Hundreds of ideas must be evolving in your mind when you want to start a new business. But, if you aren’t aware of the legal aspects involved in this whole process of building a Startup, It may land you into a trouble. Even though, you have capital, great idea and other capabilities, your business would tend to fall by avoiding legal formalities required for starting a business. Today, many of us, especially youths, have a dream to start a new business but a significant proportion falls short due to lack of finance, experience and legal knowledge.
This article focuses on the legal aspect involved while setting up a startup.
What is a Startup?
Before all the legal formalities, the first thing we need to know is ‘What is a Startup?’. In order to avail exemption from the industrial–business laws applicable to the business entities, an entity needs to fall under the definition of ‘startup’ as defined by the Government. A Start Up is not defined under any law in force. But, Government of India by notification in its Official Gazette, has specified what startup is. Your organization fall under the category of start up, only if, it fulfils following essentials–
- Up to five years from the date of its incorporation/registration, if it is incorporated or registered in India;
- In any preceding financial year its annual turnover has not exceeded Rs. 25 crore;
- And it is devoted towards innovation, deployment, development, or commercialization of new products, processes or services driven by technology or intellectual property.
A business entity can only be recognized as a Startup only if it is a Private Limited Company (registered under Companies Act, 2013) a registered partnership ( registered under Partnership Act, 1932) and a LLP (under Limited Liability Partnership Act, 2002). First thing you need to decide is what kind of business you want to get started with. You have to incorporate or register it accordingly.
If you want to incorporate a Private Limited Company, you’ll have limited liability, certain tax benefits and business continuity as it continues to exist as a separate legal entity and is not terminated or dissolved even when shareholders expire or sell their shares.
If you wish to start a partnership firm, you should keep in mind that the liability of the partnership firm is unlimited. Registering a partnership firm is not mandatory but not registering it has its own disadvantages. However, for the purpose of categorizing your entity as a startup , you need to register your partnership firm.
LLP, is the best option when you want to start a partnership firm but you want to keep your liability limited. A LLP is registered under LLP Act, 2002.
(ii) Tax Laws
Tax is generally a burden, specially, when you are going to launch a startup. Business entities in India are governed by various tax laws. Non- payment of Tax can be hazardous for your business. Taxation cannot be ignored. For instance, the owner of Su-Kam landed into trouble for non-payment of excise duty. He simply didn’t know that he has to pay excise duty.
But, under the scheme of ‘Startup India’, following tax benefits have been brought in for startups:
- Tax exemptions on capital gains by investing in start-ups directly or indirectly.
- 100% Tax exemptions on profits generated by startups for a period of 3 out of their 5 years.
- Tax exemptions on investment above Fair Market Value.
A startup is built on an innovative idea. To protect your idea from being misused and stolen , you can obtain patent, by filing a patent application with the appropriate patent office. Trade Mark , Design may be registered under the Trade Marks Act, 1999 and the Design Act, 2000 respectively. Violation of a registered trademark may land you into trouble but if the trademark is not registered, you are liable for passing-off. The Intellectual Property laws like Patent, Trademark, Design, Geographical Indication (GI) need to keep in mind before you start a new business.
(iv) Contract Law
You may need to enter into numerous Contracts in the course of your business. Even before formation of a Company, pre- incorporation Contract is formed. Breach of contract may lead you into legal trouble.
(v) Labour and Environment Law
A business entity shall comply with the Labour and Environment Laws of the nation. Ignorance of these laws is subject to strict action from the regulatory authorities. But, Government has exempted start ups from 9 labour and Environment Laws. They will not be inspected for 3 years. They are allowed to self certify compliance of labour and environment laws which can be done through the mobile app launched by the Government. Inspection can be done, only if there is credible written complaint of violation approved by one level senior officer to the Inspecting Officer.
(vi) SEBI and IT laws
You shall comply to SEBI guidelines and for securing confidential data, issuing digital signature, and prevention from cyber crime, knowledge of IT Laws is important.
Ignorance of law is not excusable. You cannot take the defense that you are not aware of a particular law. Ignorance of laws may be lead to a complete failure of your business.