INTRODUCTION:
Passionate entrepreneurs aim to build practical unique solutions for customers through their start-up venture. The business has to focus on its potential customer base, its USP and market situation. At the same time Entrepreneur should have or they should hire or outsource someone who has a good understanding about the basic laws of the land, rules, regulations that are applicable and various government schemes that are drawn for the welfare of the budding businesses and their smooth functioning.
AS PER GOVERNMENT’S ELIGIBILITY CRITERIA FOR START-UP RECOGNITION:
- The Start-up should be incorporated as a private limited company or registered as a partnership firm or LLP
- Turnover should be less than Rs. 100 Crores in any of the previous financial years
- An entity shall be considered as a Start-up to 10 years from the date of its incorporation
- The Start-up should be working towards innovation/ improvement of existing products, services and processes and should have the potential to generate employment/ create wealth.
- It must obtain certification from the Inter-Ministerial Board set up for such a purpose.
- An entity formed by splitting up or reconstruction of an existing business shall not be considered a “Start-ups”
Some important legal aspects and compliances that an entrepreneur should be aware of:-
I. SELECT WHICH TYPE OF BUSINESS ENTITY IS TO BE ESTABLISHED
The very first thing to starting any business is to be clear about the nature and type of the business whether to incorporate it as a sole proprietorship, private limited, public limited, partnership, limited liability partnership (LLP) etc. This business can be taken considering overall vision and goals, both short term and long term.
Each business organisation comes with its own set of legal requirements, rules, regulation and procedures before incorporating the business. It is advisable to seek professional consultation while incorporating any type of business entity to avoid ignorance of law and penalty of any kind.
II. BUSINESS LICENSING
To run any business there are various types of permission required from different authorities in form of permits and Licenses that allow a business to operate, failing which the business would attract undesirable lawsuits, numerous penalties and fines by various authorities. These legal documents depending on the nature of the business, industry to industry and size of business operations.
Examples of the common license applicable to all businesses under the Shop and Establishment Act which applies to all premises where trade, business or profession is carried out.
For instant restaurant business would require licenses like Food Safety License, Certificate of Environmental Clearance, Prevention of Food Adulteration Act, Health Trade License etc. is required and if, the restaurant serves alcoholic liquor for human consumption then, it could require a separate license for the same.
III. COMPANY LAW BASED COMPLIANCES
All the start-ups registering their business as a private limited company has to follow-up with the following compliances described below as per the provisions of Companies Act, 2013.
A) ANNUAL GENERAL MEETING (AGM)
The ordinary business agenda of the AGM are Approval of financial statements, declaration of dividends, the appointment of auditors, etc. and other special business agendas too. The AGM needs to be held within the jurisdiction of the registered office of the company.
First AGM shall be held within 9 months from the closing of the first financial year. In case of Subsequent AGM shall be held within 6 months from the closing of the relevant financial year. There should be one AGM every year and there must be a maximum gap of 15 months between 2 AGMs.
B) BOARD MEETINGS
The first board meeting of the Board of Directors should be held within 30 days of the incorporation of the company. There should be a minimum of two meetings one in each half calendar year and there should be a gap of at least 90 days between two meetings. Apart from that, four board meetings are supposed to be held every financial year such that the gap between two consecutive board meetings isn’t more than 120 days.
C) APPOINTMENT OF AUDITOR
The first Statutory Auditor is appointed within 30 days of the company’s incorporation in the first board meeting. In case of subsequent auditors, the appointment is made for 5 years in AGM. Form ADT-1 is filed with ROC on appointment. Shareholder’s approval is taken about the auditor every year in AGM.
D) OTHER COMPLIANCES
File e-Form MGT-7 Annual Return details to ROC based on the statement of accuracy provided by the company.
As per the provisions of the Companies Act, 2013 every company needs to prepare a Board Report in which details of the state of the company, net profit, operations during the year, and its compliance with a set of financial, accounting, and CSR policies.
File e-Form AOC-4 for filing the financial statements for each financial year with the ROC. Generally, the main means of communication between the shareholders and the Board of Directors is through the financial statements.
The form MBP-1 needs to be filed by every director 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’s a change in the director’s interest.
Every director of the organization in every financial year must file form DIR-8 with the Company Disclosure of non-disqualification.
All the start-ups registering their business as LLP under the Limited Liability Partnership Act, 2008 shall have the following compliance
Form 8 for filing of Statement of accounts with ROC before 30th October. Form 11 filing of Annual returns each year before 30th May with ROC. If it fails to do so, it may have to incur a heavy penalty.
IV) TAXATION BASED COMPLIANCES
There are 2 kind of taxes Direct (Income Tax) and indirect taxes (GST, Excise duty, Customs duty, etc.) Depending upon nature and business operations the taxes are levied in India. Here are some tax privileges are given to start up for their effective growth while it’s an infant.
