Planning out your own business is not a tough job, but what happens when you are fixed into the legal matrix of laws? In a country like India which ranks 130 out of 189 countries in ease of doing business report, one should be well aware of the existing laws and procedures. A startup cannot focus only on planning the most effective business strategy but should also focus on the regulatory environment, various legal issues and the law of the country where it plans to start its operations.
In this article, we shall try to bring forth the legal requirements for a startup.
Once the idea is conceived, the promoters /founders should focus on the structuring of their business. This would require them to first decide the location for their business. Once the targeted audience and area is decided, ask yourself “where is my management team?” Yes, you need to find one and make sure its cost effective .Your business idea needs to be consistent with applicable regulatory consideration .Tax consideration may not act as a primary issue for setting up a business, but as it grows and generates income you may want to restructure to more efficiently plans. It must be noted that if not initially thought through (on at least a preliminary level) re-structuring later may be expensive and fraught with potential risk of being subject to additional taxes. The startup has to consider the nature of its operations, the attributes of the markets, and where it proposes to hold its intellectual property while determining the location which is most suitable for its business.
Are you planning on going global? One of the principal ways is by migrating the holding structure of the startup from India to a reputed offshore jurisdiction (such as Singapore or Mauritius). From a tax standpoint, flipping the ownership offshore may entail substantial tax leakage, and to that extent it is advisable if the flip is undertaken at early stages before the value is built up in the Indian asset.
You might have heard your colleague working for a LLP (Limited Liability Partnership). LLP can be much cheaper in terms of tax bills, and good for service, family, lifestyle businesses etc., especially when you don’t plan on raising any investment in the near future. It helps you organize your internal structure as a partnership based on agreement. You can always convert your private company, partnership firm in an LLP and vice versa.
There are basically two types of companies (Public and Private) which are governed under The Companies Act, 2013. The Registrar of Companies (RoC) in each state is the nodal authority for registration of companies.
A Private company can be formed with a minimum of two members and maximum of two hundred , with paid up share capital not being less than Rs. 1,00,000.On the other hand a Public company is one with a minimum of seven members and no maximum limit . Their paid up share capital should be Rs. 5, 00,000. The two important documents that come along with it are Memorandum of Understanding and Articles of Association. They abound in relevance as rules and procedures laid down once cannot be easily overwritten .According to the rules and regulations laid down, the company has to direct its future actions.
Some formalities one needs to run a double check on are Filing of documents (Online / Offline), Name of the company which states the nature of business proposed to be undertaken by it. All these can be easily done through the MCA21 portal.
Once you are done with the above formalities, basic documents like Non Competition and Non solicitation agreement, Confidentiality & Non- Disclosure Agreement, Offer Letter/ Employment Agreements, HR policy, Intellectual property and ESOPs need to be looked after. You certainly wouldn’t like to be sued for a post-termination non-compete clause which is not enforceable under Indian laws since they are viewed to be in ‘restraint of trade or businesses under Section 27 of the Indian Contract Act, 1872.
There are over 200 laws at the federal level and the state level, governing subjects ranging from conditions of employment to social security, health, safety, welfare, trade unions, industrial and labor disputes, etc. Hence, human resource laws are to be given due consideration. Acts like Child Labour (Prohibition and Regulation) Act, 1986, Industrial Disputes Act, 1947, Trade Unions Act, 1926 , Factories Act , 1948 , Shops and Commercial Establishments Act , Industrial Employment Act , 1946 ,Maternity Benefit Act , 1941,Minimum Wages Act , 1948, Equal Remuneration Act , 1976 , Payment of Bonus Act , 1965 etc. come under the ambit of a company.
With the advent of the knowledge and information technology era, intellectual capital has gained substantial importance. There are broadly five types of Intellectual Property Rights (IPR’s) that a startup needs to protect to leverage its intellectual property, which are: Trademarks, Patents, Copyrights, Trade secrets and designs. They are governed under The Trademarks Act, 1999, The Patents Act, The Copyrights Act, 1957, and Designs Act, 2000 respectively .Trade secrets are governed under common laws.
(The opinions expressed by the author in the articles are only be used for reference purposes. Please seek appropriate legal advice from a duly licensed attorney .The author shall not be liable for any wrong interpretations of the reader.)