Legal Compliances For Startups In India

Legal Compliances For Startups In India. India has one of the world's third largest startup ecosystems, with the vast majority of startups emerging in the technology sector. Thriving start-ups are driven by passionate entrepreneurs who are committed to creating one-of-a-kind solutions that provide complete customer satisfaction. However, with the increasing complexity of technology and the multifaceted and global nature of transactions, it is critical for new and emerging businesses to have a solid legal foundation in order to survive. Before establishing a start-up, it is essential to have a thorough understanding of the legal requirements of a start-up as well as compliance with all applicable laws and regulations.
The development of start-ups has increased significantly in recent years. Numerous start-up companies have emerged in the Indian corporate structure and are working hard to establish their brand on a global scale. Legal compliances and regulations are essential for the growth of any start-up business, and it is important to follow them tirelessly.
Eligibility Criteria For Startups
Though no comprehensive definition for start-ups has been provided under Indian laws, the Government of India (GoI) defines start-ups under its start-up schemes promoted by DPIIT (Department for Promotion of Industry and Internal Trade), Minister of Commerce and Industry as:
 A Startup is referred to an entity that meets all of the following criteria:

If it is incorporated or registered under any of the following names:

Private Limited Company registered under Companies Act, 2013.

One Person Company as defined in the Companies Act, 2013.

Partnership Firm registered under Partnership Act, 1932.

Limited Liability Partnerships registered under the Limited Liability Partnership Act, 2008

As long as such an entity is not formed by splitting up or reconstructing an existing business.

It has not reached the ten-year mark since incorporation/registration, as stated above.

Its turnover has never exceeded INR 100 crore in any of its fiscal years.

It meets any of the following criteria:

Its goals are as follows:

Product/process/service/process innovation

creation of new products/processes/services

Enhancement of current products/processes/services

It is a scalable business model with the following advantages:

Employment generation or

Wealth creation

Legal Factors and Compliances That Every Startup Should Know
The primary goal of any new business is to maximize profits. While doing so, they frequently disregard mandatory legal requirements, which can have a negative impact on their business in the long run. Legal compliance is an important wheel that keeps a business's ongoing needs in check. The following are the documents and formalities that a startup must complete in order to become legally compliant:
1. Incorporation related compliance
Each structure has its own set of rules and regulations that determine whether or not registration is required, how much tax a company must pay, and what kind of licenses are required. For example, sole proprietors are exempt from registration, whereas registration is optional for Partnership Firms but required for LLPs and Private Limited Companies.
Companies in India are required to register under Indian law. A business organization can be registered as a legal entity under the following categories:

a) The Companies Act of 2013 - for Private, Public, Non-Profit, and One-Person Companies .

b) Indian Partnership Act, 1932

c) Limited Liability Partnership Act, 2008

Various companies also choose to register their businesses under various government schemes and laws in order to take advantage of the benefits and concessions provided by the laws. Companies may be registered under the MSME Act, the GST Act, or the Start-up India Scheme, depending on the nature of their business.
2. Obtaining business licenses
Licenses are required for the operation of any business. Start-ups may be required to register their business under various licenses applicable under different statutes in India, depending on the nature and size of the business. The Shop and Establishment license, which is applicable on all premises where trade, business, or profession is carried out, is a common license that applies to many businesses.
Other business licenses differ depending on the industry. Various environmental, food and safety, labour and employment laws, import-export laws, FDI Policy, FEMA, SEBI/RBI regulations in India all have an impact on license procurement.
For example, an e-commerce company may require additional requirements such as VAT registration, Service Tax Registration, Professional Tax, and so on, whereas a restaurant may require licenses such as a Food Safety License, Certificate of Environmental Clearance, Prevention of Food Adulteration Act, Health Trade License, and so on, in addition to the aforementioned licenses.
3. Requirements for documentation
Many new businesses do not pay much attention to formalizing the structure of contracts and basic incorporation documents. This can lead to a slew of legal issues if a dispute arises or when raising capital at any stage of a startup's development. The following are some basic documents that every startup should have:

Drafting incorporation documents for registered companies under the Companies Act of 2013, such as the Shareholder's Agreement, Memorandum of Association, and Articles of Association, among others.

