Legal Compliances for Start-Ups in India

Successful startups are ones that are driven by passionate entrepreneurs who are focused on building unique solutions that deliver customer delight. 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.

From formalizing a founders’ agreement to safeguarding intellectual property to enforcing business contracts, it is essential that entrepreneurs are aware and up to date with the latest laws governing their business and market.

Page Contents Startup Company: What Is It? Eligibility Criteria for Startup Recognition Importance of Legal Compliances of Startups in India Legal compliances and regulations for Startups that you need to be aware of Conclusion

Startup Company: What Is It?

Startups are young companies founded to develop a unique product or service, bring it to market and make it irresistible and irreplaceable for customers.

Startups are rooted in innovation, addressing the deficiencies of existing products or creating entirely new categories of goods and services, thereby disrupting entrenched ways of thinking, and doing business for entire industries. That is why many startups are known within their respective industries as “disruptors.”

You may be most familiar with startups in Big Tech—think Facebook, Amazon, Apple, Netflix, Google, collectively known as FAANG stocks—but even companies like WeWork, Peloton and Beyond Meat are considered startups.

Eligibility Criteria for Startup Recognition

• The organization to be framed must be a private limited organization or a limited liability partnership.
• It ought to be new firm or not more seasoned than five years, and the all-out turnover of the organization should not surpass 25 crores.
• The organizations ought to have gotten the approval from the Department of Industrial Policy and Promotion (DIPP).
• To get approval from DIPP, the firm ought to be supported by an Incubation fund, Angel Fund or Private Equity Fund.
• The firm ought to have gotten a supporter guarantee from the Indian patent and Trademark Office.
• It must have a proposal letter by an incubation.
• Capital increase is excluded from income tax under the startup India scheme.
• The firm should give innovative ideas, products, or services.
• Angel fund, Incubation fund, Accelerators, Private Equity Fund, Angel network should be registered under SEBI (Securities and Exchange Board of India).

Importance of Legal Compliances of Startups in India

The startups in India often overlook the importance of compliance either due to lack of knowledge or due to their let go attitude.  To function smoothly in the market, it is essential for startups to be compliant with the rules, regulations and laws set forth by the government.

Programs like ‘Startup India’ and ‘Make in India’ by the Government have facilitated a large-scale increase in establishments of new businesses and have comparatively simplified compliance for startups. Startups, after being registered with the Ministry of Labor and Employment, can self-certify their compliance with various labor laws and are also exempt from inspection under the same.

A successful startup, as it grows over time, needs a compliance mechanism to deal with the ever-rising needs of legal compliance.  Every act of such an established startup, from hiring new employees to establishing new office is governed by the laws of the land and compliance to such laws, is of paramount importance.

A startup can fulfill its compliance requirements either by establishing a legal department within the company or by outsourcing its legal audit to experts in the field.

Legal compliances and regulations for Startups that you need to be aware of

If you have a great idea and are leaning towards materializing your own startup dreams, here are some of the legal compliances and regulations that you need to be aware of.

1. Compliance under Labour Law

Labour laws in general deal with compliances under the Minimum Wages Act, Workmen’s Compensation Act, Industrial Dispute Acts, etc.

The most important among these acts in compliance with provisions of Sexual Harassment of Women at Workplace Act which is often overlooked by the startups and later must face a penalty for the same. Every employer by an order in writing must form an Internal Complaints Committee under Section 4 of the act where women can register their Complaints regarding Sexual harassment.

In case of non-compliance with the provisions of the act, a fine up to 50 thousand rupees shall be imposed if the offense is repeated more than once punishment imposed can be twice of that imposed at the first instance. Non-compliance can also lead to cancellation of the employer’s license or withdrawal, non-renewal or cancellation of registration required for business by government or any other local authority.

2. Compliance under Environmental Law

Increasing environmental awareness has made the laws related to the environment more stringent and non-compliance with them leads to higher penalties.

Post the enactment of the National Green Tribunal Act, 2010, which incorporates all other environmental laws under its umbrella, the penalties for non-compliance with such laws have increased manifold.

Section 26 (1) of NGT Act, 2010 states that the tribunal can award a fine up-to 10 crores and imprisonment of 3 years or both for the non-compliance of an order, award, or decision by NGT. In case of a continuing offence, the fine can be escalated up-to 25,000 Rupees per day until such continuance.

3. Compliance under Companies Act, 2013

A startup that is incorporated as a company under the Companies Act, 2013, must conform with its provisions. The Companies Act, 2013 regulates the appointment of directors, the way the annual general meeting and the board meeting is to be conducted, appointment of auditors, other basic requirements like having PAN (Permanent Account Number) and TAN (Tax Deduction and Collection Account Number), bank account, etc.  after the incorporation.  The businesses are expected to comply with the rules and regulations applicable to them to avoid the penalty that may be incurred in case of non-compliance.

4. Compliance under Income Tax Act, 1961

Every business is liable for filing of income tax returns and other procedural liabilities under the act. The Income Tax Act specifies a time limit for such filing and in case of any discrepancy, for an appeal to the higher authorities. It is essential that business, small or big, take such rules seriously and comply with them accordingly.

5. GST Compliance

Businesses or startups having less than Rs.40 lakhs per annum turn over are exempted from being considered for GST registration. This provision will help small businesses rise at a faster pace without being liable to GST in the initial days of their growth.  The amalgamation of multiple taxes under GST has facilitated the expansion of profits, specifically for startups. The benefits, however, do not release startups completely from their liability to comply with the provisions of GST. As the startup grows over time, it needs to comply with the rules under GST.

There are other laws in India which one needs to comply with to run a successful startup. It is difficult for a business entity to keep a check on all the compliances it needs to fulfill along with its profit-making goal.

Conclusion

A startup is faced with several issues that must be dealt with to grow into a successful organization. Apart from planning the most effective business strategy for the company, the startup needs to look at the regulatory environment, various legal issues, and the laws of the country where the start-up is proposed to be set up. In addition to this, the startup will also need to examine the regulatory and tax regimes of locations it plans to do business in

Adhering to legal requirements is very important for any organization; knowledge and compliance to applicable laws is the first step to ensure smooth business operations. Hiring a professional legal counsel to provide advice, oversee and maintain legal records is one of the best ways to ensure that your company is always safe and does not face legal complications and consequences. So, what are you waiting for? Contact Legal Window now.