A visionary human being has a mind of great ideas with ingenious and insightful purpose. Such ideas of innovative thinkers put into action bring evolutionary outcomes in society. World history is evident of influential people like Thomas Edison to Henry Ford, businessmen like Andrew Carnegie to Steve Jobs, Mark Zuckerberg, Elon Musk. The Indian history has no dearth of intellectual brains who ventured into businesses like Tata Group by JRD Tata, Reliance Industries by Dhirubhai Ambani, Infosys founded by Narayan Murthy, HCL Technosystems started by Shiv Nadar, and many more. Such inspiring journeys from scratch to enormous success have evolved following generations over the past few decades in India and globally. Individuals or group of individuals who come up with unique business ideas are well known today as entrepreneurs or startup founders. Besides profit-making, their contribution to public demand is equally met to extend common solutions for the people. Although on one hand, few startups have succeeded to sky heights while many have succumbed for various reasons.
For any new or existing startup business to be successful, legal compliances and license procurement, obedience to rules and regulations are basic requisites depending on their form of incorporation. The legal compliances as per applicable laws are the backbone for any promising and prospering startup venture. Simultaneously, entrepreneurs should hire or engage professional services who are well-versed with the start-up registration process, mandatory compliances under relevant laws for smooth functioning of their aspiring business journey.
The process of startup registration, its importance, and other requirements are discussed in this article.
STARTUP REGISTRATION STEP BY STEP:
- After incorporation of the business, the company must register itself on the Startup India website initiated by the Government of India. After creating the profile, the startups can avail various mentorship programs, benefits under government schemes, and exposure to state policies for startups on the website.
- Thereafter, the startup must avail recognition with the Department for Promotion of Industry and Internal Trade (DPIIT). This recognition provides access to tax exemptions/benefits towards funds of funds, a privilege for Long Term Capital Gains (LTCG), investment above fair market value, etc. Also easy compliances, IPR registration and its services, self-certification under relevant labor laws, availing benefits under schemes launched by the Government of India.
- For the purpose of registration and recognition, it is mandatory for startups to upload company details like a certificate of incorporation, director details, PAN details, GST certificate, IPR certificates.
- On completion of the registration process, the documents will be subject to scrutiny by the concerned authority and thereupon certificate of recognition will be issued to the startup company.
REQUIREMENTS FOR STARTUP COMPLIANCES
- TYPES OF BUSINESS INCORPORATION:
Every business commencement under Indian law can be prescribed under private limited companies, limited liability partnerships, partnership firms, or as a sole proprietorship. These types of business incorporation are governed by different sets of legal requirements, regulations, and adherence for running the type of startup.
A. PRIVATE LIMITED COMPANY
A private limited company is mandatory to be registered with the concerned Registrar under the provisions of the Companies Act, 2013. Minimum one member is required to start a private limited company. Every private limited company has to comply with the payment of taxes as per the slabs given in the Income Tax Act, 1961. The limited liability in the company is extended only to the share capital owned by its members. Members can transfer their ownership in the form of share transfer of the company. Foreign direct investments are permitted in private limited companies. Most importantly, a private limited company is a separate legal entity and the promoters of the company cannot be held personally liable against the debt due to the company.
B. LIMITED LIABILITY PARTNERSHIP
The limited liability partnership (LLP) is to be registered under the Limited Liability Act, 2008 with a minimum of two persons. Similar to a private limited company, the liability under LLP is limited to the extent of contribution in the partnership body corporate. It is a legally separated entity from its respective partners. All the partners possess the right of transferable ownership. The LLP is required to submit annual returns, financial statements with the Registrar every year. Foreign investments are allowed in LLP subject to approval by Reserve Bank if India and permissions by appropriate government authorities.
C. PARTNERSHIP FIRM
Unlike LLP, this type of partnership is optional for registration. Though a partnership firm also mandates a minimum of two persons to start the business in partnership it is not recognized legally as a separate entity and all its partners are personally liable for the debt and liabilities of the partnership firm. All the partners of this type of partnership firm are bestowed with unlimited liabilities. The partnership firm is exempted from submitting the annual filing, annual meetings of its business. They are accountable for taxes under Income Tax Act towards profits made by them. Any partnership can be dissolved either voluntarily or upon the death of any partner.
D. SOLE PROPRIETOR
This form of business comprises only one person. All profit and loss in the sole proprietorship business are incurred by its sole owner. He has unlimited liability in the business. The taxes are applicable as per the individual income of the sole proprietor. No foreign funding is allowed in this type of business. Comparatively, the paperwork and legal compliances involved are very less unlike the nature and type of the other three business headings highlighted above.
To invite flexible domestic investments and foreign funding, it is usually common among thriving entrepreneurs to incorporate their startup businesses into private limited companies. The option of the private limited company makes it easy for them to manage external funds and is accountable to all its members as it is a separate legal entity. Furthermore, it raises credibility among the general public and shareholders of the company, being a legally recognized entity. Another important advantage of a private limited company is that of its “Perpetual Succession” i.e. continuous existence, irrespective of death of any member or shares transferred by a shareholder of the company to any other person.