Contracts such as Non-Disclosure Agreements (NDAs), Confidentiality Agreements (CAs), Memorandums of Understanding (MoUs), Letters of Intent (LoIs), and others.

Work agreements, such as employment agreements, lease/rent agreements, service agreements, consulting agreements, and so on.

Technical agreements, including Technology Assistance Agreements, Licensing and Assignment Agreements, Outsourcing and Hosting Agreements, and others.

Company policies, such as the Sexual Harassment Policy, the Employee Grievance Management Policy, the Data Privacy and Protection Policy, the Whistleblower Policy, and others.

Intellectual Property Management - Registration of intellectual property such as copyrights, patents, trademarks, and so on in India and internationally, as well as licencing and assignment agreements relating to their intellectual property, among other things.

4. Company Legal Compliances
Certain mandatory compliances must be completed for start-ups registered under the Companies Act of 2013. Among the compliances are:
Annual General Meeting (AGM)
There should be one AGM per year, with no more than 15 months between AGMs. The primary goal of such meetings is to approve financial statements, appoint auditors, declare dividends, and so on. The Annual General Meeting must be held in the city where the company's registered office is located.
Board Meetings
The first board meeting of the Board of Directors should take place within 30 days of the company's incorporation.  Aside from that, four board meetings are supposed to take place each calendar year, with no more than 120 days between two consecutive Board Meetings.
Compulsory filing of forms
a) Appointment of an auditor (E-Form ADT-1)
The first Statutory Auditor should be appointed at the first Board Meeting within 30 days of the company's incorporation. However, following auditors could be appointed for a 5-year term at an AGM. For a 5-year appointment, an applicant must submit Form ADT-1. Following that, shareholders must endorse the auditor in the AGM each year, but there is no requirement to file ADT-1.
 b) e-Form MGT-7/7A
MGT-7 or 7A is an electronic form issued by the Ministry of Corporate Affairs (MCA) to companies to complete their annual return details. Every private limited company must file the MGT-7/ 7A form every year.
 c) e-Form AOC-4
Form AOC-4 is used to file the financial statements for each fiscal year with the ROC. In general, financial statements serve as the primary means of communication between shareholders and the Board of Directors. As a result, every company registered under the Companies Act of 2013 is required to file form AOC-4.
 d) Directors' Report
In accordance with Section 134 of the Companies Act of 2013, every company is required to prepare a Board Report containing details about the company's state, operations during the year, dividend declaration, net profit, corporate social responsibility standards, and so on.
 e) MBP-1 form
The form MBP-1 is required to be filed by the company's directors at the first meeting of the Board of Directors in each fiscal year to disclose their interest in other entities. When the director's interest changes from the previously submitted MBP-1, a new MBP-1 must be filed.
 f) DIR-8 form
Every director is required to file form DIR-8 with the Company Disclosure of non-disqualification every fiscal year.
 g) Mandatory Maintenance of Specific Registers

Minutes Register; Board Meeting Minutes Book; and General Meeting Minutes Book (which could be EGM, AGM, Creditors Meetings, etc.)

Debenture holder meetings and postal ballot

Statutory Registers;

Books of Accounts or Financial Statements

Attendance of Directors at Board Meetings or Committee Meetings

5. Tax-related Compliances

Filing Income Tax Returns, Tax Audit Reports, TDS Returns, and determining tax liability are all required under the Income Tax Act of 1961.

GST Act, 2017 - Establishment registration under the GST Act, filing of monthly, quarterly, and annual returns

Aside from legal compliance, new businesses in India can take advantage of various tax breaks.
Three years of tax exemption in seven years
Section 80IAC of the Income Tax Act allows any startup established after 1 April 2016 to claim a 100% tax rebate on profits for three years within a seven-year period. The tax rebate is not available, however, if the company's annual turnover exceeds Rs 100 crore.
Long-term capital gains are exempt from taxation (LTCG)
Start-ups are exempt from LTCG tax under Section 54EE of the Income Tax Act. This is only applicable if the capital gains invested in are a part of a fund notified by the Government of India within 6 months of the asset's actual transfer. Tax breaks for investments worth more than their fair market value
If an eligible start-up makes an investment, the government waives the tax on the portion of the investment that exceeds the fair market value.
Individual/HUF tax exemptions on LTCGs derived from equity shareholding
Individuals and HUFs are exempt from tax on LTCGs if they sell their property and then invest the proceeds in a minimum of 50% or more of an existing start-up. According to the MSME Act of 2006, the enterprises must be small/medium sized.
Conclusion
Legal compliance is critical for any organization; knowledge and compliance with applicable laws is the first step to ensuring smooth business operations. Compliance with the relevant laws in the location where the startup is doing business is critical for the successful establishment and efficient growth of startups. Compliance ensures that no penalties are imposed on a start-up at any stage of its development and assists it in avoiding any other potential risks/difficulties. One can conclude that the legal foundation of a stable determines its longevity.

