LEGALITIES IN STARTING A STARTUP

The path for an entrepreneur is usually considered a bumpy one. The beginning of this journey starts with fundraising and creating a business plan. Successful startups are ones that are driven by passionate entrepreneurs who are focused on building unique solutions. While it is very important to have a strong focus on customers and the market, it is equally critical to have a good understanding about the basic laws, rules and regulations that are applicable for the smooth running of the business.

Hence, for long-term success, an entrepreneur must keep in mind all the rules of starting a business.

1. Formalization of Business Structure

Before starting any business, you must determine the nature and type of the business. There are different types of business structures to choose from. The major types include proprietorship, private limited, and limited liability partnership, public limited. The decision of formalizing the business structure is important, as it must not be misaligned with your ideas and the purpose of the business.

All these business structures follow different registration procedures along with distinct legal statuses. So, before starting a business, formalize your business structure to not conflict with your vision.

2. Licensing

After selecting the business, you have to take care of getting licences. To begin with, you must understand the types of licences. These licences vary according to the type and nature of the business. In case of the absence of relevant licences, your business may face severe legal penalties.

Here are some basic but crucial licences:

  • The licence that commonly applies to all businesses is the Shop and Establishment Act. This act is regulated by the Department of Labour, and it regulates the areas where trades and businesses are carried out. This act regulates aspects such as the rest interval of employees, opening and closing hours, working hours, maternity leave, etc.
  • If you are looking to start an e-commerce company, you must be knowledgeable about licences such as Service Tax registration, Value-Added Tax registration, etc.

3. Taxation and Accounting Laws

One should be aware of the different types of taxes that are applicable for different types of businesses. A recently launched programme called ‘Startup India’ aims to empower startups in India. The new rules for businesses laid down by this programme outline many tax exemptions for startups for three consecutive years. But some requirements are needed to qualify as a startup, and these are as follows

  • The business must be registered as a partnership company or as an LLP (Limited Liability Partnership) company or must be incorporated as a private limited company.
  • According to the new business laws, a business entity will be considered a startup only up to ten years of registration/incorporation.
  • The annual turnover must not have exceeded 100 crores for any of the financial years since incorporation/registration.
  • Lastly, the business must be highly innovative and have the capacity to generate employment and wealth.

4. Labor Laws

Labor laws encompass issues such as minimum wages, holidays, maternity leave, bonus payment, provident funds payment, etc. According to the new business laws under the Startup India programme, startups can be exempted from labour inspection if they complete self-declaration for labour laws. There are 9 labour laws, which are:

  • The Industrial Dispute Act, 1947
  • The Industrial Employment Act, 1946
  • The Trade Unit Act, 1926
  • The Payment of Gratuity Act, 1972
  • The Employees Provident Fund and Miscellaneous Provisions Act, 1952
  • The Contract Labour Act, 1970
  • The Trade Unit Act, 1926
  • The Employees’ State Insurance Act, 1948
  • The Inter-state Migrant Workmen Act, 1979

5. Intellectual Property Rights – Protection Rules

An intellectual property right is a company’s best friend as it protects a business from theft of personal data. If you own a company and have developed something innovative or an improved formula that is helping you to face the tough competition, this rule comes to your rescue. According to this law, you can patent your secret formula or innovation and sell your product under a particular name with a trademark. This makes copying your idea, formula, or innovation punishable by law.

Additionally, the Startup India programme has also laid down new business laws, SIPP (Startups Intellectual Property Protection) being one of them. This simplifies the patent application process for startups through registered facilitators, and business owners only need to pay statutory fees. The facilitators also provide advisory services and assistance to startups in filing or disposing of a patent application.

6. Taking Care of Contracts

A contract is deemed valid only if it complies with the conditions under the Indian Contract Act, 1872.  The rules state that for a contract to be valid, it must result from the unrestricted consent of the parties, must be a lawful consideration with a lawful object, and must not be explicitly declared to be void.

Contracts such as employee contracts and NDA contracts are extremely crucial when the business is about to launch and in the later phases of the business as well. This is because employee contracts will save you from future risks. Every detail regarding the employee, such as the pay scale, extent of work, etc., is usually mentioned in the contracts. 

7. Winding Up Rules

Preparing for the worst is sometimes better for making new beginnings.

 There are 3 ways to do it, which are:

  • Fast track exit mode

It involves minimal costs and less time to wind up. But for this method, a company must not have any assets or liabilities, and there should be no business procedures for the preceding year.

  • Voluntary closure

This method is not usually practical, as, there must be a common understanding between the shareholders and creditors.

  • Court route

This is the least advisable method, as it involves a lot of discussions with the company’s stakeholders, which typically results in lengthy court procedures.

Apart from all these methods, startups registered under the Startup India programme have the ease of winding up in 90 days under one of the new startup rules, i.e., the Insolvency and Business Code, 2016.

The best ways to ensure that your company is always safe and does not face legal complications and consequences is by hiring professional legal counsel to provide advice, oversee and maintain legal records.

Aishwarya Says:

I have always been against Glorifying Over Work and therefore, in the year 2021, I have decided to launch this campaign “Balancing Life”and talk about this wrong practice, that we have been following since last few years. I will be talking to and interviewing around 1 lakh people in the coming 2021 and publish their interview regarding their opinion on glamourising Over Work.

If you are interested in participating in the same, do let me know.

Do follow me on FacebookTwitter  Youtube and Instagram.

The copyright of this Article belongs exclusively to Ms. Aishwarya Sandeep. Reproduction of the same, without permission will amount to Copyright Infringement. Appropriate Legal Action under the Indian Laws will be taken.

If you would also like to contribute to my website, then do share your articles or poems at adv.aishwaryasandeep@gmail.com

We also have a Facebook Group Restarter Moms for Mothers or Women who would like to rejoin their careers post a career break or women who are enterpreneurs.

We are also running a series Inspirational Women from January 2021 to March 31,2021, featuring around 1000 stories about Indian Women, who changed the world. #choosetochallenge

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