7 basic laws every startup entrepreneur should know about

7 basic laws every startup entrepreneur should know about

An entrepreneur solves a problem faced by people. For this, he/she should make sure that every move is precise. But don’t forget that it should be considered legit in the eyes of law. So, every entrepreneur should keep in mind certain laws to keep the business honest and think of the long term proposition of the business.

Hence, before you solve people’s problem and start serving them, consider these 7 basic laws that every startup founder in India should know about.

1. Formalize your business structure

You need to make sure what is the nature of the business and the type of it. There are multitudes of business structure you can choose from. It could be a sole proprietorship, limited liability partnership, private limited, public limited, etc. This decision is very important as it shouldn’t conflict your overall vision & purpose of doing this business.

Every type of business comes with some legal applications with it that you should know about.

Legal DetailsProprietorshipPartnershipLimited Liability PartnershipPrivate Limited Company
RegistrationThere is no need for formal registrationRegistration is optionalUnder the LLP Act 2008, it must be registered with the Ministry of Corporate AffairsAccording to the Companies Act 2013, it should be registered with the Ministry of Corporate Affairs
Legal StatusIt is not considered a separate legal entity and the promoter is himself responsible for all the liabilitiesThis is not recognised as a seperate legal entity and the promoters are personally responsible for the liabilitiesIt is considered a seperate legal entity and the promoters aren’t  personally responsible for the liabilitiesIt is a seperate legal entity and the promoters aren’t personally responsible for the liabilities.
Member LiabilityUnlimited liabilityUnlimited liabilitedLimited liability to the extent of the contribution in the LLP.Limited liability to the extent of the contribution towards the share capital.
Numbers of members requiredOnly one person (sole proprietor)Minimum 2 person are required to form partnershipMinimum 2 persons are required to form LLP.Minimum 1 person is required to form Private Limited Company.
TransferabilityNot availableNot transferrableTransferrableTransferrable by the means of share transfer
TaxationThe rules applicable for individual taxation are applicablePartners are taxed as per the guidelines of the Income Tax Act, 1961, plus surcharge and cess.LLPs are taxed as per the guidelines of the Income Tax Act, 1961, including the surcharge and cess.Private Limited Company is taxed as the guidelines of the Income Tax Act, 1961, in addition to surcharge & cess.
Annual Statutory MeetingsNot requiredNot requiredNot requiredBoard meetings and General meetings should be held periodically.
Annual FilingsNo need to file annual report with the registrar of the companies. But there will be Income Tax filing on the income of the proprietorNo need to file annual report with the registrar of the companies. But income tax should be filed for the partnership.Annual Statement of returns & solvency and annual returns should be filed with the registrar of the companies, in addition to the tax returnAnnual statement of returns & solvency and annual returns should be filed with the registrar of the companies, in addition to the tax return.
Existence or SurvivabilityExistence of business is dependant on proprietorThe existence of the partnership is dependant on the partners. You have to dissolve it at will or in the case of the death of the partner(s).The survivability of the LLP is not dependant on parnters. LLP can be dissolved voluntarily or by the order of the Company Law Board.The existence of the Private Limited Company doesn’t depend on the directors or shareholders. Though, regulatory authorities can dissolve it or it dissolve itself voluntarily.
Foreign OwnershipA Foreigner cannot be a sole proprietorForeigners are not allowed to be take part in the partnership.With the permission of the Reserve Bank of India and other applicable permissions from the government, foreigners can invest in LLPsWith the permission of the Reserve Bank of India and other applicable permissions from the government, foreigners can invest in Private Limited Companies.

2. Necessary Licenses

After selecting the type of business, you need to take care of acquiring certain licenses. These licenses vary according to the nature of the business. Before launching your startup, you need to understand different licenses. In the case of the absence of appropriate licenses, your business might get into legal battles at the inception. These are as follows:

  • The most common license that is applicable to every business is the Shop and Establishment Act. It is applicable to every business where trade, business or profession is carried out.
  • If you wish to start an e-commerce company, you need licenses like VAT registration, Service Tax Registration, Professional Tax etc.
  • Or if you want to establish a restaurant then you may require licenses like Food Safety License, Certificate of Environmental Clearance, Prevention of Food Adulteration Act, Health Trade License etc. In addition to the above-mentioned licenses.

3. Familiarize with the Taxation & Accounting laws

Different type of businesses attracts different taxes which you should be aware of beforehand. According to the ‘Startup India programme’ launched by the Government Of India, there are many tax exemptions you can benefit from. But before that, there are some conditions for your startup to qualify for these exemptions and these are:

  • The total lifespan of the startup should not be more than 7 years (10 years for biotech)
  • Is registered as a Registered Partnership, Limited Liability Company or Private Limited Company.
  • The total turnover should not exceed 25crores annually.
  • There shouldn’t be an existing business that split or reconstructed into a startup.

