Passionate businesspersonaims to build realistic unique solutions for customers through their start-up project.The focus of the business should be on its potential customer to deliver customer delight, its USP, and market situation. Simultaneously,a businessperson should have engaged someone who has a good understanding of the basic laws, rules, regulations, and different government schemes that are appropriate and applicable. It is essential to enforce business contracts, that entrepreneurs must be updated with the latest laws governing their business.
UNDER GOVERNMENT’S ELIGIBILITY STANDARD FOR START-UP RECOGNITION:-
•It should be consolidated as a private limited company or LLP orregistered as a partnership firm.
•Turnover should not exceed Rs. 100 Crores in a financial year.
•An entity shall be counted as a Start-up to 10 years from the date of incorporation.
•The Start-up must worktowards innovation/ refinement of existing products, facilities, and processes and have the potential to generate employment.
•Acquire certification from the Inter-Ministerial Board established for such purpose.
•An entity set up by separation or reformation of an existing business must not be considered a “Start-ups”.
Important legal compliances that an entrepreneur should be aware of: -
I. SELECTION OF BUSINESS ENTITY
The foremost, thing to start any business is to be clear about the type and nature of the businesswhether to incorporate it as a sole proprietorship, private limited, public limited, partnership, limited liability partnership (LLP), etc. It is preferable to look for a professional consultation to avoid ignorance of law and penalty of any kind although incorporating any kind of business establishment.
II. BUSINESS LICENSING
Licenses are basic to run any business. Subject to the nature and size of the business, several licenses are applicable in India. Signifying and obtaining the applicable licenses for your start-up is always the finest way to commence a business.The absence of applicable licenses can causeexpensive lawsuits and unfortunate legal battles. Business licenses are the official document that authorizes a business to work.
Example –The common license that applies to all businesses in the Shop and Establishment Act are trade, business, or profession that execute. Further, business licenses differ from industry to industry.
III. COMPANY LAW BASED COMPLIANCES
Every start-upregisters their business as a private limited company has to continue with the following compliances as perthe Companies Act, 2013 Provision.
A) ANNUAL GENERAL MEETING (AGM)
The standard business program of the AGM is the approval of financial statements, the appointment of auditors, declaration of dividends, etc. The Meeting requires to be held within theregistered domain of the company.
The1st AGM shall be held within 9 months from the end of the first financial year. Next, AGM shall be held within 6 months from the end of the financial year. There should be one AGM every year with a maximum gap of 15 months between 2 AGMs.
B) BOARD MEETINGS
The firstboard meeting of the Board of Directors musthold within 30 days of the incorporation of the company. There oughtto be a minimum of two meetings one in each half calendar year with a gap of at least 90 days between two. Excluding that, four board meetings are expected to be held every financial year thus the gap between two board meetings isn’t more than 120 days.
C) APPOINTMENT OF AUDITOR
The initial Statutory Auditor is appointedwithin 30 days of the company’s incorporation in the first board meeting. The appointment of a subsequent auditor is made for 5 years in AGM. Approval of Shareholder is necessary for the auditor in AGM.
D) OTHER COMPLIANCES
According to the Companies Act, 2013 every company needs to prepare a Board Report which includes: detailsof the company, net profit, its compliance with a set of financial accounting, operations during the year, and CSR policies.
IV. TAXATION BASED COMPLIANCES
Taxes are fundamental to every business. There isanextensiverange of taxes, including central tax, state tax, and local taxes that may be pertinent for certain businesses. Taxes are applied differently in every business and operating sector, aware of it can prove to be convenient.
Some tax exemptions are given to start-up for their effective growth: -
A)THREE YEARS TAX EXEMPTION IN SEVEN YEARS
According toSec. 80IAC of the Income Tax Act, anystart-up that is corporate after 1 April 2016 can benefit 100% tax relief on its profits for 3 years within 10 years.
Nevertheless, if the Company’s yearly turnover exceeds Rs 100 crore, then the tax relief is not attainable. Tax exemption under this section is only available to DPIIT recognized private limited companies or LLPs.
B) IMMUNITY FROM TAX ON LONG-TERM CAPITAL GAINS (LTCG)
A provision under Section 54EE of the Income Tax Act. Start-ups are relieved from LTCG tax. This is only appropriateprovided that, the capital gains that were invested in are part of the fund acquaint by the Government in the entire duration of 6 months from the date of the actual transfer of the capital.
