Startup In India: The Basic Legal Compliances And Aspects

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After the US & China, India ranks third in the list of largest startup ecosystems worldwide, where Indian unicorns are valued at $168 billion. In the previous years, India made striking advancements by adding at least 3 unicorns per month, totaling up to 51 annually. Most of the startups belong to the niche of technology. 

However, before gearing up for a startup, an individual needs to know about the various legal requirements for starting a startup. Besides legal requirements, one also needs to know about various laws and regulations for opening a startup. Firstly, let’s get started with the legal eligibility requirements for a startup.

How to start a Business by Dhruv Rathee | Being an Entrepreneur in India | Dhruv Rathee

What are The Basic Eligibility Criteria For Starting A Startup? 

Indian laws haven’t yet set any legal definition of a startup. However, the scheme by the Government of India says that for an entity to be called a startup, it should satisfy the following criteria. 

  • The entity must have any of the company registrations. These registrations include Private Limited Company under the Companies Act of 2019, Partnership Firm under the Partnership Act of 1932, Limited Liability Partnership under the Liability Partnership Act of 2008 or One Person Company under the Companies Act of 2013. The company/entity must hold at least one of these registrations for the company. 
  • The entity shouldn’t have been formed due to the breaking off of a former business.
  • The entity shouldn’t be older than ten years with any of the above registrations.
  • The entity has never had a turnover beyond Rs.100 crore in any of its financial years.
  • The entity should have a common developmental objective for the common good. It should either have the objective of developing or innovating any new product/service or the development of the existing product/service. 
  • The entity must have a scalable business model that has opportunities for increasing the employment rate or national wealth.

Here are the essential requirements for a company/entity to be regarded as a startup in the premises of India. 

Legal Compliances That Every Startup In India Should Know 

Besides focusing on strengthening their brand identity and expanding their customer base, startup entrepreneurs should also be aware of the basic legal compliances laid out for startups by the government. Let’s get started without delay!

1- Choose The Type And Incorporation Of Your Entity 

Startup founders must be very clear about their business’s type, incorporation, and nature right from their budding stage. For this, they should also have proficient knowledge of various types of incorporations’ requirements, advantages, and disadvantages. Proper knowledge of these areas will help businesses set and analyze their objectives and goals in the long term.

There are 4 types of businesses: public limited, private limited, partnership, sole proprietorship, and limited liability partnership. Each incorporation has its own rules and regulations regarding registration, taxes, and license. The table below narrates the legal implications for all kinds of businesses. 

Legal Details/ImplicationsPrivate Limited Company LLP (Limited Liability Company)PartnershipProprietorship
Legal StatusThe company stands out with its distinct legal status where its promoters and founders aren’t accountable and legally responsible for the affairs of the company.The company stands out with its distinct legal status where its promoters and founders aren’t accountable and legally responsible for the affairs of the company.The company has no distinct legal status wherein its promoters and founders are legally responsible in case of liabilities.The company has no distinct legal status wherein its promoters and founders are legally responsible in case of liabilities.
Members NeededThe company must have at least one person to set up the foundation.The company must have at least two persons to set up the foundation.The company needs at least 2 people to get started with the partnership.A single person is enough for the entire company.
RegistrationThe company must be registered formally with the Ministry of Corporate Affairs according to the Companies Act of 2013.The company must be registered formally with the Ministry of Corporate Affairs according to the Liability Partnership Act of 2008.  It depends on the company if it wishes to get itself registered.There’s no compulsion for registration.
Transfer of OwnershipThe company needs no kind of formal registration.The owners can share their ownership by various means.The ownership cannot be transferred.The ownership cannot be transferred.
Foreign OwnershipForeigners and NRIs can easily hold shares and invest in their interested businesses without any applicable permits.Foreigners and NRIs can easily hold shares and invest in their interested businesses without any applicable permits.The company cannot have partners who are foreigners.The company cannot have a proprietor who is a foreigner.
Annual Statutory MeetingsThe company should conduct general meetings and board meetings at specific intervals.The company requires no statutory meetings annually.The company requires no statutory meetings annually.The company requires no statutory meetings annually.
ExistenceThe company can be dissolved anytime-either voluntarily or by the authorities, which makes its existence independent of the shareholders and directors.The company can be dissolved anytime-either voluntarily or by the Company Law Board, which makes its existence independent of the shareholders and directors.The company can be dissolved at any time according to the partners’ wishes, which makes its existence depends on the partners.The existence of the company is dependent on the wishes of the founder.
TaxationThe profits earned by the founders are taxed according to the Income Tax Act of 1961.The profits earned by the founders are taxed according to the Income Tax Act of 1961.The profits earned by the partners are taxed according to the Income Tax Act of 1961.The company is taxed according to the annual revenue generated by the proprietor, just like an individual.
Annual FilingsIt’s mandatory on the part of the computer to file tax returns, annual returns, and Annual Statement of Returns & Solvency.
It’s mandatory on the part of the computer to file tax returns, annual returns, and Annual Statement of Returns & Solvency.
The company needs to file income tax annually.
The company needs to file income tax annually.

