India is the largest start-ups ecosystem in the world with a large majority of startups emerging in the market. Startups are started by passionate entrepreneurs who are focused on building unique solutions to deliver complete customer satisfaction. But with the increasing complexity in the technology sectors it is always important to have a strong legal base to survive in the market. Before setting up a startup, having thorough knowledge about legal compliance is always beneficial. Startups should be aware of the legal requirements of a startup and being compliant with all applicable laws and regulations is mandatory. Legal compliance and regulations are essential for the growth of any startup and it is important to follow them indefatigably.
Eligibility criteria for start-ups
Although there is no properly defined definition of a startup that has been provided under Indian laws, however Government of India under their startup scheme have defined star up as-
An entity shall be considered as a startup if it satisfies all the following conditions-
- If it is incorporated as a company i.e. a Private Limited Company, Partnership Firm, Limited Liability Company (LLP) or a One Person Company. Provided that such an entity is not formed by splitting up or reconstruction of a business already in existence.
- That it should not have completed its 10 years of incorporation.
- Its turnover should not exceed more than INR 100 Crores
- It must satisfy its working towards innovation, Development and improvement of existing products/ processes and services. It is a scalable business model with a high potential of employment generation or health creation.
Legal Aspects and Compliance that Every Startup should know and follow
The primary goal of any startup is on how to maximise their profits. While thinking of maximizing profits companies tend to ignore legal requirements which may affect their business in a longer run. Following are the documentation and formalities to be followed by a startup to become legally complaint:
- Incorporation Related Compliance
Each structure has its own set of rules and regulations which decides the tax requirement for a company, licenses requirement of a company etc. for instance Sole proprietorship does not require any registration, in partnership firm registration is optional, however in Private Limited Company and in LLPs registration is mandatory.
Companies have different registration requirements and they will be registered as per the Companies Act, 2013 in case of a Private, Public Limited Company, not for profit ad One person company, in case of a Partnership Firm Indian Partnership Act, 1932 is applied and for LLPs Limited Liability Partnership Act, 2008 is applied.
Several companies opt their companies to register under different government schemes and laws to avail the benefits and concessions provided under the law. Companies depending on the nature of the business may be registered under MSME Act, the GST Act or under the startup India scheme.
- Applying for Business Licenses
Obtaining a license is an integral part of any business. Startups may require different licenses depending on the size of the business. The common license that is applied for business is shop and establishment license, Trademark License, environmental, FSSAI License, labour and employment laws and import and export laws, FDI Policy, FEMA, SBI/RBI regulations in India impact the procurement of license.
- Documents Requirements
Many organizations do not pay much attention to the documentation and end up in the plethora of legal complications faced by them in future. That is why some basic documentation is necessary while registering of the company and they are as follows-
- Drafting of Incorporation Agreement such as founder’s agreement, shareholder’s agreement, MOA, AOA for registration of your company.
- Agreement such as Non-Disclosure Agreement (NDA), confidentiality agreement, Memorandum of Association (MOU)
- Work agreement such as employment agreement, lease/rent agreement, service agreement, consultancy agreements and others.
- Technical agreements
- Company policies such as Technology Assistance agreement, Licensing and Assignment agreement, Outsourcing and hosting agreements and otters.
- Registration of Intellectual Property Rights such as copyrights, Trademark, Design, Patents etc. in India and cross borders. Licensing And assignment agreement related to their Intellectual Property.
- Company Law Based Compliances
There are certain mandatory compliances for companies registered under Companies Act, 2013 such as-
- Annual General meeting should be conducted after every 15 months.
- Board meeting shall take place within 30 days of the incorporation of the company. Apart from that 4 board meetings should take place in a financial year.
- Forms such as ADT-1, MGT-7, AOC-4 are to be submitted annually.
- Taxation Based Compliance
There is Income Tax return compliance which includes Tax audit report, TDS returns, assessment of tax liability and there is GST return filing compliance. Apart from the legal compliance, startups can avail various rebates available to new companies in India.
- Labour Law Compliance
After starting of a startup they have to comply with labour laws, which includes payment of wages etc. the laws which are applicable are-
- The employee State Insurance Act, 1948- this act makes it mandatory for some establishments to get themselves registered.
- Employee Provident Fund Scheme, 1952- This act makes companies contribute toward the provident fund of the employees.
- Maternity Benefit Act, 1961- It gives benefit to the employees of the company
- Payment of wages 1936/ Minimum wages Act, 1948- it is given to maintain the basic wage of the labour.
- The Industrial disputes act 1947- This act has been enacted for the investigation and settlement of Industrial disputes in any industrial establishments.
- Trade Union Act, 1926- This is an Act to provide for the registration and regulation of Trade Unions.
It is important for every organization to adhere to the legal compliances with the applicable laws as it will help your organization to run smoothly.
Contact BIAT Legal LLP for the best legal assistance.