A company can invest Rs 50 lakhs in the Long-term as the maximum amount of capital. The amount must be financed in the fund continuous for a minimum of 3 years.
C) TAX FREEDOM ON INVESTMENTS ABOVE THE FAIR MARKET VALUE
The government will exempt from tax on the investment above the fair market value for an eligible start-up thatinvests.
D) TAX EXEMPTIONS TO INDIVIDUAL/HINDU UNDIVIDED FAMILY ON LTCG FROM EQUITY SHAREHOLDING
Whether an individual or a Hindu Undivided Familychooses to sell their property and then invests the money, to subscribe to a minimum of 50% or more of an existing start-up, then they are exempted from tax on these LTCG. As defined under MSME’s Act of 2006, the enterprises must be small or medium.
E) GST BASED COMPLIANCE
For small businesses operating in India the Composition scheme under GST law. A business is required to register under GST whose turnover exceeds Rs. 40 lakhs in a financial year. For service providers limit is Rs. 20 lakhs.
Businesses having turnover up to Rs 1.5 crore in a year the optional scheme provides for a lower amount of tax with minimum compliances. Under GST Monthly return and Annual return is part of mandatory compliances and GST audit for certain suppliers.
V. ACCOUNTING LAWS
Concerning business accounting, it is better to maintain proper books of accounts and audit them at intervals to make sure that relevant taxation and accounting rules are attached. However, ignoring this can lead to serious accounting discrepancies. Having a sound payment and receipting system for customers assured a bit clear accounting system.
VI. ADHERING TO LABOUR LAWS
Labour laws arefundamental to every organization. With the formationof the company and recruiting peopleto work forthe organization,the owner must be cognizant of particularlabor laws whether the company is big or some it is immaterial.
Businesses feasibly based on respective labor laws that are; minimum wages,Maternity benefits, Gratuity, PF payment, protection against sexual harassment are amongst rest that will need to be adhered to. It is foremostto take advice from a legal expert to appraisethe laws appropriate to your start-up.
Concerninglabor laws, registration of start-ups under the Start-up India initiative is an absolute self-declaration (for nine labor laws) for one year from the date of amalgamation and obtainimmunity from laborscrutiny. The nine labor laws pertinent under this scheme are:
•The Trade Unit Act, 1926
•The Industrial Employment (Standing Orders) Act, 1946
•The Industrial Disputes Act, 1947
•The Employees’ State Insurance Act, 1948.
•The Employees’ Provident Funds and Miscellaneous Provisions Act, 1952
•The Contract Labour (Regulation and Abolition) Act, 1970
•The Payment of Gratuity Act, 1972
•The Inter-State Migrant Workmen (Regulation of Employment and Conditions of Service) Act, 1979
•Building and Other Constructions Workers’ (Regulation of Employment and Conditions of Service) Act, 1996
Having an attractive and well-designed employee policy can be a major key to attract and withhold good talent and a determiner for start-ups. The Employee policies can also boost employee morale and rise in productivity.
VII. IPR BASED COMPLIANCE
The entire idea of start-upaims to work towards innovation, expansion, and commercialization of new processes, services, or products, driven by intellectual property.
The foremost work done by a start-up is to classify and prioritize the Intellectual Property Rights involved in the business. conditionalto the type of industry involved, IP Rights play a pivotal role. It possibly protected by timely registration, having policies, by non-disclosure agreements are preventive measuresto safeguard it. Start-ups hold the ‘Scheme for Start-ups Intellectual Property Protection (SIPP) under the Start-up India enterprise.
VIII. COMPLIANCES OF CONTRACTUAL OBLIGATIONS
A contract is defined under the Indian Contract Act, 1872. The essence of any business contract is to ensure the smooth functioning of work. Contract work with employees is most important to look at while starting a Venture. Non–Disclosure Agreements are one of the most important contracts for start-ups.
There is a risk of ideas and other confidential business be theft. Hence, to avoid that Non- disclosure agreements need to be drafted and used by start-ups while sharing information with people outside the organization.
Hope this article will help you further to know about the basics of Laws related to start-ups in India.
1. Saurin Parikh, Legal Basics that Every Indian Start-up Should Know, https://razorpay.com/blog/legal-basics-that-every-indian-startup-should-know/, DECEMBER 4, 2020
2. Abhilasha Jaiswal, Corporate Law, Legal Compliances for Start-Ups in India, https://taxguru.in/corporate-law/legal-compliances-start-ups-india.html, 30 Mar 2021