Decoding The Legal Maze In The Business Terrain: All About Legal Regulations For Start-ups

INTRODUCTION

India has been an emerging sector for new era startups, it has been termed as a globally the largest producer of new innovations, the means of various business ventures/startups.India previously bloomed well in the segments of IT and software, but now is expanding rapidly towards the sector of new startups, these startups are a balustrade in boosting the economy of India as they are oriented towards providing an income to someone and not working for a firm based outside India.These startups of today are potentially the unicorns(a company which is valued over 1 billion U.S Dollars) or the decacorns of the future.Today, India holds the 3rd highest place in the startup ecosystem in the world with over 1.2 million actively registered startups and 113 unicorns in India.Not limiting to this, India has about 12000+ patented startups till date.The Covid-year, 2021 proved to be a Unicorn year as it gave birth to more that 45 unicorns which had a valuation of $102 Billion.The cities that aced in this were Delhi NCR, Bangalore, Mumbai.Few of these startups were related to conversational Messaging, cryptocurrency exchanges,Cloud kitchen services and Direct to customer services.

Few startups like Zomato, Policy-bazaar gained so much wealth that they launched their own IPO in the market.One of the other established unicorn in the educational field is PW(physics-wallah) which drastically captured the market.

These startups are DPIIT(Department of Industrial Policy, Promotion, and Internal Trade) recognized.Basically, DPIIT provides the Startup India Recognition Certificates to the eligible startups.As per General Statutory Rule 127(E), startups that meet the definition prescribed under this are considered to be a part of ‘Startup India Action Plan’.There are several points to consider for a startup to get a recognition.As there could be various forms of startups, but to get one registered, it has to fall under certain norms/categories to be recognized.Such as:-

1. It should be registered as a private limited company or be registered as a partnership firm or a LLP(Limited Liability Partnership).
2. The turnover should not be more than a sum of 100 Crore Rupees in any of the years of its operations till date.
3. There is a fixed period in which a business is referred to as a startup. For instance, a firm may only be considered to be a startup up-to the first 10 years from the date of its commencement.
4. The startup should be aimed at the point of inventing/innovating/improving the products(which may have existed for some time).
5. It should be aimed at the process of providing services or processes to provide new openings(jobs) for individuals or to create wealth.
6. One of the important segments of calling a business a startup is that, for an entity to be called as a startup, that entity should not be a reconstruction of a pre-existing business that could be due to splitting or some other reason.This basically changes the concept of startup and hence, is not regarded as one. 

One of the other benefits that a registered startup gets is the tax exemption under Section 80 of IAC of the Income tax act.Once the clearance certificate is issued to the firm,it can apply for exemption from tax for consecutively three financial years, in its span of ten years(since its incorporation).The eligibility for getting exempted from tax is same as the criteria for the registration, but one major important thing to note is that the ‘startup should be registered after April 1st, 2016’.Another mode of Tax exemption is under Section 56 of the Income Tax Act, also known as the Angel Tax.This basically regulates the raised capital.

Above mentioned is the generalised idea of what a startup means and what essentials it has to go through to get it running swiftly.For this, it's quite important for the startup to acknowledge and consider what type of startup they want to get registered as or what type of business they want.There could be a variety of different startups in this field(this is a critical determinant in the overall success of a startup).The crucial steps includes getting registered under the Ministry of Corporate Affairs, obtaining a PAN(Permanent Account Number) card, get GST (Goods and Service Tax) and if the business has international clients one must comply with FEMA the norms of (Foreign Exchange Management Act).Some of the major categories are listed below:-

• Sole Proprietorship.
• One Person Company.
• Partnership Firm.
• Private ltd. Company.
• Public  ltd. Company.
• Limited Liability Partnership(LLP).
• Cooperatives.

