Legal Compliances Checklist for Startups in India
Startup

Legal Compliances Checklist for Startups in India

The growth of start-ups in India has been impressive over the past years, making the Indian ecosystem conducive to them. The government of India announced an initiative – Start Up India - with regard to the same, which aimed at focussing on simplification and handling, funding support and incentives, and industry-academia partnership and incubation. The Nasscom Tech Start-up Report 2020–21 states that India has 38 unicorn companies or businesses valued at more than $1 billion. The start-ups in the Indian ecosystem have to meet with the set compliances to establish themselves. Out of this, there are certain legal requirements that start-ups are bound to comply with. These compliances are discussed below briefly:

Also ReadProcedure, Document Checklist And Costs For Incorporation Of A Private Limited Company

 

  1. Identification of business organisation structure: When starting a business, one should create a separate legal entity under which they will operate. It is the most important item on the legal checklist for start-ups in India.  Private Limited Companies, Limited Liability Partnerships, One Person Companies, Sole Proprietorship Firms, and Partnership Firms are the six main legal entities recognised in India. A start-up can opt for any according to the business structure it wants to establish.

  2. Registration: The two most crucial considerations for registering a start-up are as follows:  The start-up must be incorporated before registering with the "Start-up India Program," which is the second step. A start-up's incorporation includes obtaining a Directory Identity Number and a Digital Signature Certificate. By enrolling online, you can receive this recognition from the Department for Promotion and Industry and Internal Trade (DPIIT). The platform aims to encourage innovation in the nation by giving businesses access to a range of financial incentives and advantages like tax exemptions.

  3. Obtaining Licences: It's crucial to understand that these licences are necessary for businesses to function lawfully and that they must be obtained. Every business organisation has different compliances to make. A business may be subject to legal penalties, fines, or other consequences if it fails to secure the licences necessary to operate in its industry. For example, a restaurant business will want a Certificate of Environmental Clearance, a Food Security Licence, and a Prevention of Food Adulteration Act Certificate, while an e-commerce start-up will require service tax and VAT registration.

  4. Company Law Compliances: Meetings with board members, filling out crucial documents, auditing data, and producing reports are all things that a registered company must adhere to. They can be listed as:

  • Annual-General Meeting

  • Board Meetings

  • Appointment of Auditor

  • Director’s Report

  • Maintenance of statutory registers

  • Circulation of Financial Statement

  1. Taxation Compliances: The two types of taxes are taxes, both direct (Income Tax) and indirect (GST, Excise duty, Customs duty, etc.) In India, taxes are imposed according to nature and company operations. Here are several tax benefits provided to start-ups for their efficient growth while they are still in their nascent stage.

  • Three-year tax holiday in a block of seven years

  • Exemption from tax on long-term capital gains

  • Tax exemptions on investments above the fair market value

  • Tax exemptions to individual/HUF on LTCG from equity shareholding

  • GST based compliance

  1. IPR Compliances: Start-ups place a high value on originality, creativity, and uniqueness as the foundation of their success. They establish a company with the intention of introducing the world to a brand-new good, service, or method. Protecting the intellectual property rights necessary for growing their firm is vital for entrepreneurs. 

Also Read: How Can You Form A Company In USA From India?

Start-ups have a number of options for safeguarding these assets, including non-disclosure agreements, copyrights, trademarks, and patents.

  1. Labour Law Compliances: Start-ups must abide by the labour laws that come with opening a real firm. Rules like the Minimum Wage, Maternity Leave, or Protection Against Sexual Harassment in the Workplace, these laws are designed to shield employees from the possible exploitation of their employers. Additionally, they serve as a tool for holding both parties responsible for their conduct.

  2. Event-based compliances: Some are related to particular occasions or industries, such as compliance with FEMA for start-ups with FDI or Customs law for businesses who import or export. When a start-up deals with potentially hazardous goods or processes, environmental law clearance is required, whereas when it interacts with real estate, RERA approval and other compliance with property laws are required. Mergers and acquisitions or large transactions that would significantly harm competition in India would require clearance under the Competition Law.

