Before starting a startup, a plan and knowing startup company rules and regulations are mandatory. Local, federal and state government agencies assist startup entrepreneurs seeking information on rules and regulations.
Understanding the legal requirements for starting a business in India is essential. Startups must know them all at the concept stage. But, some startups do not take these considerations seriously. Eventually, they end up making legal mistakes that damage them badly.
Legal checklist for startups in India
Startup Entrepreneurs must prepare a checklist of essential things. This is to ensure no problems in doing business in the long run. Here is the legal checklist for startups in India:
Signing the CO-Founder Agreement
If your startup involves two or more co-founders, it is essential to sign a co-founder agreement. This step is mandatory under startup company rules and regulations. Most importantly, the agreement should clearly define the equity share, responsibilities, roles, etc. Usually, the simple agreements tend to reduce friction at the later stage between the co-founders to the least extent possible.
Create a Legal Entity
When you set up a startup, you should create a distinct legal entity under which you will operate. This is the most important legal checklist for startups in India. We have six types of legal entities under startup India. They are namely the Private Limited Company, Limited Liability Partnership, One Person Company, Sole Proprietorship Firm, Partnership Firm without Registrar of Firms and Partnership Firm with Registrar of Firms.
After identifying the place you want to operate legally, you need to set up your finances. Mainly to ensure your startup’s assets remain separate from your personal assets. And lastly, file all the relevant paperwork to set up. This is to keep others from attacking your personal assets over a dispute with your startup.
Registering the Startup
With the ease in the startup registration process, many aspiring entrepreneurs wish to bring their startup formation into reality.
There are two things to note in registering the startup. First one is incorporating your startup, and second is registering it under the Startup India Program that is a startup India initiative.
Incorporating a startup includes obtaining the Digital Signature Certificate and Directory Identity Number.
Here, we’ll see the startup registration process on Startup India. Let’s have a quick glimpse of the criteria to be considered eligible for DPIIT startup recognition.
|Company Age||period of both existence and operations should not be exceeding five years from the Date of Incorporation|
|Company Type||incorporated as a Limited Liability Partnership, a Private Limited Company, or a Registered Partnership Firm|
|Annual Turnover||It should not exceed INR 25 crore for any financial year since its incorporation.|
|Original Entity||It should not have been formed by reconstructing or splitting up an existing business.|
|Innovative and Scalable||It should work towards development, processing, or improving a product and must have an adaptable business model.|
After you know you are an eligible startup, register along with all the required documents. Upload a form online on the startup India website and get approval from the inter-ministry board.
Non-disclosure Agreements or NDA’s
According to legal advice for startups in India, NDA is one of the most important contracts that startups might find useful. Many-a-times startups discuss their ideas with potential investors, employees, customers; this often risks new startups.
Many-a-times, ideas and business information shared in goodwill may be misused. Hence, to avoid such situations, startups must use the drafted NDA while discussing critical business information with people outside the organisation.
Applying for startup licenses
Various licenses are applicable in India according to the size and nature of the business. Hence, obtaining the permit for your startup is the best way to start. The absence of relevant licenses can lead to unwanted legal battles and costly lawsuits. The startup registration process is the official process of listing a business and relevant information with the official registrar.
For instance, For a restaurant license are Certificate of Environmental Clearance, food security license, Prevention of food adulteration act, etc. For an e-commerce startup, licenses are like Service tax registration, VAT registration, service tax registration. If you go by the legal advice for startups in India, applying for licenses can also benefit you in tax deductions.
Intellectual Property Rights
When you plan your startup, you need to develop a trademark, patent, and copyright protection before you begin operating. This ensures that no competitor or any entity steals your products or methods like codes, research, algorithms or designs that will come from your ideas.
Startup founders must be aware of the basic principles of intellectual property rights like patent filing, copyright protection, and trademark registration. Most importantly, IP created during the startups’ operation should belong to the company and not to an individual. Hence, timely IP audits are crucial.
Compliance with Labour Laws and Employment Agreements
A startup entrepreneur needs to ensure that the labour laws in India are applicable in the geographical area of startup location. Also, they should ensure the signature of employees on employment agreements. Both of these steps should be considered irrespective of the size of the startup.
Some of the labour laws in India are ESI, PF, sexual harassment, wages, gratuity, maternity benefits etc. Clauses for Employment Agreements execution for consultants/ employees/ freelancers are-
- term of employment,
- intellectual-property safeguard,
- probation period if any,
- Terms of termination(standard and immediate termination
- Contract of service or for service clause
Every startup must be aware of labour law and mention it in HR policies. All the matters associated with the concern of employees are required handling through this law. Enacted for settlements of disputes in industrial environments the labour Laws In India is beneficial in cases where an employee has some disagreement with the employer.
Self Certification for compliance of Labour Laws in India
Startups should furnish self-declaration for compliance of nine labour laws in India and environmental laws. However, there is no inspection for three years, in the case of labour laws. Further, the startups registered under the Startup India initiative can complete a self-declaration for nine labour laws.
The nine applicable labour laws in India are:
- The Industrial Disputes Act, 1947
- The Trade Unit Act, 1926
- The Industrial Employment (Standing Orders) Act, 1946
- The Contract Labour Act, 1970
- The Employees’ State Insurance Act 1948
- Employees’ Provident Funds & Miscellaneous Provisions Act, 1952
- The Building and Other Construction Workers Act, 1996
- Payment of Gratuity Act, 1972
- The Inter-State Migrant Workmen Act, 1979
Compliance with Information Technology laws
We live in a technologically advanced era. Here things like cloud computing, e-contracts, digital signatures, protecting privacy, securing confidential data from hackers, are not only trendy but greatly important too.
Most of the startups provide app-based or web-based products or services. At the same time, there are several IT Laws like the startup laws in India that technology-based startups should follow according to startup companies rules and regulations.
Startups dealing in online wallets, bitcoins, financial services, etc. need to follow specific startup laws in India. This is to avoid your startups’ jeopardisation by government agencies.
GST registration is one of the Legal Checklists for Startups in India. All manufacturers, service providers, exporters, sellers etc. need to get their GST Registration in India. Following are the ways to obtain GST registration for startups after the startup registration process in India :
- When the aggregate turnover is more than Rs 20 lakhs, or Rs 10 lakhs in the state of a special category.
- If there are intra-state supplies of goods by the business.
- When the business provides services and sells goods online.
- When the business held tax registration under the previous tax regime.
Obtain GST registration within thirty days of startup incorporation. Otherwise, the startup will be subject to hefty penalties.
Service Tax/ VAT/PAN Registration
PAN registration of the company/ co-founders/ directors is an essential legal requirement for starting a business in India. Secondly, suppose your startup is service-based and crosses Rs 10,00,000 gross in a financial year. In that case, Service tax and VAT registration come into need. Additionally, if it sells goods and crosses Rs 20,00,000, then there is the need for the VAT and Service Tax.
Even if you are a marketplace, the amount of commissions received from the shipping charges, vendors, or any other value-added charges also draws the service tax levy. There is the exemption in service tax and VAT for specific services and individual goods. The startup must know whether they fall in any of the lists of exemptions or not.
Addressing Legal Checklists and Advice for Startups
Addressing the Legal checklists for startups in India can avoid conflicts and legal hassles later on. Moreover, Startup entrepreneurs should engage legal advisors at the very outset of their startups. Startup legal advisors help the entrepreneurs focus on running their startup by giving them timely updates. Hence, if you’re planning to start a startup, then apply legal advice for startups in India.