Sole Proprietorship

Sole proprietorship is the simplest form of business ownership(only includes one person solely, who is responsible directly to the enterprise and funds the capital solitary).This segment business is best suited for small scale venture.The key benefits of this model is simplicity and the ease by which it is formed and no requirement for registration.It is not mandatory for this business to be registered, but it’s advised to get registered as it may be helpful to to file a suit in case things go against it or any other legal troubles arise,hence, this model is said to be registered.Sole proprietorship is one of the most cost effective forms of business as it is suitable for small scale operations but there’s a downside to it too, as one may have unlimited liability which may be a significant risk and there is a limited scope in growth due to the financial constraints due to which the expansion is possible to a certain extent.To get a Sole proprietorship registered, one must ensure that the documents like PAN and Aadhar Card of the proprietor are there matching with his address proof.Along with the bank details of the proprietor should be there.Aforementioned, as it is not formally needed for a proprietor to get registered but to require some licences and permits with regard to the business one may get themself registered either as a micro or small or medium enterprise under the MSME Act 2006.One thing to note is that in case a proprietor has an annual turnover more than 20 Lakhs or more one has to get themselves registered under GST.Different locations/states have different labour regulations are there and proprietor should get them registered under State’s Shops and Establishment Act(For e.g The Uttar Pradesh Shops and Commercial Establishments Act).

One Person Company

An OPC is distinct legal setup where the individual sets a whole business and has a limited liability.Basically it benefits like bothe for instance from both the Sole Proprietorship and a Private Company as it offers limited liability.Although, with the benefits it gets, there are several legal documents required to get started.For e.g, MoA(Memorandum of Association) this is submitted to the registrar of the company, AoA(Articles of Association), Proof of registered office with PAN and Aadhar Card accompanied by the nominee’s consent are to be submitted by the means of Form INC-3[it is basically an instruction kit for filling consent form(e-form)by the nominee].After filling the required documents, a declaration by a person who is a qualified professional should be made stating all necessary legal.To get this registered and DSC(Digital Signature Certificate) and a DIN(Director Identification Number) is required.After this, all the relevant documents are required to be attached to a SPICe+ form, this is inclusive of MOA, AOA, all the declarations made, proof of the registered office, appointment of the nominee and other documents as prescribed by the MCA(Ministry of Corporate Affairs).

(SPICe+ form -it is a special type of integrated web form that offers 10 different services by 3 union government ministries such as Ministry of Labour & Department of Revenue in the Ministry of Finance and the Ministry of Corporate Affairs, it basically saves many procedures/time and cost towards starting a business.It has been an integral part of various initiatives such as the concept of Ease of Doing Business (EODB). 

Private Ltd. Company

Governed under the Companies Act, 2013, this structure of businesses is a separate legal entity(basically all the company’s debts or responsibilities are of the company) of business form where the registered owners are basically offered a protection from liability.Though it has complex and stringent compliances to be adhered to but at the same time provides much more credible source,hence, if a business is an ambitious one it often opts for this as a startup.Also, this has access to funding and scalability comparatively to others.In a private company the blend of creativity and security structure is seen as it is created by a number of people(this basically safeguards the assets of the directors and the owners).A company has no constraint in getting a big capital sanctioned as there could be external investors who may issue loans/debentures.To get started the basic documents required are a passport-sized photo, proof of identity and address proof of Indian nationals for directorship, Self-attested PAN card copy, Aadhaar card, Notarized documents, Business address proof along with an NOC(no objection certificate).After the documents are checked and if no objections are raised then the process of registration starts which requires DSC(Digital Signature Certificate) and a DIN(Director Identification Number), SPICe+ Part A, SPICe+ Part B.

Limited Liability Company/Partnership(LLP)

Limited Liability Company/Partnership(LLP) as the name suggests benefits like both partnership and a limited liability protection of a company.One of the major benefits a partner may get is that if the company ever goes bankrupt or faces insolvency, the partners are only liable to the agreed contribution they had(mitigates the personal risks.Limited Liability Partnerships are subjected to fervent craze among startups these days as its puts forward a delicate balance between the operational agility and the protection against liability.The basic documents required to start a Limited Liability Partnership are:- Proof of registered office with PAN and Aadhar Card, passport-size photo, proof of identity and address,Digital Signature Certificate (DSC).After these documents are submitted and verified a DIN(Director Identification Number) is required along with a name for the company in the Draft containing the LLP agreement.Another Form for incorporation of LLP(FiLLiP) is required which basically includes the a declaration signed by the partners which states that they agreed to accept the post as a partner and would be readily available for regulating the functions of the firm.RoC will issue the certificate of incorporation if the submitted documents and registration succeeds.

