to your startup and ensure that your startup is compliant with the required labor laws.
5. Get Your Contracts in Order
Starting a business with the help of friends or family connections is all good but never make the mistake of avoiding drafting contracts due to those relations because, in times of disputes, these contracts will only save your business from slipping out of your hand.
6. Familiarize Yourself With Taxation & Accounting Laws
Needless to say when running a business, accounting and taxes are something you have to always deal with but since not all are familiar with them, it is highly important to get a clear idea about both from an experienced corporate law firm to avoid unnecessary expenditures.
Taxes are part and parcel of every business and there is a broad variety of them that you should be aware of beforehand. Different business and operating sectors attract different taxes such as central tax, state tax, and even local taxes but however, the Indian government is supporting startups vividly by allowing tax exemptions and tax holidays for new businesses via the ‘Startup India’ initiative for a period of 3 years.
Under this imitative, a startup can also get tax exemptions from investments and capital gains above the Fair Market Value but to avail of the benefits, the startups have to qualify the conditions mentioned below:
- No startup should be more than 7 years old (or 10 years for biotech) from the date of incorporation.
- The startup must be new and should not have been formed by splitting or reconstructing an existing business.
- It must be registered as a Partnership firm, Limited Liability Company, or Private Limited Company.
- The annual turnover of the company should not exceed 25 crores.
Other than that, there are certain things you must practice while running a business like maintaining proper books of accounts, timely audits, Income tax filing, etc. to protect your company against accounting discrepancies.
Yet again, the Startup India scheme provides an exemption here for startups in the form of Angel Tax in which the Angel investor (one who invests his money in a startup) will get 100% tax exemption if the startup is DPIIT recognized and the paid-up share capital and premium doesn’t exceed 25 lakhs. Also, there's an 80 IAC Tax exemption in which a start-up incorporated after April 1, 2016, provided its turnover does not exceed Rs. 100 crores in the previous year can get a tax holiday for 3 consecutive financial years out of its first 10 years since incorporation.
Wait, there’s more. The proof that the government of India is pampering startups is the introduction of the Presumptive Taxation Scheme for HUFs and individual proprietors under which if a startup has a turnover of fewer than 2 crores, then you can reveal your income as 50% of the value of services provided (only for service providers) and 8% of non-digital transactions or 6% of digital transactions (only for a supplier of goods). Isn’t that surprising?
Now, although a startup can be registered without a PAN (Permanent Account Number), there’s no harm in getting one as soon as you are ready for business because with a PAN in your hand you can leverage the tax benefits provided by the government fully rather than paying more than required. Simply visit the NSDL website to get your PAN, TAN, TIN, or whatever is needed for your startup.
7. Plan Your Exit
Nothing can be said about a startup, it can either boom or crash but when it does, you can’t simply shutter down and put a lock or closed sign and walk away. Just like while onboarding your business journey you have to follow certain legal procedures, off-boarding too must be done legally.
Since many people are involved in running a business, you must inform your closure to everyone associated with it like the vendors, stakeholders, employees, investors, and customers in advance rather than leaving them in shock.
From the legal standpoint, there are basically three ways to wind up a startup:
Fast track exit mode - The best-suited closure for startups as it allows companies to expedite shutdown at a lower cost and a shorter time period. But it can be done only if you have neither assets/liabilities nor any business operation for the past one year. If these conditions are met, then the company can strike off its name from the Registrar of the Companies (RoC).
Court or tribunal route - The traditional mode of closure via courts or tribunals is not advisable for startups as it involves prolonged court proceedings which is nothing but a huge waste of time.
Voluntary closure - Another quick way of closure but it requires the shareholders and/or creditors of the company to be on the same page with your decision.
Apart from these three, you can also shut down your startup via The Insolvency and Bankruptcy Bill, 2015 in which an insolvency professional is hired to liquidate the assets of the company within 90 days, in accordance with the ‘Startup India Action Plan’.
Lastly, if you want your startup to operate but not shut down, you can apply to be a ‘Dormant Company’, in which you will get permission to stay afloat with minimum compliance. However, if your company stays dormant for a period of 5 years then it will be automatically struck off from the RoC.
Doing anything legally does involve a lot of procedures and challenges but, adhering to laws also saves you from disasters which is why if you are about to set out on a business journey, not just going through the above-mentioned laws is enough but understanding and applying them is necessary.
It may sound easier to do everything on your own but is pretty much challenging and hence seeking professional help from experts of Parker and Parker Co. LLP, one of the prominent corporate law firms in India is the first step you must take for your startup.