Legal Guide for Startups in India

Legal Guide for Startups in India

The primary goal of any start-up is to maximize its profit. While doing so, they tend to ignore the mandatory legal requirements, which may affect their business adversely in the longer run. Legal compliance is an essential wheel that keeps a check on any going needs of a business. Following are the documentation and formalities to be followed by a start-up to become legally compliant:

1.Incorporation related compliance

Each structure has its own set of rules and regulations that decide whether registration is required or not, how much tax a company must pay and what kind of licenses it requires. For instance, sole proprietors do not need any registration whereas it is optional in partnership firms, however, it is compulsory for LLPs and private limited companies. Companies have a mandatory registration requirement under the laws of India.

Various companies also opt to register their businesses under different government schemes and laws to avail the benefits and concessions provided under the laws. Companies, depending on the nature of the business may be registered under the MSME Act, the GST Act or under the Start-up India Scheme.

2.Applying for business licenses

Licenses are integral for running any business. Based on the nature and the size of the business, start-ups may be required to register their business under various licenses applicable under different statutes in India. The common license that applies to many businesses are as follow   

–          The Shop and Establishment license

–          Various environmental licenses,

–          Food and safety,

–          Labour and employment laws

–          Import-export laws,

–          FDI Policy, FEMA, SEBI/RBI regulations

3.Documentation requirements

A lot of emerging businesses do not pay much attention to formalize the structure of the contracts and basic incorporation related documents. This can create a plethora of legal complications in case, a dispute arises or while raising investment, at any stage of a start-up’s growth. Some basic documentation that every start-up should take care of are:

a)  MOA and AOA

b) Non-Disclosure Agreement (NDA) 

c) Work Agreements

d) Technical Agreements

e) Company policies such as; Sexual Harassment Policy, Employee Grievance Management Policy, Data Privacy and Protection Policy, Whistleblower Policy and others.

f) Intellectual Property Management – Registration of intellectual property like Copyrights, Patents, Trademarks etc. in India and internationally, Licensing and Assignment Agreements related to their Intellectual Property and others.

4.Taxation based Compliances

·  Under Income Tax Act, 1961 – filing Income Tax Returns, Tax Audit Reports, TDS Returns, assessment of tax liability.

·  GST Act, 2017 – Registration of establishment under the GST Act, Filing of monthly, quarterly and annual returns.

Apart from the legal compliance, start-ups can also avail various rebates available to new companies in India.

Three years tax holiday in seven years

Under section 80IAC of the Income Tax Act, any startup that is established after 1 April 2016 can avail 100% tax rebate on its profits for 3 years within a block of 7 years. However, if the Company’s annual turnover is more than Rs 100 crore, then the tax rebate is not available.

Tax exemption on long-term capital gains (LTCG)

Under Section 54EE of the Income Tax Act, start-ups are exempted 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 of India within 6 months from the date of the asset’s actual transfer.

Tax exemptions on investments above the fair market value

If an eligible start-up does any investment, the government exempts the tax on the investment above the fair market value.

Tax exemptions to individual/HUF on LTCGs from equity shareholding

If an individual/HUF sells their property and then invests that money to subscribe to a minimum of 50% or more of an existing start-up, then they are exempted from tax on these LTCGs. The enterprises must be small/medium ones, as stated under MSME’s Act of 2006.

5.Labour law-based Compliance

India being a welfare state has ensured strict measures to be taken for labour welfare and safety. Some of the major laws that need to be followed are:

· The Employee’s State Insurance Act, 1948: This act makes it mandatory for some establishments to get themselves registered with the State Insurance Corporation and contribute to the State Insurance Corporation Fund. 

· Employee Provident Fund Scheme, 1952: This act makes it mandatory for the companies to contribute towards the Provident Fund of the employees.

· Maternity Benefit Act, 1961: The Sexual Harassment of Women at Workplace (Prevention, Prohibition, and Redressal) Act, 2013

· Payment of Wages 1936 /Minimum Wages Act 1948 to regulate basic wages of the labour force

· Contract Labour (Regulation & Abolition) Act, 1970/ Interstate Migrant Workmen (Regulation of Employment And Conditions of Service) Act, 1979 to regulate the employment of labour hired on a contractual or migration basis.

· The Industrial Disputes Act, 1947 (the “ID Act”) has been enacted for the investigation and settlement of industrial disputes in any industrial establishment.

· Trade Union Act. 1926 – An Act to provide for the registration and regulation of Trade Unions.

Compliance with the relevant laws where the startup is doing business is important for the successful setup and efficient growth of startups. Compliance ensures that no penalty is imposed on a start-up at any point in its growth and helps it stay out of any other possible risks/difficulties. One can conclude that the longevity of a stable is dependent on how secure its legal foundation is.

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