Partnership Firm

A partnership refers to a coalition between at-least two or more people/companies who have a similar target or a specific target to achieve.In a partnership, the sharing of ownership is present along with sharing of profits and liabilities.However, partners may be personally liable for debts.As much as this is beneficial as it offers huge resources and a broader spectrum of expertise but along with these greater benefits there is an increased amount of risk a firm may face if it is on the verge of insolvency/bankruptcy or is a major loss making sector.One of the important aspects while entering a partnership firm is that while undertaking declaration or signing agreements one has the duty towards the other to reveal all the information and keep things transparent as conspicuousness may not  cause problems in the future.For e.g,outlining roles/responsibilities, duration of partnership, entry and exit roles make an essential part of this.To enter a partnership or a partnership firm, only few formal documents are required i.e PAN and Aadhar card of designated partners and address proof with a Partnership deed.After filing these documents, to get the partnership registered, a Designated Partner Identification Number (DPIN) and a Digital Signature Certificate (DSC) would be required.

Cooperatives

This is a type of a business model that basically functions on the principle of mutual help or assistance.This type of business is basically governed and managed by the Multi-State Cooperative Societies Act, 2002 and the corresponding cooperative societies.For e.g, housing cooperative or an agriculture 

Public Ltd. Company

The structure of a public company is different from that of a private company, for e.g in a private company which by its virtue, restricts the members to maximum 50 and transfers its  shares which is unlikely to be done by a public company.Similarly, in a public company the minimum paid up capital is 7 lakh rupees.The thing to be noted is that a public company cannot be called be startup specifically as its spread over a larger area and startups are generally young innovative company in its early stages of its development.The documents required here are address proof, with a valid PAN along with the identity of all share holders and the directors.With the basic details(including the personal details) there must NOC(No Objection Certificate) issued as well,DSC(Digital Signature Certificate) and a DIN(Director Identification Number), MoA(Memorandum of Association),AoA(Articles of Association),Digital Signature Certificate (DSC) of the directors.If the applications are verified, the ROC would issue the certificate of the Public Ltd. Company.

The steps for choosing a business for startup is quite essential in determining the outlook of it in the future.This is a step towards a strategic foundation for the venture as starting a business is a complex endeavour that revolves around legal and regulatory challenges.Complying with the labyrinth of laws or requirements are the key to ensure success and avoid costly legal pitfalls.Startups should evaluate the pros and cons of a particular segment and act accordingly

To get things swiftly done, one must get their specific business/startup registered as per the norms of the industry and the laws pertaining to it.This may help the startup from any legal troubles and play a vital role in the IP(intellectual property) sector of a company such as the trademark, the brand logo/brand name.These things are also crucial in maintaining the credibility of the brand/company/firm amongst the clients or the investors.The valid documents should be approved by a RoC(Registrar of Companies), this provides for instance the business licences(trade licence for restaurants/shops) or different permits such as for getting GST registration(if the turnover of a company exceeds a certain threshold), for food related business the FSSAI(Food Safety and Standards Authority issues) licence or a pharmaceutical company -DCGI licence(Drugs Controller General of India).The simplest way of getting registered is by following the online instructions of the government to set up an account and start(these details are found in www.StartupIndia.gov.in ).After the startup’s account is successfully registered by following the standard procedure of for e.g getting DPIIT recognition,there are a few documents to be annexed in case a legal issue arises.A certificate of incorporation is issued to the the registered business which is required to be annexed along with it LOR( Letter of Recommendation) is required to be submitted.In some cases a business would be working differently and hence to protect its product or safeguarding it the IP Protection is applied.For e.g a patented product publication report, which may be published in the Indian Patent Office Journal could be supportive and be a substantial legal proof of originality.Other important documents include a TAN (Tax Collection and Deduction Account Number) from the Income Tax Department, the other document is a PAN card as for all the important transactions a PAN may provide along with  all the tax benefits to a startup as aforementioned.

Another important legal segment of obtaining a licence is a getting an environmental permit as per the industry norms or the required consent from the respective control boards so that the environment regulations are maintained.In few businesses the registration of the EPFO(Employees' Provident Fund Organization ) and ESIC(Employees' State Insurance Corporation) are mandated by law(this is done to benefit the employees).Apart from these laws/requirements there are several labour laws too that need to be complied with the industry standards.Basic labour laws include the employment contracts(basically mentions the terms and conditions of a contract inclusive of the rules and responsibilities,benefits and termination clauses), Minimum Wages(ensures that the minimum wage criteria is fulfilled, because if this is not followed, a legal action may be taken against the company), providing equal opportunity and do no discriminations on any grounds as per Article 14, 15 and 16 of the Indian Constitution.