2- Get Your Business A License 

License is the legal permission essential for the smooth functioning of a business. The business falls prey to lawsuits, fines, and undesirable penalties without proper licensing. However, there are many types of licenses. Depending on their nature, size, and type of business, they vary from industry to industry. One common license which stands mandatory for every business in India is the “Shop and Establishment license,” which is applicable for all kinds of trade and businesses within the Indian Premises.

Besides this common license, a business also needs other various licenses depending on its niche, nature, and size for its full-fledged functioning. For example, a food restaurant needs a Food Safety License, Prevention of Food Adulteration Act, and Certificate of Environmental Clearance to be eligible to serve food to the public. Whereas food restaurants that deliver liquor for consumption need a Health Trade License. 

3- Company Law-based Compliances 

Startups and companies registered according to the Companies Act of 2013 must abide by certain compliances. Some of them are listed below. 

(i)- AGM (Annual General Meetings)

The company should conduct at least 1 AGM throughout a financial year. There must be a minimum time difference of at least 15 months between two consecutive AGMs. The main agenda of these meetings should include approval of financial statements and other such agendas. These meetings should be conducted within the premises of the city where the company is located. 

(ii)- Board Meetings 

The company should conduct at least 4 board meetings among the Board of Directors throughout a financial year. The time difference between two consecutive meetings shouldn’t exceed 120 days. The first meeting should be conducted within 30 days after the company gains its incorporation. Within the span of half a calendar year, the company should conduct at least two meetings with a minimum time gap of at least 90 days between two consecutive meetings.

(iii)- Filing of Forms 

E-Form ADT-1

The company, along with its Board of Directors, should appoint its statutory auditor in the first board meeting, i.e., within 30 days of receiving the company’s incorporation. The auditors serve for a term of 5 years. For the first filing, the interested applicant has to file form ADT-1 for getting appointed for 5 years. The other filings will be done collectively by the shareholders and auditor.

e-Form MGT-7

MCA (Ministry of Corporate Affairs) issues e-Form MGT-7 as an electronic form that every private-labeled company must fill annually with their annual returns.

e-Form AOC-4

All companies and startups which hold registration under the Companies Act of 2013 must file their financial statements in e-Form AOC-4 along with ROC. It’s because these financial statements act as a communication path between the directors and shareholders.

Form MBP-1

Directors must file MBP-1 in the first board meeting at the beginning of every financial year, stating their interests in the company. If the director changes his mind and interest midway, then a new MBP-1 must be filed.

Form DIR-8

In each financial year, it’s mandatory on the part of every director to file DIR-8 along with the Company Disclosure. 

Director’s Report

Keeping up with compliance 134, all companies and startups must create a board report stating various details such as annual profit, functioning state of the company, dividend declaration, and others. All companies must file Director’s Report according to the Companies Act of 2013.

Maintenance of Registers

Besides filling these forms, companies, along with the Board of Directors, must maintain Statutory Registers, Minutes Register, Postal Ballot, Books of Accounts, Board meeting minutes book, Register of Directors Attendance, etc. 

4- Taxation Based Compliances 

Taxes are of 2 kinds; direct taxes and indirect taxes. Direct tax includes income tax. Indirect tax includes GST, Customs Duty, Excise Duty, etc. Every business and company has to pay taxes in India. However, the amount of tax to be levied and paid varies according to their business operations, type, and nature. 

The company must file Tax Audit Reports, Tax returns, and TDS returns according to the Income Tax Act of 1961. According to the GST Act of 2017, the company must file annual returns annually, quarterly, and monthly. However, startups can also escape high taxes by rebates applicable to budding new companies. 