  3. Contractual Obligations: Every business has agreements in place with various parties who play a role in how the firm operates, such as clients, workers, or vendors, through contracts.

Also Read: Startup Due Diligence explained

Any organisation must adhere to its regulatory requirements; the first step to ensure smooth operation is to comprehend and follow the applicable laws. To start a firm, every beginning entrepreneur must be familiar with all applicable regulations. One of the best ways to ensure that the business is always safe and avoids legal issues and implications is to hire an expert legal counsel who can advise, supervise, and maintain legal records.

How To Increase Authorised Share Capital?
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How To Increase Authorised Share Capital?

A company is made up of parts called shares. The maximum number of shares a company can issue is called authorised share capital. In India, a company can decide to increase this number before selling shares to everyday investors. This is also known as nominal capital. So, think of authorised capital like the company's growth limit. On the other hand, paid-up capital is the total of shares the company has already sold. This means, paid-up capital can never be more than the authorised capital. In simple terms, if a company's authorised capital is like its maximum capacity, the paid-up capital is how much of that capacity is already filled.

How To Increase Authorised Share Capital?

Following steps may be taken to increase the authorised share capital of a company:

Step 1: Verification of Articles of Association: The first step towards increasing an enterprise’s authorised capital is the verification of Articles of Association (AoA) to check if there is necessary authority to increase the authorised share capital, if not then the Articles of Association are to be accordingly changed which can be done by passing a Special Resolution as per Section 14 of the Companies Act.

Step2: Convening a Board Meeting: The next step is to convene a Board Meeting which can be done by providing of the notice of the same to the Director at least 7 days prior to the meeting and at the Board Meeting itself, approval is to be obtained the Board of Directors in order to increase the authorised share capital. Following this an Extraordinary General Meeting (EGM) is to be conducted and the date, time and venue of such meeting is to be fixed at the Board meeting. Other things that are required to be done during the Board meeting include issuing the notice of Extraordinary General Meeting to all the shareholders, auditors and directors of the enterprise.

The purpose of holding an EGM in this process is to obtain the assent of the shareholders. The approval of the shareholders is required to be in the form of an ordinary resolution authorising increasing of authorised share capital. It is to be noted here that if the Annual General Meeting (AGM) is to be conducted in the near future then this issue can be present before the shareholders under ‘Special Business’ and their assent can be obtained for the purpose of increasing share capital. The notice of a general meeting is to be issued at least 21 days prior to the meeting along with an Explanatory Statement as per Section 102 of the Companies Act. If there is a need to amend the Articles of Association then the company must file the form MGT-14 within 30 days after passing the Special Resolution at the General Meeting. Filing of form MGT-14 is a necessary step is Article of Association does not allow increasing of authorised share capital.

Step 3: Filing of Form SH-7: After conducting the EGM and obtaining the consent of shareholders the company is required to file form SH-7 within 30 days of passing the ordinary resolution at the general meeting. A certain amount of fee is to be paid while filing form SH-7 and along with filing the form, the company is required to attach and submit a copy of the Board Resolution, the notice concerning the EGM along with the explanatory statement, an authorised true copy of the ordinary resolution passed in the general meeting and an altered version of Memorandum of Association which has the new higher limit of authorised share capital.

Step 4: Increase in the Authorised Share Capital: if the procedure for increasing the authorised share capital is followed properly then the Registrar would authorise the request to increase the authorised share capital and the updated authorised share capital will be reflected on the Ministry of Corporate Affairs’ online portal. Following this, the company can increase its paid-up capital by attracting more investors to purchase their equity shares.

Conclusion

As the company grows and expands, or for the purposes of raising capital through an IPO, or to attract investors, an increase in the authorised share capital becomes essential. It is pertinent to know the procedure by which the same can be done. It is always preferable to obtain legal advice before you decide to increase the authorised share capital of your company.

