Starting a new company in India is not as easy as it seems. Both new and emerging companies and startups have to go through various legal formalities. Some of these formalities include financial regulations, tax obligations, and recognition like DPIIT Recognition for Start-ups, and labor law regulations which are fundamental to the functioning of any business organization in India.
Entrepreneurs planning to enter the Indian dimension must ensure that they comply with all legal obligations required under the law of the country. One of the most important of these obligations is to legally register the company. After registration, the next step is to choose the right company or its company structure before completing the other necessary documentation formalities.
When it comes to a company or its structure, individuals should choose their company or its company structure wisely as it enables the company to operate efficiently and achieve desired goals and profitability.
There are various legal formalities and requirements involved in starting up a business in India which are as follows:
Decide the name of the business and its structure
A person should have a clear understanding of the nature and type of start-up business he intends to develop. When refining startup ideas, the founders will need to incorporate the company as a specific type of business – sole proprietorship, private limited company, public limited company, Limited Liability Company, etc. This clarity will be an integral part of the business from the start, overall business vision and goals, both short-term and long-term. Moreover, it also helps the founder to predict the direction in which they should take their seed funding. Each type of start-up has its own set of legal requirements, regulations, and companies should pay special attention to them before starting a business.
Create a Founder’s Agreement
The founder’s agreement is a document that contains important information about the founders of the company. Thus, the document acts as an agreement that legally determines the rights, ownership, obligations, dispute resolution, and other terms of the founders and the company.
That's why a well-drafted founder's agreement with all the necessary details is a solid foundation for the company's journey. The agreement can also be used as a guide in case of disagreements.
Get a Startup Business License
Licensing or Start-up India registration is an integral part of any business. Depending on the nature and size of the business, different licenses are available in India. Knowing the valid starting licenses and getting them is always the best way to start a business.
A lack of proper licenses can lead to costly lawsuits and unwanted legal battles for a startup. Licenses are legal documents that allow a company to operate, while company registration is the formal process of registering a company with an official registrar (along with the relevant information). The government provides various licenses and registration where various government aids are given to the start-ups like DPIIT Recognition given by the Department for Promotion of Industry and Internal Trade or DPIIT.
The general permit that applies to all starters is the Shops and Establishment Act, which applies to all premises where a craft, business, or profession is practiced. Other business licenses vary from industry to industry.
Understand the Accounting and Taxation Laws
Taxes are an important part of any business. As for India, some companies may be subject to various taxes such as central tax, state tax, and even local taxes. Since different business and activity sectors have different taxes, it can be very useful to know the relevant text mode beforehand.
There are also various schemes and initiatives such as the Startup India initiative of the National Government which aims to boost startups through various exemptions and tax exemptions.
Good knowledge of such initiatives and startup-friendly regulations can also come in handy. A start-up can also enjoy an income tax exemption for 3 years, as well as taxes on capital gains and investments above fair market value. Therefore, a holistic knowledge of taxation can be beneficial for growth and even development.
When it comes to business accounting, it is good practice for a business to maintain proper accounting records and have them audited from time to time to ensure compliance with relevant accounting and tax regulations. As a result, a reliable payment and invoicing system can contribute to clear accounting.
Understand the Labor Laws
Labor law compliance is an integral part of any start-up business, whether small or large. When you are incorporated as a business and hire people to work for your organization, you are subject to different employment laws regardless of the size of the organization.
Laws pertaining to minimum wage, gratuity, PF payment, weekly leave, maternity benefits, sexual harassment, payment of allowances, etc. will have to be followed. It is best to consult an attorney to evaluate the laws that apply to your startup and ensure that your startup complies with the required employment laws. Regarding labor law, a startup registered under the Startup India initiative can file a declaration (on nine labor laws) within one year of its incorporation date to be exempted from labor inspection.
Opt for protection of Intellectual Property
Intellectual property is an essential part of most companies today, especially technology-oriented companies. Whether its codes, algorithms or even research results, it's all part of the collective intellectual property associated with the organization.
Creating and then protecting these intellectual properties is crucial to the efficient growth of any innovative company. Therefore, legal knowledge related to IPR law can be useful at every stage of a company's journey.
Startups can also benefit from Startup India's Scheme for Startup Intellectual Property Protection (SIPP), which nurtures and guides innovative and emerging technologies and help them properly protect and commercialize them.
Effective Contract Management
Contracts are the core of running any startup business. The contract is necessary to ensure the proper performance of the work and is an excellent mechanism to ensure redress if the work is not completed. Entrepreneurs can benefit from basic knowledge of various aspects of contract management.
As per the Indian Contract Act, of 1872, all agreements for commencing business are contracts if entered into with the free consent of parties authorized to contract, for lawful consideration with lawful purpose and not expressly voided.
Employee contracts are one of the most important aspects of research when starting a business. Founders often initially work with their trusted circle of friends while ensuring a certain ease and efficiency in starting the business by defining and executing employee contracts with information about salary, the scope of work, and stock options (if applicable). even the first few employees are always recommended. Having this clarity from the start helps a startup reduce risk later on.
Know the Winding-up Process
Winding up or shutting down a business because of a not-so-good startup idea is a tough task for any entrepreneur. When a startup decides to close, all stakeholders – from vendors to employees to customers and investors – should be notified in advance and the whole process should be properly planned and executed to make it easy for everyone to shut down.
There are basically three types a business can be winded up which are as follows:
• Fast Track Exit Mode
• Court or Tribunal
• Voluntary Winding-up
It is very important for everyone, whether it is a start-up or an established company, the legal requirements are met; knowledge and compliance with applicable laws are the first steps in ensuring a smooth start to the business. Hiring a professional lawyer to advise, guide and manage your legal files is one of the best ways to ensure that your startup business is always safe and free from legal complications and consequences.
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