India has one of the world's third largest startup ecosystems, with the vast majority of startups emerging in the technology sector. Thriving start-ups are driven by passionate entrepreneurs who are committed to creating one-of-a-kind solutions that provide complete customer satisfaction. However, with the increasing complexity of technology and the multifaceted and global nature of transactions, it is critical for new and emerging businesses to have a solid legal foundation in order to survive. Before establishing a start-up, it is essential to have a thorough understanding of the legal requirements of a start-up as well as compliance with all applicable laws and regulations.

The development of start-ups has increased significantly in recent years. Numerous start-up companies have emerged in the Indian corporate structure and are working hard to establish their brand on a global scale. Legal compliances and regulations are essential for the growth of any start-up business, and it is important to follow them tirelessly.

Eligibility Criteria For Startups

Though no comprehensive definition for start-ups has been provided under Indian laws, the Government of India (GoI) defines start-ups under its start-up schemes promoted by DPIIT (Department for Promotion of Industry and Internal Trade), Minister of Commerce and Industry as:

A Startup is referred to an entity that meets all of the following criteria:

If it is incorporated or registered under any of the following names:

Private Limited Company registered under Companies Act, 2013.
One Person Company as defined in the Companies Act, 2013.
Partnership Firm registered under Partnership Act, 1932.
Limited Liability Partnerships registered under the Limited Liability Partnership Act, 2008

As long as such an entity is not formed by splitting up or reconstructing an existing business.

It has not reached the ten-year mark since incorporation/registration, as stated above.
Its turnover has never exceeded INR 100 crore in any of its fiscal years.
It meets any of the following criteria:

Its goals are as follows:

Product/process/service/process innovation
creation of new products/processes/services
Enhancement of current products/processes/services

It is a scalable business model with the following advantages:

Employment generation or
Wealth creation

Legal Factors and Compliances That Every Startup Should Know

The primary goal of any new business is to maximize profits. While doing so, they frequently disregard mandatory legal requirements, which can have a negative impact on their business in the long run. Legal compliance is an important wheel that keeps a business's ongoing needs in check. The following are the documents and formalities that a startup must complete in order to become legally compliant:

1. Incorporation related compliance

Each structure has its own set of rules and regulations that determine whether or not registration is required, how much tax a company must pay, and what kind of licenses are required. For example, sole proprietors are exempt from registration, whereas registration is optional for Partnership Firms but required for LLPs and Private Limited Companies.

Companies in India are required to register under Indian law. A business organization can be registered as a legal entity under the following categories:

a) The Companies Act of 2013 - for Private, Public, Non-Profit, and One-Person Companies .
b) Indian Partnership Act, 1932
c) Limited Liability Partnership Act, 2008

2. Obtaining business licenses

Licenses are required for the operation of any business. Start-ups may be required to register their business under various licenses applicable under different statutes in India, depending on the nature and size of the business. The Shop and Establishment license, which is applicable on all premises where trade, business, or profession is carried out, is a common license that applies to many businesses.

Other business licenses differ depending on the industry. Various environmental, food and safety, labour and employment laws, import-export laws, FDI Policy, FEMA, SEBI/RBI regulations in India all have an impact on license procurement.

For example, an e-commerce company may require additional requirements such as VAT registration, Service Tax Registration, Professional Tax, and so on, whereas a restaurant may require licenses such as a Food Safety License, Certificate of Environmental Clearance, Prevention of Food Adulteration Act, Health Trade License, and so on, in addition to the aforementioned licenses.