Setting up a Sole Proprietorship Business in India
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Setting up a Sole Proprietorship Business in India

A sole proprietorship is the simplest form of company formation. In this form of business incorporation, you set up a business solely on your own. Sole proprietorship business is not separate from the owner, i.e., it does not have a separate legal identity of its own. The personal income tax return of the owner is used to file taxes for the business as well. In this form of business, a person alone is liable to pay the debts, if any, and enjoy the profits earned. A sole proprietorship is the preferred form of business for professionals such as consultants, lawyers, etc. Its popularity stems from factors such as simple to set up, low cost of formation, etc.

How is a Sole Proprietorship Business set up?

It is easy to form a sole proprietorship company. Since the entire business is done on the name of the owner itself, there is less paperwork to be done while setting up this kind of business. It is a hassle-free form of business. Any person who wishes to start a business that is not so complex, he/she may consider the Sole Proprietorship form of business. 


The following steps must be followed to form a Sole Proprietorship business:-

  1. Select a name and register your business: Name selected for business by a person can be any, but one must ensure that the name chosen must not be registered by others. After selecting a name, the person must register the name, if possible, the person must get the name trademarked. 
  2. Finding an appropriate location for the business: A person must decide whether he wants to do the business from home or at rent or purchase an office. If a person decides to work from home, then there's no need for finding an apt place for setting up a business. However, if a person is not opting for work from home, then he/she must find a suitable location for its business. If a person has set up a business premise, then it must be registered under the Shop and Establishment Act. 
  3. Apply for GST Registration: If the business is engaged in the sale of goods or services, it must apply for GST registration number. GST registration can be applied by providing certain documents such as Aadhar Card, PAN Card, and self-attested copies of the above documents. 
  4. Open a Current Bank Account: Most important is to open a current bank account. The person must open a separate current account in the name of the owner or business in order to avoid any mixing of the expenditure made for personal purposes or business purposes. 


Advantages of Sole Proprietorship

  1. The most important advantage of a sole proprietorship is its simplicity and that it is easy to establish and has a hassle-free process of establishment. 
  2. The owner himself enjoys all the profits earned. However, when there is a loss, he alone is liable to pay all the debts. 
  3. The person who sets up a sole proprietorship business he alone has authority over the entire business. He himself makes plans, invests money, supervises the business, enjoys profits.
  4. A sole proprietor and his business are not a separate legal entity, but it is one. Therefore, all the assets, liabilities, profits, and losses on the part of the owner. 
  5. In a sole proprietorship, the trader is taxed on the personal income of the owner, i.e., the tax is levied on the profits earned by the owner. Like other forms of business, the sole proprietor need not pay any other form of tax. 
  6. The sole proprietor can work for as long as he wishes, he may even sell it when is wishes, or may pass on to its heirs. 

 

Disadvantages of Sole Proprietorship 

  1. The owners are fully liable, i.e., if the owner fails to pay the debts, then the owner's personal property such as home, personal savings can be taken away to pay the debts. 
  2. The main disadvantage of a sole proprietorship is that it is difficult to expand the business due to factors such as lack of resources, lack of staff, and many more
  3. In the absence of a sole proprietor, the business can go haywire, i.e., it can cause huge losses if it is not managed aptly. 


Conclusion

A sole proprietorship is an excellent first step for those diving into the business world, especially if you're starting without much funding and want to gauge your product's appeal in the market. This business structure is essentially an extension of you as an individual, meaning you are the sole owner, and you hold all the decision-making power. The setup process is straightforward and cost-effective, making it ideal for those with a limited budget. You're not burdened by numerous formalities or paperwork, which are common in other types of business structures. This simplicity extends to compliance requirements as well, with fewer legal and financial regulations to worry about. However, remember that in a sole proprietorship, the owner is personally liable for the business's debts and liabilities. This means that if your business runs into financial trouble, your personal assets could be at risk.  In conclusion, if you're looking to start small, have little funding, and want to test your product in the market, a sole proprietorship could be a smart way to dip your toes into the entrepreneurial waters. As your business grows, you can always consider transitioning to a different business structure that better suits your evolving needs.

