India is one of the largest startup ecosystems in the world with a large majority of startups emerging in the technology sector. Flourishing start-ups are driven by passionate entrepreneurs who are focused on building unique solutions to deliver complete customer satisfaction. But with the increasing complexity of technology and the multi-faceted and global nature of transactions, it is paramount for new and emerging enterprises to have a strong legal base to survive. Before setting up a start-up, having thorough knowledge about the legal requirements of a start-up and being compliant with all applicable laws and regulations is mandatory. The last few years have seen a significant rise in the development of start-ups. Numerous start-up companies have emerged in the Indian corporate structure and are continuously working towards establishing their name globally. Legal compliances and regulations are essential for the growth of any start-up business and it is important to follow them indefatigably. In this article we'll take you through the most important legal compliances for startups in India, so you can establish and run your business efficiently.
Though there is no comprehensive definition for start-ups that have been provided under Indian laws, the Government of India (GoI) under its start-up schemes define start-ups as:
An entity shall be considered as a startup(meaning of Startup) if it satisfies all the following conditions:
Provided that such an entity is not formed by splitting up or reconstruction of a business already in existence.
The primary goal of any start-up is to maximize its profit. While doing so, they tend to ignore the mandatory legal requirements which may affect their business adversely in the longer run.
When it comes to legal compliances for startups in India, financial compliance for startups should be given top priority, as it covers a wide range of important financial regulations. Including but not limited to tax laws, accounting standards, and reporting requirements.
It's crucial for startups to stay informed about the latest financial compliance regulations and to ensure that their financial processes and records are in line with these regulations.
Legal compliance is an essential wheel that keeps a check on any going needs of a business. Following are the documentation and formalities to be followed by a start-up to become legally compliant:
Each structure has its own set of rules and regulations that decided whether registration is required or not, how much tax a company must pay and what kind of licenses does it require? For instance, sole proprietors do not need any registration whereas it is optional in partnership firms, however, it is compulsory for LLPs and private limited companies.
Companies have a mandatory registration requirement under the laws of India. A company may be registered as a legal entity under:
a) The Companies Act, 2013 – for private, public, not-for-profit and one person companies
b) Indian Partnership Act, 1932
c) Limited Liability Partnership Act, 2008
Various companies also opt to register their businesses under different government schemes and laws to avail the benefits and concessions provided under the laws. Companies, depending on the nature of the business may be registered under the MSME Act, the GST Act or under the Start-up India Scheme.
Licenses are integral for running any business. Based on the nature and the size of the business, start-ups may be required to register their business under various licenses applicable under different statutes in India. The common license that applies to many businesses is the Shop and Establishment license which is applicable on all premises where trade, business or profession is carried out.
Other business licenses vary from industry to industry. Various environmental, food and safety, labour and employment laws and import-export laws, FDI Policy, FEMA, SEBI/RBI regulations in India impact the procurement of licenses.
For instance, an e-commerce company may need to fulfil additional requirements like VAT registration, Service Tax Registration, Professional Tax etc. while a restaurant may need licenses like a Food Safety License, Certificate of Environmental Clearance, Prevention of Food Adulteration Act, Health Trade License etc. along with the above-mentioned licenses.
A lot of emerging businesses do not pay much attention to formalize the structure of the contracts and basic incorporation related documents. This can create a plethora of legal complications in case, a dispute arises or while raising investment, at any stage of a start-up’s growth. Some basic documentation that every start-up should take care of are:
a) Drafting the incorporation documents such as; Founder’s Agreement, Shareholder’s Agreement, Memorandum of Association and Articles of Association for registered companies under the Companies Ac, 2013 etc.
b) Contracts such as; Non-Disclosure Agreement (NDA), Confidentiality Agreement, Memorandum of Understanding (MoU)s, Letter of Intent and others.
c) Work Agreements such as; Employment Agreements, Lease/Rent Agreement, Service Agreement, Consultancy Agreements and others.
d) Technical Agreements such as; Technology Assistance Agreement, Licensing and Assignment Agreement, Outsourcing and Hosting Agreements and others.
e) Company policies such as; Sexual Harassment Policy, Employee Grievance Management Policy, Data Privacy and Protection Policy, Whistleblower Policy and others.
f) Intellectual Property Management - Registration of intellectual property like Copyrights, Patents, Trademarks etc. in India and internationally, Licensing and Assignment Agreements related to their Intellectual Property and others.