A) THREE YEARS TAX HOLIDAY IN A BLOCK OF SEVEN YEARS
Under section 80IAC of the Income Tax Act, Any start up that is incorporated after 1 April 2016 can avail 100% tax rebate on its profits for 3 years within a block of 10 years.
However, if the Company’s annual turnover exceeds Rs 100 crore, then the tax rebate is not available. This tax exemption is provided so that businesses meet their capital requirements while setting up. Only private limited companies or LLPs are eligible for tax exemption under this section. The company should be a DPIIT recognised start up.
B) EXEMPTION FROM TAX ON LONG-TERM CAPITAL GAINS (LTCG)
To provide ease in doing business for start-ups, a provision under Section 54EE has been added to the Income Tax Act. Under this provision, Start-ups are exempt 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 within a total period of 6 months from the date of the actual transfer of the asset.
The maximum amount of capital that a company can invest in the long-term specified asset has a cap limit of Rs 50 lakhs. The amount then has to be invested in the fund for continuously for at least 3 years.
C) TAX EXEMPTIONS ON INVESTMENTS ABOVE THE FAIR MARKET VALUE
If an eligible start-up makes any investment, the government will exempt the tax on the investment above the fair market value. This includes a range of different investments such as funding secured by resident angel investors and funds that are not registered as venture capital ones.
D) TAX EXEMPTIONS TO INDIVIDUAL/HUF ON LTCG FROM EQUITY SHAREHOLDING
If an individual or a HUF decides to sell their property and then invests the money they get from the sale to subscribe to a minimum of 50% or more of an existing start-up, then they are exempted from tax on these LTCG. The enterprises must be small or medium ones, as defined under MSME’s Act of 2006.
However, this is only applicable as long as the shares are not sold again within 5 years or even transferred to someone else. The start-ups have to use the amount that has been invested to purchase assets. No transfer is allowed during the lock-in period of 5 years. These tax incentives and exemptions are that they will promote general investments made in start-ups, which will then encourage their growth.
E) GST BASED COMPLIANCE
Any business whose turnover exceeds Rs 40 lakhs in a financial year is required to register under GST. This limit is Rs 20 lakh for service providers. The Composition scheme under GST law for small businesses operating in India. The optional scheme provides for a lower amount of tax with minimum compliance for certain businesses having turnover up to Rs 1.5 crore in a year. Monthly return, Annual return are part of mandatory compliances under GST and GST audit for certain suppliers.
V) IPR BASED COMPLIANCE
The entire idea of start-up initiative aims to work towards innovation, development and commercialization of new processes, services or products, driven by technology or intellectual property.
The first step for any start-up is to evaluate and prioritize the IP Rights involved in its business. Depending upon the type of industry involved, IP Rights play a crucial role. Sometimes IP Rights are the only asset available and secret sauce with a start-up.
It can be protected through timely registration, by entering into non-disclosure agreements, by keeping its trade secret, having policies as preventive measures to protect it. Start-ups can leverage the ‘Scheme for Start-ups Intellectual Property Protection’ (SIPP) under the Start-up India initiative.
VI) COMPLIANCES UNDER LABOUR LAWS
Businesses can be subject to several labour laws regardless of their size. Laws with such as minimum wages, PF payment, Gratuity, Maternity benefits, protection against sexual harassment are among others will need to be complied with. It is best to consult a legal expert to assess the laws applicable to your start up.
With regards to labour laws, start-ups registered under the Start-up India initiative can complete a self-declaration (for nine labour laws) within one year from the date of incorporation in order and get an exemption from labour inspection. The nine labour laws applicable under this scheme 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.
Start-ups under this scheme will have to file a self-certified return for the second and third year to continue with the exemption.
VII) COMPLIANCES OF CONTRACTUAL OBLIGATIONS
The essence of any business contract is to ensure the smooth functioning of work. In cases recourse of non-fulfilment of work. Work contracts with employees or freelancers are one of the most crucial aspects to be looked into while starting a venture. One of the important contract that start-ups might find it useful to have are Non-Disclosure Agreements.
The Start-ups exposes to risks like the theft of ideas and other confidential business information which might be used against the business. Hence, to avoid such scenarios, non-disclosure agreements or NDAs need to be drafted and used by start-ups while discussing critical business information with people outside the organization.
VIII) EVENT BASED COMPLIANCES
Some are events and industry-specific compliances like starts-ups having FDI would have to comply with FEMA, in cases of Import Export the business entity would have to comply with Customs law.
When the start-up is dealing with hazardous product or process it would need Environmental law clearance, whereas when it deals in real estate it would need RERA sanction and other property law compliances.
In cases of Mergers and acquisition or huge transaction having an appreciable adverse impact on Competition in India, it would need Competition law approval.
IX) CONCLUSION
Hope the article was informative and gives up a fair detailed idea about Indian laws applicable to a start-up.
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