Legal Basics Every Indian Startup Should be Aware of

Start-up in India is the face of a fresh inventive idea that is being put into effect and the expression of an idea that has been implemented and is being worked on in India. If you’re thinking of starting your own business, you’re probably thinking of a company that’s anxious to get up to speed with the market and follow in the footsteps of other companies that have been in the market for a long time and have secured a place.

A start-up can take the form of a partnership, a sole proprietorship, or any number of other forms of organization. Even if a start-up company does not have a healthy corporate culture when it first begins, it does have legal responsibilities that must be met in order for the firm to grow and go in the right direction legally and ethically. Despite the fact that an entrepreneur is faced with many challenges and attempts to find solutions to them, he/she should not forget that the eyes of the law are always watching.

A company’s efficiency depends on eight legal elements that define the main obligations and legal acts that must be followed.

1) Formalization of Business Structure

When it comes to conducting business, it is important to comprehend and utilise suitable organisational structure. Entrepreneurship, limited liability partnership, and private limited company are examples of business structures.

Registration, legal status, taxation, member obligation, number of members, etc. are some of the essential legal aspects. A proprietorship and partnership, for example, share the same legal entity and the promoter is personally liable, however in a limited liability partnership a separate legal entity is recognised and the promoters aren’t personally liable.

2) Licensing 

According to the sort of business carried out, every business requires a licence. Prior to the launch of a business, the right licencing issuance process must begin in order to avoid legal conflicts at the outset of the venture. Every firm has its own set of licences. It is necessary to pay VAT, service tax, registration, and professional taxes when starting an e-commerce company. The Shop and Establishment Act of 1953 is the most frequent licencing law for most businesses.

3) Laws Regarding Taxation and Accounting

There are a number of tax breaks for companies under the government’s Start-up India programme. The tax and business structure of each business dictates which tax policy should be used. Tax benefits can be claimed during the first seven years of a start-up’s existence. The business or limited liability partnership must be registered. Each year’s revenue shall not exceed 25 crores. Accounts and tax audits are required for any business to comply with the country’s taxes laws.

4) Labour Laws

Every business has employees or workers who assist in the smooth and efficient operating of the business on a daily basis. Some of these are the Minimum Wage Act, gratuity and Provident Fund Payments; paid holidays for workers; and harassment at work and bonus payments.

There is an exemption from labour inspection for a start-up that follows all nine of the country’s labour rules on a regular basis.

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

Proper employee and worker policies may help to improve morale and productivity among workers by improving their sense of belonging.

5) Protection of Intellectual Property Rights

It’s not uncommon for start-ups to come up with unique and odd concepts that can be safeguarded in this world with the help of laws. When we create a new product, process, or procedure to make anything in an easier way, we have the right to call it our own.

It is related to the Start-up India programme that the intellectual property rights start-up scheme was created. As part of this plan, intellectual property would be protected and commercialised, and trademarks, copyrights, and designs would be managed as part of the business start-up. As a result of these new laws, the government has decreased patent costs by 80 percent for new businesses. There is a requirement that this panel educates people on how to obtain a patent, as well as other intellectual property.

6) Foreign Investments

There are laws for foreign venture capital investors to encourage foreign investment in the business (FVCI). FEMA’s 2000 schedule 6 and its 2016 third amendment regulate investments.

In accordance with Schedule 6 of Notification No. FEMA, any foreign investor may contribute 100 percent of the capital to an Indian start-up engaged in any activity or company. Instead of international remittances, a company can issue equity or debt securities.

7) Management of Business Contracts

The Indian Contract Act of 1872 determines what constitutes a valid legal contract. There are some conditions that must be met before a contract can be considered valid. Employer-employee agreements are the first commercial contracts that should be made in full force. Salary, stock options, scope of work, etc., should all be discussed in detail prior to signing the contract.

Because in order to set up, the start-up host must communicate ideas about how the business will work with investors, suppliers, and customers; there is a high risk of ideas being misappropriated. So, nondisclosure agreements assist restrict the transmission of knowledge.

8) Winding Up of Business

When a firm is founded, it’s important to know what the laws are for closing it down, because no one can predict when the worst will happen. For example, there are three ways to wind-up a company, namely the fast-track departure, the court or tribunal route, or voluntary closure.

There should be no assets or obligations left behind in order to qualify for a fast-track exit. The company’s name can be withdrawn from the register of companies afterward (ROC).

If you choose to close your business voluntarily, you must settle all accounts with the company, which means that both the shareholders and the creditors must be in agreement. This process is a turbulent one because of the lengthy legal proceedings.

As a result of the 2015 Insolvency and Bankruptcy Bill, businesses can be wound up quickly and easily. According to government policy, sections 55 to 58 of the Insolvency and Bankruptcy Code, 2016 have been notified by the Ministry of Corporate Affairs in order to efficiently manage the insolvency resolution process.

The following are the basic legal processes that must be taken in order to establish a start-up’s legal structure. For productive working and developing a start-up, legal understanding is helpful.