According to the startup statistics India stands second highest number of startups which seems to be increasing day by day. Given that it becomes necessary to make sure they are following the necessary legal obligations.
Not complying with laws can negatively affect the company as the damages can be huge and it also impacts the reputation of the business.
Before diving into the laws let’s look at the points one needs to qualify to be recognised as a startup :
Now, that we are clear with what can be classified as a startup let’s take a look at the laws it needs to follow :
The structure of your business depends on the industry you are in, the goals you have for your business and how you want to place yourself in the market.
It becomes necessary to be clear about your type of business because each category has different obligations to follow and exists to achieve different kinds of purposes.
The type of business also affects the funding. You need to choose based on whether you want to bootstrap or raise funds externally. A private limited company comes off as a great option as it gives more flexibility with the funds.
You can classify yourself as :
After you have chosen your organisation’s structure, that is, you have incorporated your startup it is now time to register your business.
In India we have a Startup India Initiative under which you can be recognised as a startup by the Department for Promotion and Industry and Internal Trade (DPIIT).
You can register yourself online on the website – StartupIndia.gov by filling and uploading all the necessary details and documents. After this you get the approval from the inter-ministry board.
When there are co-founders it becomes mandatory to have an agreement with them under startup rules and regulations.
The agreement consists of roles, duties, shares, and other necessary details which help in the functioning of the organising smoothly.
It comes to rescue when you have a disagreement and also helps in giving the right direction to the organisation by providing clarity about the roles.
Based on the nature of your business you require a license to carry out the functioning of your services. If you lack the licenses you might get into legal trouble.
For example, restaurants, bakers, food franchise outlets and all food related product suppliers need to be verified by the Food Safety and Standards Authority of India.
Manufacturing businesses will need air and water pollution permits.
Your startup idea is probably the closest thing to you and you need to protect it and all the strategies you have planned for it. If you are pitching your basic business idea to the investors or public then the information is not considered as confidential. It has to be related to the insides of the business.
While discussing the strategies with your investors and employees make sure a NDA contract is signed with them so as to protect your plan.
If anyone breaches the contract you can take a legal action against them and claim your damages.
Not always one can work in good faith, at times certain things need to be protected to avoid risks.
Every startup will have something unique to it, a secret sauce that you would like to have a claim over for years.
Intellectual property rights help you do that. They help you have a patent, copyright protection, trademark registration so that no one else can copy or steal your product.
Your brand’s name, logo, designs, even your unique selling proposition can be protected using the Intellectual Property rights.
Startups Intellectual Property Protection Scheme by Government of India helps startups to file applications for patents, designs, etc through registered facilitators in the concerned IP offices.
Taxes play an important role and it is necessary to define what kind of taxes will be applicable to your business.
If your business exceeds the turnover of 40 lakhs you will have to register for GST and the limit is 20 lakhs for service providers.
Income tax filing is crucial which again will differ based on your organisational structure. The Income tax is filed on the earnings and the government of India has introduced Presumptive Taxation Scheme for HUFs and individual proprietors. Under this scheme if you have a turnover of less than 2 crores you can reveal your income as :
The startup India scheme also provides exemption on taxes.
It is advised to have a Permanent Account Number for the entity even though the Start-up can be registered without PAN. When you have a PAN you can leverage the tax benefits provided by the government or else you will have to pay the taxes at a higher rate.
One can register for PAN online on NSDL website by filling the necessary forms. Documents like Certificate of Incorporation, address proof, etc will be needed for the registration of PAN.
As an entrepreneur you are duty bound to take care of your labours and make sure they are getting the aid and protection they deserve.
The labour laws revolve around wages, gratuity, maternity benefits, sexual harassment and other matters that deal with the welfare of employees.
Some of the important acts are :
Government of India introduced Shram Suvidha Portal where startups can submit their self certification for the laws mentioned below and avoid inspection for 5 years.
When you have a website or any digital assets make sure to put out how the public can utilise it. This will help in the protection of your interests and gives you control of your data.
Additionally, we even have IT laws that need to be followed while carrying out digital signatures, e-contracts, etc. The laws will help you protect your data from hackers. And if you are a startup that is into bitcoin, NFTs and along the lines of it there are certain rules to be followed for the protection of the people involved in the trade and the startup as well.
It is difficult to shut down a business you have worked on but if that needs to be done then it needs to follow a legal procedure. This puts all the stakeholders, from employees to investors at ease and makes the off boarding process smooth and systematic.
There are three ways of shutting down a business :
The Insolvency and Bankruptcy Bill, 2015 also allows the closure if the simple debt structures are shown and the assets are liquidated within 90 days as per the Startup India Action Plan.
And if the startup doesn’t want to shut down and not operate they can apply for Dormant Company but if they are dormant for 5 years then they are struck off in the Registrar of Companies.
Following laws helps a business function smoothly and systematically so make sure you adhere to them as per the nature of your business.
Pay close attention to the contracts that are being written so as to avoid any error. Also, focus on bookkeeping and managing registers from the beginning even if it is not legally needed because this will help you in the future and also avoids a lot of confusion.
Based on the field of your business there will be laws specific to it so have them cleared as well. Obeying the laws will assure that you are not fined and also avoids harm to the reputation of the business.