Not confined to this, there are other important legal agreements and contracts that are important in protecting a startup or could be a reason for their downfall if the things are not followed.These include the Vendor agreements(also known as the supplier contracts, which state the basic terms and conditions under which either goods or services are bought), Partnership Agreements, NDAs(Non-disclosure agreements) which are legal contracts which is basically a set of terms and conditions that prohibits disclosure of any confidential information to anyone.ToS(Terms of Service or User Agreements) are a type of legal contracts which basically exists between an entity that provides service(for e.g a app based service provider) and its user.These User Agreements outline all the terms and conditions that are a must to adhere with while the platform of a service is being used.

While it is important to follow the legal procedures, it quality important to legally assess and take necessary precautions while raising funds/investments for the startup.The first being the evaluation of the requirements of the funding, if this is done correctly it greatly helps the startup in preparing a comprehensive startup forecast(this includes the projected business growth in a particular/specific time fragment.Basically, this is done by analysing the data of sales, conditions of the current market etc).Secondly, the process of Assessing the investment preparedness is important too, it determines whether a startup is actually ready to raise financing additionally to recognizing the financial requirements.If the predicted returns are possible and the board is convinced they become possible investors(Things like market Position Revenue Growth, ROI, Competition is considered).Another crucial step in this is finding the correct investors(this plays a huge role in any company’s setup).The pitch of sales and the investing thesis(which talks about the approach that is taken in investing) are potentially the main segments which attracts the investors.

Even after due care there may be some instances where a startup faces stumbling blocks.It may be finances, it may be legal problems or complex regulatory permissions under particular statutes which may be difficult to obtain.Despite of these, a startup is more likely to do some thing that is a specific legal mistake which could be the sole reason for downfall of the startup.The general startups that a startup may face are like getting a desired Capital - The core problem a startup faces is the one which faces a problem in generating enough funds for running smoothly.In the nascent stages of a business it is quite a big task to generate an income or gather investors to generate capital.If sufficient capital is not generated or the inflow of money is not there, the startup may fail in basic R&D and fails to hire the requisite staff etc.Due to these complications, the companies/startups focus on other methods to gather the funds such as crowdsourcing, angel investors etc.Other miscellaneous problems

includes a variety of risks that could potentially be a reason for the downfall,such as lack of qualified workers, Infrastructure issues, the research to right clients and cultural issues.

Not Choosing Proper Business Idea and Seeking Legal Support

The core reasons for the failure/pitfall of the business is neglecting or not properly analyzing the proper incorporation of type of business they want to start or grow into.The owners in India have a little idea in the different types of business that exist.Failing to understand or take the ground steps could be a mistake with such repercussions like tax complications or liability issues from which a startup may never recover.Each business/startup type has a different set of advantages for e.g  limited liability partnership (LLP), or private limited company, has its own set of advantages, disadvantages, and legal implications.These small yet important steps could be crucial to avoid any blunders in the future.Incorporation of a business/startup also means there has to be a legal registration of the same whose failure may expose the founder to the risk of losing his personal assets to these risks and legal liabilities.Hence, it is quite important to refer to tax handling professionals/attorneys for understanding the unique characteristics of each business structure and considering factors such as scalability, funding requirements, and legal compliance, entrepreneurs can make an informed decision.One should not wait till last moment as it the legal aid is limited and could cause further challenge to an  organization.As a result, these hindrances could halt in a business venture.

Intellectual Property related Problems

Another pitfall, a company faces is over the issue of choosing a potential trademark or a Intellectual Property related issue.Especially its seen in the current day businesses that due to the exponential growth in the sector of business various domains or trade names belong to one particular business for e.g a business website may have ‘.com’ in the end the other may have ‘.in’ in its name making them different.Although, it is seen even the small distinctions like .com cannot be very confusing,hence, it is suggested to use different names/spellings to stand out in the market.Because if firm chooses such a name that infringes another brand’s logo/trademark/tradename it could lead to legal issues or rebranding fees.Hence, it is suggested to the firms to check different databases present for similarities or surf the net with typing the similar domain name they are trying to get.