(i)- Tax Holiday Of Three Years In A Span Of Seven Years 

The Income Tax Act has section 80 IAC, which states that within a span of seven years, startups can take advantage of the first three years without paying any tax on their total profits. This means they get an advantage of a 100% tax rebate for the three years. However, startups and companies that have an annual turnover of and above Rs 100 crore cannot benefit from this tax rebate. The tax exemption is to help budding businesses manage their capital requirements during the initial days. The company should be recognized as a DPIIT startup and must either be an LLP or a private label company.

(ii)- Exemption Of Taxes On LTCG (Long Term Capital Gains) 

The Income Tax Act has section 54EE, which states that startups can benefit from tax exemption on LTCG only if the company’s invested capital gains come from the government’s fund within 6 months. Companies can, at maximum, invest Rs 50 lakhs in the long term. However, the amount invested should be used gradually and continuously for a period of 3 years.

(iii)- Exemption Of Taxes If Investments Done Worth Beyond The Fair Market Value 

If a company eligible to be regarded as a startup makes any investment which worth beyond the fair market value, then it’s exempted from taxes. This investment may originate from any source, such as the funding gathered by resident angel investors. 

(iv)- Exemption Of Taxes On LTCG To HUF/Individual From Equity Shareholding 

Suppose a HUF or individual puts their property on sale, thereby investing the acquired money to gain the ownership of a startup by at least 50%, then these LTCG will not have to pay taxes. However, according to MSME’s Act of 2006, the startup should either be medium or small. Moreover, the HUF/individual retains the advantage of tax exemption only until its shares are owned. If the shares are sold/transferred to any other HUF/individual, then this tax exemption becomes inapplicable in such cases. 

(v)- Compliance Based On GST 

GST registration is mandatory for every business/startup/company with an annual turnover beyond Rs 40 lakhs. In the case of service providers, GST registration is mandatory if their annual turnover is beyond 20 lakhs. The company has to file returns on a quarterly, monthly and annual basis. 

5- IPR Based Compliance 

The entity should be focused on the objective of developing or innovating any new product/service or the development of the existing product/service for an entity to be recognized as a startup. IP rights form an essential part of a startup. Proper and timely registration, non-disclosure agreements, and policies are essential to protect these rights. The Start-up India initiative also has a particular scheme named SIPP (Scheme for Start-ups Intellectual Property Protection) which will prove beneficial for growing startups.

6- Labor Law-Based Compliances 

Labour laws vary from one business to another depending on their nature and size. The common laws which every business, irrespective of its size, has to abide by are PF payment, protection and prevention of sexual harassment, minimum wages, maternity benefits, gratuity, etc. Thus, startups and businesses should have a legal startup right from the beginning. Some of the major labor laws are described below.

(i)- The Employee’s State Insurance Act of 1948 

According to this act, startups must have registration from the State Insurance Corporation, thereby making significant monetary contributions to the State Insurance Corporation Fund. 

(ii)- Employee Provident Fund Scheme of 1952 

According to this act, startups and businesses must make significant monetary contributions to the Provident Fund, which is meant for the welfare of the employees. 

(iii)- Maternity Benefit Act of 1961

According to this act, women are entitled to full payment during their absence from work as a result of pregnancy, thereby protecting their employment. 

(iv)- Minimum Wages Act of 1948 & Payment of Wages of 1936 

According to these acts, employees who do labor work are entitled to regular basic wages.

(v)- Industrial Disputes Act of 1947

This act, also known as ID Act, comes into force for resolving the disputes of any startup, business, or other such industrial dispute.

(vi)- Trade Union Act of 1926

This act states the rules and regulations for the smooth registration and functioning of Trade Unions.

(vii)- Interstate Migrant Workmen Act of 1979, Contract Labour Act of 1970

These acts are for the protection of employees and labor who are hired either on migration or contractual basis.

7- Compliance Of Contractual Obligations 

It’s essential for businesses to hire freelancers, workers, and employees who then get access to ideas and confidential information regarding the business. For the safety of such crucial and confidential information and ideas, businesses should always go for NDAs (Non-Disclosure Agreements) with their employees, freelancers, and workers. NDAs act like a safe vault whenever information is shared with people who are not directly involved in the business. 

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