 

last updated on: 14 May 2023 

 

 

How To Start A Single Person Company in India
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How To Start A Single Person Company in India

The general misconception among prospective founders is that to start up, they require at least one more co-founder. What they miss out on is the fact that with the recent reforms introduced in the Companies Act it has been made possible to form a One Person Company or OPC which can be setup by a single person. Such a company works wonders for someone who wants 100% control over his company. However, an OPC may have certain issues such as not having the ability of introducing a partner, personal liability and not being high on the priority list of investors. Through this post, we discuss how is an OPC set up and what are the legal requirements associated with the same. 

 

Requirements for setting up a One Person Company

Following are the requirements for setting up a One Person Company:-

  1. Member:  A member of One Person Company should be an Indian citizen. He/she should have stayed in India for not less than 180 days in the preceding calendar year. A person cannot incorporate more than one OPC.

  2. Nomination: A member of One Person Company shall nominate name of another person with his consent. In case there is death of the member or there is member’s incapacity to contract, such another person would become the member of One Person Company.

  3. Director: There has to be one Director to form a One Person Company.

 

Steps for setting up a One Person Company 

Following steps need to be followed in order to set up a OPC:

 

  1. Applying for the Digital Signature Certificate of the proposed Director of the One Person Company.

  2. Applying for the Director Identification Number of the proposed Director of the One Person Company.

  3. Selecting a name of the Company and making an application for the same to the Ministry of Corporate Affairs. The Ministry of Corporate Affairs has started a web service by the name of Reserve Unique Service (RUN) through which a unique name can be reserved for a new Company.

  4. Filing an application for Incorporation of Company with the Registrar within the jurisdiction of the registered office of the company. The application is to be made in Form No. INC.2 for a One Person Company.

  5. Filing of application mentioning consent of Nominee. It is to be done as per Form No. INC.3.

  6. A fee is to be paid along with Form No. INC.2 and Form No. INC.3.

  7. Filing of Memorandum of Association and Articles of Association of the One Person Company. 

  8. Filing of forms with Ministry of Corporate Affairs.

  9. Payment of fees to Ministry of Corporate Affairs and stamp duty.

  10. Issue of the certificate of Incorporation.

 

Compliances required by an OPC


The following compliances are required for an OPC:

  1. Filing of annual returns

  2. Filing of financial statements

  3. Appointing of auditor

  4. Filing of income tax return

  5. Annual meeting: First meeting should be held within 30 days of incorporation. 

  6. Submitting to ROC the following documents: 

                  *  Balance sheet

                  *  Accounts of profits and losses

                  *  Cash flow statement

                  *  Change in equity

Those who read this article also consulted a startup expert to decide what is the right company for you.


Conclusion

A One Person Company (OPC) might be the right choice for you if you don't want to spend a lot of money to start your business and want to keep control over it. But remember, an OPC might not attract many investors because it doesn't offer them much. Plus, you can't offer employee stock options in an OPC. An OPC is a good option if you want to start a business on a tight budget without a lot of outside interference. Always take time to learn about your business and make a plan, and get professional advice when you need it. Also, keep up with any changes in the rules and regulations that might affect your OPC. Starting an OPC in India could be a great first step in becoming a business owner. With the flexibility and perks this type of business offers, you can really make your business grow and reach your goals. We hope this guide has given you a good overview of how to start an OPC in India. We wish you lots of luck on your journey as a business owner and entrepreneur!

 

Update on 14 May, 2023

 

Structuring your Startup as a LLP - To Do or Not To Do
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Structuring your Startup as a LLP - To Do or Not To Do

In the year 2023, every new business wants an entity with the highest return and the least amount of risk. A limited liability partnership (LLP) is a type of business in which the liability of some or all of the partners is limited to the amount of money they put into the business. Creditors can't take legal action against a partner's personal assets and income. LLPs are basically a flexible legal and tax entity that lets the partners benefit from economies of scale by working together and using each other's expertise, while also reducing their liability for the actions of other partners.