Failure in Complying with the Requisite Permits

The Firms have to submit various documents in general.In some cases it requires a specialist of the legal sector to directly handle the issuance and filing these documents.Sometimes, when there’s an absence of an attorney or due to some negligence, there may be some pending obligations which may cause huge troubles to the startups.It is hence, quite critical to analyze and submit the documents/permits carefully and keep a track on the expiration of few licences/permits and the things related to their renewal.Some of these permits are essential in getting tax benefits.Therefore, a new startup should be extra careful while getting itself registered, else it may face serious implications, including the penalties and in extreme cases the shutting down of the business.

Not able to Ensure Regulatory Compliance:

Obtaining a licence could be a lengthy process, this depends completely on the business and its type.Also, it is industry/state specific in getting the appropriate licence.This basically means the startups or the companies should engage in at least in regulatory frameworks such as environmental guidelines, local laws, environmental guidelines and safety standards.If a company Fails to secure these documents, it may be penalised and can attract fines and penalties from regulatory authorities, disrupt business operations, and tarnish the startup’s reputation and the trust it has amongst its clients. It is vital for entrepreneurs to conduct thorough research and understand the specific licences and permits required for their industry, to avoid these pitfalls.Bunch of experienced legal experts or consultants with expertise in regulatory compliance can provide valuable guidance and ensure adherence to the necessary procedure.

Non Compliance with Tax and Labor Laws:

A critical aspect for startups operating in India is Compliance with tax and labour laws.Neglecting tax and labour obligations and any failure to comply with these laws can have serious repercussions, including financial penalties, legal troubles, and reputational damage.If timely filing of tax returns, payment of taxes,adhering to GST (Goods and Services Tax) norms is not properly done it can lead to heavy penalties and even legal actions such as a suit from the corresponding tax authorities.Some small yet important regulations to be maintained by a company should be maintained as well such as norms like minimum wages/working hours or any other important statutory regulations if are not fulfilled or there are short-comings may cause fines or disputes.By Implementing a robust process, by maintaining up to date records along with regular reviewing and updating compliance practices will lower the the risks of penalties and legal problems. 

Non Compliance with Agreements or Legal Contracts

Contracts play a pivotal role in any form of business it may safeguards the personal assets of a person and protects them from legal liabilities or any risks that could burden the startups proceedings or adversely affect its stakeholders.The contracts form a legal obligations containing legal responsibilities/tasks or duties one has to perform(for e.g it may contain clauses signed by the partners that they would work for regulating the business).Hence, it is very crucial in drafting a comprehensive contract which is transparent(this could be achieved by a legal advisor or a person who has a forte in making contracts with proper legal bindings, as a contract which may be structured properly, may sway away the potential risks or problems).Aforesaid, the terms and conditions , roles and responsibilities should be clear, the scope/duration of work should be clear, because any ambiguity in the contract may cause serious misunderstandings and could potentially lead to filing of suits and internal problems, breach of contracts or very costly legal battles.Hence, drafting a contract is a groundwork to making a good foundation in a firm.Clarity, communication and transparency are the key to in achieving the target without battles/disputes etc. as ambiguous language may create confusion, differing interpretations or even in some case could be used against the policy of the firm if there is ever a breach of contract.A contract which is drafted should be a comprehensive one, i.e it should never miss to mention the key details and should be directly on point and must include relevant information such as payment information or the deadlines.It may be an easier method, to used pre made contract templates but a legal advice should be taken before entering into one.There untailored contracts fail to include information which is unique about the startup and the way it approaches things.Also, in some cases this information may not be even relevant as per the Indian Laws.As every a startup has its own sets of risks and liabilities which the template may not cover.

If any business and personal finances are mixed

Its crucial to protect any asset that is personal as it may help in preventing the financial risk and personal liability.It is essential for owners of different startups to avoid common mistakes and implement proper strategies for a business to excel.Protecting personal assets ensures that the personal finances remain intact.The thin layer of separation provides a layer of help and protection in case any legal problems arise.Mixing personal and business finances, failing to establish a legal entity may jeopardise personal assets another way a personal asset may be jeopardise is when regulation enforced by law is breached.Hence, to mitigate these risks the founders of various businesses should establish their businesses as a separate legal entity and not as a blend of their personal asset and their professional asset i.e a startup.Again the role of legal advisory comes into a crucial play with regard to establishing a business and the various regulations it has to comply.Therefore, it is advised to every business(basically a new one) to seek legal guidance before entering into the market is a must, as it would definitely help the businesses to overcome any problem which is legally oriented in the future.