For start-ups registered under the Companies Act, 2013 there are certain mandatory compliances that need to be completed. Some of the compliances include:
There should be one AGM every year and there must be a gap of at most 15 months between 2 AGMs. Approval of financial statements, the appointment of auditors, declaration of dividends, etc. is the main objective for such meetings. The annual general meeting needs to take place in the city where the company’s registered office is located.
The first board meeting of the Board of Directors should take place within 30 days of the incorporation of the company. Apart from that, four board meetings are supposed to take place every financial year such that the gap between two consecutive board meetings isn’t more than 120 days.
The first Statutory Auditor should be appointed within 30 days of the company’s incorporation in the first board meeting. However, in an AGM the subsequent auditors could be appointed for 5 years. An applicant is required to file form ADT-1 for a 5-year appointment. After that, every year shareholder endorses the auditor in AGM, but there’s no requirement to file ADT-1.
MGT-7 is an electronic form issued to the companies by the Ministry of Corporate Affairs (MCA) to fill their annual return details. Every private limited company must file the form MGT-7 every year.
Form AOC-4 is used for filing the financial statements for each financial year with the ROC. Generally, the primary means of communication between the shareholders and the Board of Directors is through the financial statements. Hence, every company registered under the Companies Act, 2013 is required to file the form AOC-4.
As per the Companies Act, 2013 every company is required to prepare a board report containing the details of the state of the company, operations during the year, dividend declaration, net profit, corporate social responsibility standards, etc in compliance with section 134.
The form MBP-1 is required to be filed by the directors of the company in the first meeting of the Board of Director in every financial year where they would disclose their interest in other entities. Fresh MBP-1 must be filed, whenever there is a change in the interest of the director from the earlier submitted MBP-1.
Every director is required to file form DIR-8 in every financial year with the Company Disclosure of non-disqualification.
Apart from the legal compliance, start-ups can also avail various rebates available to new companies in India.
Under section 80IAC of the Income Tax Act, any startup that is established after 1 April 2016 can avail 100% tax rebate on its profits for 3 years within a block of 7 years. However, if the Company’s annual turnover is more than Rs 100 crore, then the tax rebate is not available.
Under Section 54EE of the Income Tax Act, start-ups are exempted from LTCG tax. However, this is only applicable if the capital gains that have been invested in are a part of the fund notified by the Government of India within 6 months from the date of the asset’s actual transfer.
If an eligible start-up does any investment, the government exempts the tax on the investment above the fair market value.
If an individual/HUF sells their property and then invests that money to subscribe to a minimum of 50% or more of an existing start-up, then they are exempted from tax on these LTCGs. The enterprises must be small/medium ones, as stated under MSME’s Act of 2006.
India being a welfare state has ensured strict measures to be taken for labour welfare and safety. Some of the major laws that need to be followed are:
Adhering to legal requirements is crucial for any organization; knowledge and compliance with applicable laws is the initial step to ensure smooth business operations. Compliance with the relevant laws where the startup is doing business is important for the successful setup and efficient growth of startups. Compliance ensures that no penalty is imposed on a start-up at any point in its growth and helps it stay out of any other possible risks/difficulties. One can conclude that the longevity of a stable is dependent on how secure its legal foundation is.
The "law for startups" in India refers to the legal regulations and requirements that startups must comply with in order to operate their business legally and avoid any legal consequences.
Annual Compliance is compulsory for all companies and LLPs registered with MCA. Irrespective of the turnover and capital of the business, the annual filing must have complied. Late filing or non-filing of the same can result in additional fee and penalties.
Yes, bookkeeping is compulsory for all businesses except the sole proprietorship. Even the sole proprietorship has to maintain accounts after earning a certain turnover. Additionally, the companies have to maintain accounts in accordance with the accounting standards prescribed.
The procedure of registration in such cases shall be real-time and the certificate of recognition would be immediately issued upon successful submission of the application.
Yes. An entity can be registered as a Start-up without a PAN. However, it is advised that a valid PAN of the entity is provided at the time of registration, as each entity is recognised as a separate taxable person.
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