In India, these kinds of partnerships are governed by the Limited Liability Partnership Act, 2008, which says that at least one partner of an LLP must be an Indian citizen. Under this Act, there is no minimum amount of capital that must be put in. If the LLP's contributions are more than INR 25 lakhs or if its annual turnover is more than INR 40 lakhs, it has to have its books audited.

Registration

The Registrar of Companies is responsible for registering and controlling the LLPs. 

  1. In order to incorporate an LLP, the digital signatures are to be obtained from the respective partners. 
  2. An application should be made to obtain the Director Identification Number (DIN) or Designated Partner Identification Number (DPIN). 
  3. A Digital Signature Certificate (DSC) has to be acquired from a licensed Certifying Authority, and the same has to be registered on the portal of the Ministry of Corporate Affairs.
  4. Thereafter, a new user's registration should be made, and the person should apply for the name of LLP by filing Form 1. Any of the partners or designated partners may submit the form by appending the digital signatures and paying the required fee. 
  5. Form 2 relating to the incorporation of LLP has to be filled up after the approval of the name. Registration fees prescribed in Annexure A of the LLP Rules, 2009, should be paid. 
  6. The Registrar will then register the LLP within 14 days after perusing all the relevant documents and compliance with relevant provisions of the LLP Act. A certificate of incorporation will be issued as per Form 16. 
  7. After this, the person has to apply for a Permanent Account Number before the National Securities Depository Limited (NSDL).
  8. An agreement has to be filed within 30 days of the incorporation of LLP along with the information in Form 3 and Form 4. 


Advantages of an LLP Company

There are a lot of advantages in setting up an LLP company. 

  1. The organization and management of the internal business is easier and more flexible. 
  2. There is no maximum limit on the number of partners an LLP may have.
  3. The LLP agreements can be tailor-made in accordance with the needs of the partners.
  4. The funds can also be raised and utilized depending upon the needs of the partners. 
  5. No minimum capital limit required. 
  6. The cost of formation is lower as compared to other entities such as private limited company, OPC, etc. 
  7. No additional tax liability, such as dividend distribution tax is payable by the partners in LLP if they want to withdraw the profits. In the case of LLP, the provision of 'deemed dividend' under income tax law is not applicable, and no dividend distribution tax is payable as under section 40(b). LLPs are not required to audit their accounts compulsorily unless their contribution exceeds INR 25 Lakhs, or the annual turnover exceeds INR 40 Lakhs. LLPs only have to submit the Statement of Annual Return & Statement of Accounts and Solvency due to which they face a lower burden of compliance. 

Those who reac this Article also consulted a Startup Expert on LLP 


Disadvantages

However, there are also certain disadvantages in registering as an LLP. One should know them before taking a decision.

  1. In an LLP, funds cannot be raised from the public. Since it does not have the concept of equity or shareholding like a company, angel investors, HNIs, venture capital, and private equity funds do not invest in an LLP as shareholders.
  2. An LLP has to rely on funding from promoters and debt funding.
  3. It is mandatory for an LLP to file an income tax return and MCA annual return each year irrespective of their activity.
  4. In case of failure to file Form 8 or Form 11 (LLP Annual Filing), a penalty of Rs.100 per day, each form is applicable, and there is no cap on this amount.
  5. All the LLPs are taxed at a rate of 30%, even if they have different turnovers. 

Limited Liability Partnerships or an LLP is an alternative form of a legal entity that operates based on an agreement and offers flexibility without imposing detailed legal and procedural requirements. 

Conclusion

To sum it up, choosing to make your startup a Limited Liability Partnership (LLP) is a big decision. This type of business has some good points like limited responsibility for debts, easy-to-change management, and some tax benefits. But there are also some downsides, like the tough job of managing a partnership and potential issues with responsibility for problems.

