Legal Compliances Checklist for Startups in India

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.

Startup Due Diligence Explained

Startup Due Diligence Explained

Due diligence in the context of startups refers to the audit/evaluation of the business that angel and Venture Capitalist investors conduct before determining whether to invest. Effective due diligence is, therefore, essential for startup fundraising. Due diligence is a concept everyone who has ever watched Shark Tank, Dragon's Den, or any other program where billionaire investors test startup entrepreneurs would be familiar with. Investors are introduced to several businesses throughout the programs, along with their financials and expected growth. The presentation is polished and assured, and suddenly it ends because the entrepreneur left out a crucial detail. A concealed debt, litigation with a former business partner, or some other ethical problem with the proposed product is frequently discovered by investors.

What is due diligence?

An informal introduction to due diligence can be seen in the banter between startup founders and investors on Shark Tank and similar programs. In truth, due diligence is a far more formal and regulated procedure in which investors thoroughly examine every facet of the company.


As used in the context of startups, due diligence refers to a series of inspections an investor might perform on a startup to verify that particular facts about the company are accurate or that the investment is a suitable strategic fit. The second objective of the due diligence process is to find potential red flags that should have been mentioned before the due diligence. An acquirer who is considering an acquisition may also conduct due diligence.

Who performs due diligence?

The type of due diligence required by a company, as well as who will perform it, will be determined by the stage of the business and the amount of the transaction.


For instance, a founder raising £100,000 in pre-seed funding for their startup will receive fewer checks from angel investors than a business raising £1M in Series A funding from a venture capital company or being acquired by a corporation for £100,000,000.


For early-stage investments, investors frequently conduct their due diligence, which typically includes speaking with the founder several times to understand their vision, methodology, and whether they possess the necessary skills to deal with unpredictability.


Lawyers and accountants will frequently perform due diligence for a significant transaction, ensuring that all paperwork and financial projections are accurate. Background investigations on the co-founders and key management team can also be part of due diligence and can be done by other parties.

Process of due diligence and checklist

When a startup engages with an investor, informal due diligence begins. A general definition of the company is given using the seemingly trivial questions that investors pose. The procedure can start once the term sheet has been approved by both the startup and the investor.


A venture capitalist request list, including several information requirements, will now be sent to the startup by the investor, who is usually always a VC investor.


The complexity of the company and its ecosystem, the speed at which papers may be retrieved, and the VC investor's ability to obtain and process information quickly all affect how long due diligence ultimately takes. Naturally, if there are any anomalies throughout this procedure, it will also slow down or stop altogether. The procedure should take no less than two to three weeks, but it could go on for up to two months.


Going through a due diligence process as part of the evaluation verifies that the organization under consideration is able to respond to inquiries and provide sufficient justification when needed.  The due diligence checklist might, for instance, demand that the company's audited financial records, including its capitalization table balance sheet, financial statements, income statements, and business plan, be disclosed as well as the directors' identification proof and the company's audited financial records. 


In order to ensure that the company's intellectual property rights and cash flows are adequately protected and that the company is not bearing an excessive amount of liability or capital expenditures in its agreements, due diligence checklists also include reviews of contracts (redacted when necessary), such as stock option or employment agreements.


To make sure the company's intellectual property is adequately safeguarded, the due diligence checklist can also include an examination of patents, trademarks, and copyrights. Startup due diligence frequently includes interviewing the management team concurrently with these operations to better understand the methods that produced these data.

When due diligence takes place and its outcome

In advance of a financial transaction, due diligence is performed. Due diligence may also be performed in connection with a regulatory investigation or following security failures like breaches. Startups should set themselves up for due diligence from the start by gathering the appropriate paperwork and organizing it in a way that makes it simple to retrieve it should the need arise. 


A due diligence report that summarizes the process will be produced as a result of the process, enabling the investor or acquirer to decide whether to make an investment or pursue an M&A transaction. M&A transactions or investments will be given the all-clear to proceed in the form of a term sheet stating the parameters of the agreement, assuming the company has submitted all necessary papers and the due diligence has not revealed any red flags.


The investor is almost certainly interested in the product or service if the due diligence stage has already been achieved. The investor looks out for almost everything in the due diligence process, including but not limited to product/service, market, people, financials, equity structures and risks. Being honest with potential investors or acquirers about risks and any aspects of your company they might be concerned about is crucial for startups. Early discussion allows for establishing a course of action before these concerns are classified as red flags.