Legal Requirements for Starting a Business in India

Starting a new business venture in India is not as easy as it might seem. Several legal formalities are to be complied with, for both new as well as established businesses and startups. Some of these formalities include financial regulations, tax obligations as well as employment law regulations, which are central to the functioning of every business organization in India.

Entrepreneurs when planning to enter the Indian dimension should make sure that they are complying with all the legal obligations that the law of the land demands. One of the most important of these obligations is to get the business legally registered. Once registered, the next step is to choose the appropriate company/business structure before starting working on other documentation formalities that are required.

When it comes to business/company structure, individuals should wisely choose their company/business structure as it allows the venture to operate efficiently and reach the desired targets and profitability. For starting a company in India, any one of these following business structures can be opted for, with each presenting its pros and cons:·

  • Sole Proprietorship
  • Partnership
  • Limited Liability Partnership
  • OPC (One Person Company)
  • Private Limited Company
  • Public Limited Company

Legal Guide to the requirements and formalities involved in starting a business

From forming a founders’ agreement to protecting intellectual property, entrepreneurs must be aware and updated about the latest laws governing their business and market. Some of these crucial legal formalities that entrepreneurs in India should be aware of before setting up a business venture are:

1) Deciding on a business name

Once you decide which business structure fulfils your purpose, you are then required to choose a business name that reflects your venture’s ideology and make sure it is not already claimed by some other entity. For this, you will have to choose an entity name that safeguards your entity at the state level, a trademark that safeguards your entity at the national level and a domain name that gives life to your venture online.

2) Creation of a founder’s agreement

A Founder’s Agreement is a document that has important details about the founding members of a venture/business. The document thus acts as an agreement that legally establishes the rights, ownership, responsibilities, dispute resolution and other terms executed between the founders and the company.

Therefore, having a well-drafted Founders Agreement with all necessary details forms a solid foundation for the journey of a business. The agreement can also act as the go-to guide in the case of any disagreements arises.

3) Acquire all the legal licenses and registrations

Once the Founder’s Agreement is drafted, the authorization to do business is what’s required next. The authorizations come in the form of legal licenses and registrations. While some of them are general and are required for all kinds of businesses other are specialized and are additionally required for certain kinds of businesses. Example Include:

General registrations:

  • GST registration
  • Permanent Account Number
  • Tax Account Number
  • Bank Account
  • Shop and Establishments license (License for physical premises to the commercial establishment)

Specialized registrations:

  • IEC code (To do import and export business)
  • FSSAI License (To start a food business)
  • Kosher Registration (To deal with kosher goods)
  • Halal Registration (To deal with Halal goods)
  • Other licenses for other types of businesses

4) Be acquainted with the relevant tax regime and accounting norms

Taxes are an important part of every business. And when it comes to India, there are a wide variety of taxes, such as, central tax, state tax and even local taxes that may apply to some businesses. Since different business and operating sectors attract different taxes, knowing the relevant text regime well in advance can be quite useful.

There are also various schemes and initiatives such as the Central Government’s ‘Startup India’ initiatives that aim to promote startups, via various exemptions and tax holidays.

Good knowledge of such initiatives and pro-startup regulations can also come in handy. A startup can also avail of income tax exemption for 3 years as well as tax exemptions from capital gains and investments above the Fair Market Value. Therefore, holistic knowledge of taxation can prove to be fruitful for growth and even expansion.

As far as business accounting is concerned, it is good practice for a business to maintain proper books of accounts and audit them from time to time ensuring that relevant accounting and taxation rules are being followed.

For this, having a sound payment and invoicing system can help ensure a clear accounting system.

5) Be acquaint with labour laws

Labour laws are part of every organization, small or big. When your venture is recognized as a company that hires people, your organization is subject to several labour laws regardless of its scale. These laws govern crucial issues such as minimum wages, gratuity, PF payment, weekly holidays, maternity benefits, sexual harassment, and payment of bonus among other key areas.

6) Safeguard Intellectual Property

Intellectual property is a vital part of most businesses today, especially for tech-centric ventures. Be it codes, algorithms or even research findings, all these are some of the common intellectual property owned by an organization.

The creation and the subsequent protection of these intellectual properties are central to the effective growth of every innovating venture. Therefore, legal know-how in relation to IPR laws can come in handy at every stage of a venture’s journey.

Startups can also take the advantage of the Scheme for Startups Intellectual Property Protection (SIPP) under the Startup India initiative, that nurtures and mentor innovative and emerging technologies and help in its due protection and commercialization.