Before you make up your mind, think carefully about what your business needs and what you want to achieve. Reflect on what your business is about, how many partners there are, and your plans for growing the business. It might be a good idea to talk to a legal or financial expert who can give you professional advice and help you make the best choice.

In the end, choosing the right type of business is super important for the success of your startup. By thinking hard about the good and bad points of making your startup an LLP, you can make a smart choice that will help your business do well in the future.

 

Last updated on: May 14, 2023

Things Nobody Told You About Setting up a Private Limited Company
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Things Nobody Told You About Setting up a Private Limited Company

A founder of a startup has a million things on his mind. How to establish an entity and which entity to choose are his primary initial concerns. The finest decisions are those that are well-informed. Therefore, we will discuss the formation of a Private Limited Company. As a result of investor confidence and the ability to raise equity investment, private firms have been viewed as the ideal structure for start-ups. However, they have a high formation cost and a complicated creation technique. Read on to discover information that nobody informs you about establishing a Private Limited Company.

Also Read: Procedure, Document Checklist And Costs For Incorporation Of A Private Limited Company

 

Requirements for setting up a Private Limited Company

Following are the requirements for setting up a private limited company:-

  1. Members: The minimum number of members are two and the maximum number of members are 200 for setting up a Private Limited Company. If two or more persons are jointly holding shares in a private limited company, then they would be considered as a single member. Also, the persons who are are present or past employees will not be counted in the number of members. 
  2. Memorandum of Association: The Memorandum of Association is the guiding document of a company. It contains the Name of the Company with last words “Private Limited”, details of the Registered Office, objects for which the company was formed and what would be the liability of its members. 
  3. Articles of Association: The Articles of Association shall contain Regulations for management of the Company. It regulates the relations inside the company and between the members. 
  4. Directors: There should be minimum 2 Directors in the case of a Private Limited Company.
  5. Minimum Authorized Capital: A private limited company requires a minimum Authorised capital of INR 1 Lakh. This is the money, the company receives from its shareholders.
     

Steps for setting up a Private Limited company

The following steps are required to be followed while setting up a private limited company: 

  1. Apply for the Digital Signature Certificate (DSC) of the proposed Directors of the Private Limited Company.
  2. Apply for the Director Identification Number (DIN) of the proposed Directors of the Private Limited Company.
  3. Apply for the availability of names. Make sure to choose a unique name.
  4. File an application for Incorporation of Company with the Registrar within the jurisdiction of the registered office of the company. 
  5. File of Memorandum of Association (MoA) and Articles of Association (AoA).
  6. Apply for PAN and TAN of the Private Limited Company
  7. The Registrar of Companies (RoC) issues Certificate of Incorporation along with PAN and TAN of the Private Limited Company.
  8. Open a Current account on the Private Limited Company’s Name.

The Ministry of Corporate Affairs has now prescribed a default option by the name of Simplified Proforma for Incorporating Company Electronically (SPICe). A Form INC-32 is to be filed through the means of SPICe. Along with this, there is also filing of eMoA (Electronically Memorandum of Association) and eAoA (Electronically Articles of Association. These are in forms INC-33 and INC-34 respectively. 

Those who read this article also consulted a Startup Expert

Conclusion

Starting a private limited company can be a great idea for entrepreneurs. This kind of company is popular among startups because it's easier to give some of the company to investors in return for their money. If you start a private limited company, it can help keep your personal stuff like your house and car safe if the business runs into trouble.

Yes, it can take time and be a bit tricky to set up, but the perks like paying less tax, appearing more trustworthy, and protecting your personal things are worth it. Before you jump in, it's a good idea to do your homework, get some expert advice, and think hard about what starting a company means. If you're determined and have a good business idea, starting a private limited company can help your business grow and succeed in the long run.

 

Last updated on: May 14, 2023