Starting up is every entrepreneur’s heartfelt dream, but what exactly is a startup? One requires the following features to qualify as a startup to register with ‘Startup India’, a Government of India scheme:
- The startup should be incorporated as a private limited company, a limited liability partnership, or a partnership firm.
- In any of the previous years, its turnover should be less than Rs. 100 Crores.
- It should not be older than 10 years
- The startup should have wealth and employment creating services
- The entity should not be a result of a business splitting up or of its reconstruction
Before starting up, entrepreneurs must know the laws and regulations that relate to startups. Making legal mistakes can have severe consequences and lead to great loss for the company involved. The following are some of the laws and legal considerations that entrepreneurs should know :
SELECTING THE TYPE OF BUSINESS ENTITY TO BE ESTABLISHED
The most elementary thing for an entrepreneur to know is to understand and decide the type of company he desires. It could be a private limited company, a partnership, a limited liability partnership(LLP), or a sole proprietorship. The rules and regulations for each business type concerning registration, licensing, taxation, etc. differ. For example, in proprietorships, the income of the individual is the basis on which the income tax is filed, and there is no necessity to submit the annual statements. Furthermore, registration is not required for proprietorships, is optional for partnerships, and is mandatory for private limited companies and LLPs.
The next stage of a company’s genesis is its registration. The registration procedure depends on the kind of company that is set up. Registration means incorporating the startup, as well as its registration under the Startup India program. Incorporation involves the procurement of the Digital Signature Certificate and the Directory Identity Number.
CO-FOUNDER’S AGREEMENTS AND EMPLOYEE CONTRACTS
Startups that feature two or more co-founders will find it crucial to sign a co-founder’s agreement. This step is not optional, but mandatory under startup rules and regulations. Other details such an agreement should also address are the equity share, responsibilities, roles, compensation, non-compete, contingency plans in cases of disagreements, etc. The agreement must be lucid and simple enough to facilitate a frictionless relationship between the co-founders.
It is also imperative for there to be contracts with all the employees of the company. It is not advisable to employ people in the beginning stages of a company without entering into employee contracts. Such contracts should feature all the relevant details and terms of employment like remuneration, etc.
Non-Disclosure agreements are vital tools in the toolkit of startups to protect their ideas when they are discussed with various parties, such as investors, employees, customers. NDAs are an effective tool to protect vital business information from going outside the company.
KNOWLEDGE OF LABOUR LAWS
A big responsibility of any employer is to know all the requisite labor regulations that one ought to comply with. These include laws on various subjects, such as provident fund and gratuity, payment of wages, maternity benefits, workplace sexual harassment, etc. A startup registered with the Startup India initiative, is eligible for an exemption from inspection under various labor laws, as per a signed self-declaration, for the first year after incorporation or registration of partnership.
APPLYING FOR REQUIRED STARTUP LICENSES
Based on the nature and the size of the business, a startup may require different licenses to carry out its operations. It is a costly oversight to not have these licenses and it can lead to legal trouble for the company. For instance, the verification of the Food Safety and Standards Authority of India will be necessary for all food-related suppliers, and restaurants will also require licenses like food safety licenses, Certificate of Environmental Clearance, etc.
SAFEGUARDING INTELLECTUAL PROPERTY RIGHTS
Any startup must protect the ideas that it’s built upon. Every startup needs to protect the intellectual property upon which the foundations of its innovations lie. Intellectual Property protections exist to give certain monopoly rights to the innovators over their innovations, so that they can recuperate their research and development costs, as well as to incentivize innovation in the market, which would lead to economic growth.
Startup founders must know the importance of intellectual property rights, such as patents, trademarks, and copyright. Intellectual property rights protections enable a startup to protect their innovative ideas against theft, and founders ought to know about the basic provisions, such as registration of trademarks, copyright protection, and the filing of patents.
The Startup India initiative is cognizant of the importance of intellectual property rights protection, and through the initiative technology startups and Micro, Small, and Medium Enterprises (MSME), receive financial support to file international patents. This support helps to foster innovation and growth in the market and contributes to the recognition of the value of Intellectual Property Rights.
KNOWLEDGE OF TAXATION AND ACCOUNTING LAWS
It is also imperative for entrepreneurs to be keenly aware of the types of taxes applicable to the different types of business structures. It is also extremely important for startups to make sure their companies are adhering to the taxation laws rigorously. For this purpose, they should maintain proper books of accounts and engage in regular auditing.
Entrepreneurs should also be aware of the process of winding up a company. An entrepreneur should never be caught blindsided and should be prepared for the worst. These are the ways to wind up a company:
- Fast Track Exit Mode
This method doesn’t take a lot of time and doesn’t cost a lot. This requires the company to have no assets or liabilities and for it to have had no business for the past year.
- Voluntary Closure
This requires the shareholders and creditors to be on the same page. It is often impractical.
- Court/Tribunal Route
This is a long process, with lengthy court proceedings. This method is ill-advised as a way of winding up a business.
The Insolvency and Bankruptcy Bill, 2015 provides another way of winding up, wherein the assets of the company are liquidated by a hired insolvency professional under 90 days.
Author(s) Name: Sudhanshu Sorout (Campus Law Center, Delhi University)