7) Creating a proper business policy

Creating a proper business policy is another step that can take a venture towards success. It is something that keeps the employees as well as the management focused. This way desired targeted growth can be easily achieved.

8) Get business insurance of your choice

Business insurance can safeguard your venture in cases where the personal liability protections of your venture aren’t enough. Insurance can protect not just your individual assets, but your business’s assets too. Some types of insurances such as unemployment and disability insurance are even compulsory by law.

It’s also a wise decision to have avail insurance that protects your startup from other potential risks. Some of these include general liability insurance, product liability insurance, commercial property insurance etc.

9) Have a clear idea about the mode of winding up

Winding up a company is a difficult call to make. When a company decides to shut down, all the stakeholders, from vendors to investors are needed to be informed in advance making the entire procedure a task that needs to be thoroughly planned and executed.

From the legal standpoint, there are three ways to wind up:

  • Court or Tribunal Route
  • Voluntary Closure/ Fast Track Exit Mode

Documents required for starting a business in India

The first step to establish a business in India is to make sure that the documents required for registration are complete. Any error in documentation can put all the efforts in vain.

There are a lot of legal formalities and documentation that are necessary for setting up a business in India. The following are the most crucial documents required:

  • Digital Signature Certificate (DSC)
  • Director Identification Number (DIN)
  • Registration on the MCA Portal
  • Certificate of Incorporation
  • Commencement of Business Certificate

Along with these documents, you will also need documents that officially represent your business’s company’s office address, PAN number, GST registration, ROC registration, Professional Tax registration, Provident Fund registration, and ESIC registration.

Various startup documents are also required to be arranged before starting a startup in India. Below is the list of those documents:

#1 Bylaws

Bylaws act as sets of rules. They make sure that every startup functions smoothly with correctness and gives voice to everyone involved in the working.

#2 Memorandum of Understanding

It consists of all formal conversations you have made with suppliers, potential partners and others involved in the business. An MOU is a good way to lay the terms of a project or relationship between employees and employers in writing.

#3 Licensing Agreement

A licensing agreement is entered by two parties basically in scenarios such as maintaining possession of a product or control over an asset and another company/ individual desiring to use the asset.

#4 Non-Disclosure Agreement

It is the first thing that you are required to reach out for when dealing with any client or investor. It ensures that the privacy of your company, as well as that of the other party, remains protected.

Aside from aforesaid documents, other startup documents that may assist you in beginning a startup in India are the Intellectual Property agreement, Employment agreement, Non-compete agreement etc.

Conclusion

Starting a business in India can be daunting, especially with all the legal requirements that you are required to follow. However, now that you know about them, you are not just ready to start it but ready to make it a success. Adhering to legal formalities is very important for any business; knowledge and compliance to applicable laws is the initial step to ensure smooth business operations.

The best ways to ensure that your company is always safe and does not face legal complications and consequences is by hiring professional legal counsel to provide advice, oversee and maintain legal records.

Frequently Asked Questions (FAQs)

1. Which type of business is easiest to start?

A service business is one of the easiest businesses to start, especially when you are a beginner. A business that sells a service, like skill, expertise, or labour, can be considered as a service business.

2. What is the first thing to do before starting any business activity?

The best steps to take when trying to start a business are looking at the legal aspects of the sector, analysing the competitors, and evaluating your finances and business licenses and permissions.

3. What amount of capital should be introduced for starting a business?

The amount of capital depends on the activity and its scale. It differs from small and medium scale businesses to wholesale and retail businesses. The best way to decide the appropriate amount is to first analyse the future expenses and requirements.

Also, one has to fulfil the minimum requirement of capital based on the organization structure chosen.

4. What aspects should be considered while choosing the right business entity?

To choose the right business structure, the first aspect is to decide if there is any business partner or not. Those who wish to be sole owners opt for Sole Proprietorship and OPC whereas other structures can be established with partners.

Next thing is to decide about the capital requirement. For businesses with a large capital requirement, corporate structures are beneficial. Apart from all other pre-registration aspects, one must not forget to consider the post-registration aspects, tax liabilities, and compliance matters.

5. Which steps should be taken to register a business in India?

To register a business in India, the promoters or owners are required to finalize their business activities and capital requirements first. Based on aspects such as the association of partnership, capital requirements, types of activities, etc. the appropriate business structure is chosen.

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