India is one of the largest startup ecosystems in the world with a large majority of startups emerging in the technology sector. Flourishing start-ups are driven by passionate entrepreneurs who are focused on building unique solutions to deliver complete customer satisfaction. But with the increasing complexity of technology and the multi-faceted and global nature of transactions, it is paramount for new and emerging enterprises to have a strong legal base to survive. Before setting up a start-up, having thorough knowledge about the legal requirements of a start-up and being compliant with all applicable laws and regulations is mandatory.
Eligibility Criteria for Startups-
An entity shall be considered as a startup if it satisfies all the following conditions:
*If it is incorporated/registered as any of the followings:
*Private Limited Company (as defined in Companies Act, 2013).
*Partnership Firm (registered under Partnership Act, 1932).
*Limited Liability Partnership (registered under Limited Liability Partnership Act, 2008).
*One Person Company (as defined in Companies Act, 2013).
Provided that such an entity is not formed by splitting up or reconstruction of a business already in existence.
*It has not completed ten years since incorporation/registration as above.
*Its turnover for any of the financial years has not exceeded INR 100 Crore.
*It satisfies any of the following conditions:
It is working towards:
*Innovation of new products/processes/services or
*Development of new products/processes/services or
*Improvement of existing products/processes/services
It is a scalable business model with a high potential of:
*Employment generation or
*Wealth creation.
Legal Aspects and Compliances That Every Startup Should Know-
Any start-up’s main objective is to increase profits. They frequently disregard the necessary legal requirements in the process, which could have a long-term negative impact on their business.
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-
Every structure has its own set of guidelines that determine what kind of licences are needed, how much tax a company must pay, and whether registration is necessary. For example, private limited companies and limited liability partnerships require registration, but sole proprietors are exempt from this requirement.
Companies have a mandatory registration requirement under the laws of India. A company may be registered as a legal entity under:
a) The Companies Act, 2013 – for private, public, not-for-profit and one person companies
b) Indian Partnership Act, 1932
c) Limited Liability Partnership Act, 2008
2. Applying for business licenses-
Obtaining licences is essential to operating any business. Start-ups may need to register their business under different licences applicable under different statutes in India, depending on the nature and size of the business. The Shop and Establishment licence is a common licence that covers a wide range of businesses. It can be obtained for any location where trade, business or profession is conducted.
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) Drafting the incorporation documents such as; Founder’s Agreement, Shareholder’s Agreement, Memorandum of Association and Articles of Association for registered companies under the Companies Ac, 2013 etc.
b) Contracts such as; Non-Disclosure Agreement (NDA), Confidentiality Agreement, Memorandum of Understanding (MoU)s, Letter of Intent and others.
c) Work Agreements such as; Employment Agreements, Lease/Rent Agreement, Service Agreement, Consultancy Agreements and others.
d) Technical Agreements such as; Technology Assistance Agreement, Licensing and Assignment Agreement, Outsourcing and Hosting Agreements and others.
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.
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: This act makes it mandatory for the company to provide the following benefits:
*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.