It is very crucial for every business to maintain proper books of accounts and audit them from time to time to ensure that tax rules are adhered to.

4. Beware of Labour Laws

Irrespective of the size of the establishment, you need to adhere to the labour laws. These laws could be with regard to minimum wages, gratuity, PF payment, weekly holidays, maternity benefits, sexual harassment, payment of bonus and so on.

A startup registered under startup India programme have the option to complete self-declaration for 9 labours laws within 1 year and get an exemption from the labour inspection. The 9 laws are as follows:

  • The Industrial Disputes Act, 1947
  • The Trade Unit Act, 1926
  • Building and Other Constructions Workers’ (Regulation of Employment and Conditions of Service) Act, 1996
  • The Industrial Employment (Standing Orders) Act, 1946
  • The Inter-State Migrant Workmen (Regulation of Employment and Conditions of Service) Act, 1979
  • The Payment of Gratuity Act, 1972
  • The Contract Labour (Regulation and Abolition) Act, 1970
  • The Employees’ Provident Funds and Miscellaneous Provisions Act, 1952
  • The Employees’ State Insurance Act, 1948.

In order to continue with the exemption, the startup can file the self-declaration for the second and third year as well.

Also, if a startup has a well-defined employee policy, then that can provide an edge over other startups. This policy could help in talent acquisition and retention. Moreover, this could boost the employee’s morale and overall productivity.

5. Protection of Intellectual Property Rights.

If you have a secret sauce or an algorithm in this high-tech world, then it is important that you should take note of this law. According to this, you can patent your innovative product or an improved process of making something, or a trademark than gives you exclusive right over selling under a specific name. All this comes under Intellectual Property rights.

A Startup can leverage the ‘Scheme for Startups Intellectual Property Protection’ (SIPP) under the ‘Startup India programme’.

  • This scheme was set up to protect & commercialize your intellectual property. The facilitators of the scheme are empanelled by the Controller General of Patents, Trademarks and Design.
  • This panel of facilitators also helps the startup by providing advisory services, assisting in patent filing and disposal of patent application in addition to various other services at a minimum charge.

6. Effective management of the contracts

Contracts are very effective to ensure the normal functioning of any project or to provide recourse in case of non-performance. Under the Indian Contract Act, 1872 a contract is legit when

  • A contract is made by the free consent of the parties competent to contract
  • It is for a lawful consideration with a lawful object
  • And are not expressly declared to be void

While starting a venture, employee contracts need to be taken care of carefully. It is highly recommended to outline the details about the salary, scope of work and stock options (if any) with even your first employees. This would drastically reduce risks at a later point in time.

NDAs or Non-Disclosure Agreement is another important contract that a startup might find useful. Any startup discusses its ideas with a host of people from the investors to the employees to customers. And because of this, there is a huge possibility of the theft of the ideas presented. Which is where NDAs come into play. This prevents the information from spreading not only from the people inside but also with the people outside the organization.

7. Winding up of business

It might be nightmarish to think of winding up of business before starting up. But it is often said that you should prepare for the worst and hope for the best. So the process of winding up should be done systematically as many people are involved with the functioning of the company.

There are 3 ways to wind up a company and these are

  • Fast track exit mode
  • Court or tribunal route
  • Voluntary closure

Out of all the 3 ways mentioned above, the best option is to choose a fast track exit mode. It takes less time to shut down a company with minimal cost involved. For this, 2 conditions are necessary

  • First, the company should not have any assets or liabilities
  • Secondly, there shouldn’t be any business operation for the past year

If these conditions are met, then the company can be struck off its name from the Registrar of the Companies (RoC).

And in the case of the voluntary closure, the shareholders and/or creditors need to be on the same page of winding up. Despite being an easy route, it is not often applicable and practical at times.

The third way of winding up via tribunal courts is not advisable at all. As it involves several meetings with various stakeholders leading to prolonged court proceedings.

There is another way of winding up of the company using the Insolvency and Bankruptcy Bill, 2015. In this case, an insolvency professional is hired to liquidate the assets of the company within 90 days, in accordance to the ‘Startup India Action Plan’.

This article is written by Anubhav, who is a Content Writer at LegalRaasta.
LegalRaasta is an online platform that provides expert legal services including ITR Filings, LLP Registration, Private Limited Company Registration, Partnership Registration & Proprietorship Firm registration and the list goes on. So what are you waiting for? Contact us now and get your business registered.

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