- BUSINESS LICENCES
Once the business is incorporated, the owner of the business is mandatorily required to obtain applicable licenses from the concerned local authorities. A business license is a legal document issued by government agencies to permit the running of such a business in a particular locality. This makes the business comply with the necessary regulations of the concerned bodies. Any non-compliance may lead to heavy penalties, fines by governing authorities, or worse, termination of business. Also, business licenses vary and apply according to the trade and industry involved. For instance, import-export license for foreign trading, factory license under Factories Act, 1948 granted by the state government where it to be set up, food safety license regulated by Food Safety and Standard Authority of India (FSSAI) for food products in India, liquor license of restaurant serving alcohol to its customers, Health Trade license for businesses engaged in Health and medicine industry, Trade license for all kinds of businesses under Shop and Establishment Act, etc.
- GST REGISTRATION
The taxation system in India is of two kinds; 1. Direct Taxes and 2. Indirect Taxes. Direct tax includes income tax whereas indirect tax includes GST, customs duty, excise duty, service tax, value-added tax. The Government of India introduced Goods & Service Tax (GST) to eradicate indirect taxes with an objective to bring all taxes under one ambit to ease the tax regime for businesses more particularly startups across the country. However, GST registration is mandatory for any startup business with a turnover exceeding Rs 40 lacs in a financial year. This has brought immense relief for small size businesses in India. The GST is applicable as per the nature of business functioning in the respective industry.
- INTELLECTUAL PROPERTY RIGHTS
Intellectual property rights protect creative ideas for innovative products and services for businesses in the competitive market. Intellectual property is classified as Patent, Trademark, Trade Secrets, and Copyrights. It helps distinguish their business product in the market, gives it an edge, and provides legal protection against piracy, theft, and unauthorized use by other market players. Startup companies should be proactive while using logos, inventions, trade names, designs, products, and services for their business to protect their intellectual property. It is important for startup businesses to register on the highest priority their intellectual property considering the risk involved.
A comprehensive set of terms and conditions for any startup venture are an important aspect of a successful business. The contractual obligations bind the parties two perform their duties as per the terms agreed upon between them. Likewise, the interest of the start-up company remains intact and helps in avoiding any unwanted litigation for them. Startup owners must have basic knowledge of various features of the contract and its importance for their business. Based on the company and business model, the contracts/agreements could be either a third party agreement such as service agreement, franchise agreement, purchase agreement, or tripartite agreement with people outside the company. Share-purchase agreements determine the share size in the company and total investments made in the company. While hiring employees in the company, an employer-employee contracts setting out salary details, payment of gratuity, holidays, bonus, minimum wages, and for female employees it is necessary to mention clauses with regard to sexual harassment and maternity benefits, etc.
- ADHERENCE TO LABOUR LAWS
Under the Startup India Initiative launched by the Government of India, it provides for self-declaration (towards nine-labor laws) within a period of one year from the date of incorporation. This will exempt them from labour inspection. It is advisable to consult a legal professional to be fully compliant with the labour laws appropriate for startup company. It is important for all startup employers to adhere to labour laws such as Industrial Disputes Act, Payment of Gratuity Act, Trade Unit Act etc.
- EXEMPTIONS/BENEFITS UNDER TAX LAWS
For startups incorporated as private limited companies or limited liability partnership (LLP) engaged in innovation, development, or scalable business model with a high potential of employment generation and wealth creation with a turnover of less than 100 crores can avail 100% rebate for three assessment years within ten years from the date of its incorporation. The central government has introduced privilege under section 80IAC of the Income Tax Act for startups incorporated after 01.04.2016 to boost entrepreneurship in India. It is mandatory that the startup is recognised by the Department for Promotion of Industry and Internal Trade (DPIIT) for availing such tax benefits. Furthermore, to simplify ease of doing business the government has added section 54EE to the Income Tax Act providing exemption to Long Term Capital Gains(LTCG) subject to eligibility met by the startups.
India has seen immense growth in its startup ecosystem. Many cities like Bangalore, Hyderabad, Mumbai, Pune and Delhi have seen new startups in the last few years. This has increased the figure to more than 60,000 recognised startups under DPIIT in India. In the global ranking, after United States and United Kingdom, India stands on 3rd position with its progressing growth. The government schemes such as Startup India initiative, Startup India Seed Fund, Stand Up India, Pradhan Mantri Mudra Yojana, ATAL Innovation Mission and many others have been introduced to promote and support new businesses and strengthen them financially. The heightening number of startups in India is seen due to the simple process for registration of startups business, easy tax regime, online licence compliances, variety of government schemes launched to endorse and encourage entrepreneurship in the country.
AUTHOR: RAGHU VASISHTH
PRACTICING LAWYER IN DELHI
EMAIL ID: raghuvasishth19gmail.com