3. Requirements for documentation

Many new businesses do not pay much attention to formalizing the structure of contracts and basic incorporation documents. This can lead to a slew of legal issues if a dispute arises or when raising capital at any stage of a startup's development. The following are some basic documents that every startup should have:

Drafting incorporation documents for registered companies under the Companies Act of 2013, such as the Shareholder's Agreement, Memorandum of Association, and Articles of Association, among others.
Contracts such as Non-Disclosure Agreements (NDAs), Confidentiality Agreements (CAs), Memorandums of Understanding (MoUs), Letters of Intent (LoIs), and others.
Work agreements, such as employment agreements, lease/rent agreements, service agreements, consulting agreements, and so on.
Technical agreements, including Technology Assistance Agreements, Licensing and Assignment Agreements, Outsourcing and Hosting Agreements, and others.
Company policies, such as the Sexual Harassment Policy, the Employee Grievance Management Policy, the Data Privacy and Protection Policy, the Whistleblower Policy, and others.
Intellectual Property Management - Registration of intellectual property such as copyrights, patents, trademarks, and so on in India and internationally, as well as licencing and assignment agreements relating to their intellectual property, among other things.

4. Company Legal Compliances

Certain mandatory compliances must be completed for start-ups registered under the Companies Act of 2013. Among the compliances are:

Annual General Meeting (AGM)

There should be one AGM per year, with no more than 15 months between AGMs. The primary goal of such meetings is to approve financial statements, appoint auditors, declare dividends, and so on. The Annual General Meeting must be held in the city where the company's registered office is located.

Board Meetings

The first board meeting of the Board of Directors should take place within 30 days of the company's incorporation. Aside from that, four board meetings are supposed to take place each calendar year, with no more than 120 days between two consecutive Board Meetings.

Compulsory filing of forms

a) Appointment of an auditor (E-Form ADT-1)

The first Statutory Auditor should be appointed at the first Board Meeting within 30 days of the company's incorporation. However, following auditors could be appointed for a 5-year term at an AGM. For a 5-year appointment, an applicant must submit Form ADT-1. Following that, shareholders must endorse the auditor in the AGM each year, but there is no requirement to file ADT-1.

b) e-Form MGT-7/7A

MGT-7 or 7A is an electronic form issued by the Ministry of Corporate Affairs (MCA) to companies to complete their annual return details. Every private limited company must file the MGT-7/ 7A form every year.

c) e-Form AOC-4

Form AOC-4 is used to file the financial statements for each fiscal year with the ROC. In general, financial statements serve as the primary means of communication between shareholders and the Board of Directors. As a result, every company registered under the Companies Act of 2013 is required to file form AOC-4.

d) Directors' Report

In accordance with Section 134 of the Companies Act of 2013, every company is required to prepare a Board Report containing details about the company's state, operations during the year, dividend declaration, net profit, corporate social responsibility standards, and so on.

e) MBP-1 form

The form MBP-1 is required to be filed by the company's directors at the first meeting of the Board of Directors in each fiscal year to disclose their interest in other entities. When the director's interest changes from the previously submitted MBP-1, a new MBP-1 must be filed.

f) DIR-8 form

Every director is required to file form DIR-8 with the Company Disclosure of non-disqualification every fiscal year.

g) Mandatory Maintenance of Specific Registers

Minutes Register; Board Meeting Minutes Book; and General Meeting Minutes Book (which could be EGM, AGM, Creditors Meetings, etc.)
Debenture holder meetings and postal ballot
Statutory Registers;
Books of Accounts or Financial Statements
Attendance of Directors at Board Meetings or Committee Meetings

5. Tax-related Compliances

Filing Income Tax Returns, Tax Audit Reports, TDS Returns, and determining tax liability are all required under the Income Tax Act of 1961.
GST Act, 2017 - Establishment registration under the GST Act, filing of monthly, quarterly, and annual returns

Aside from legal compliance, new businesses in India can take advantage of various tax breaks.

Three years of tax exemption in seven years

Section 80IAC of the Income Tax Act allows any startup established after 1 April 2016 to claim a 100% tax rebate on profits for three years within a seven-year period. The tax rebate is not available, however, if the company's annual turnover exceeds Rs 100 crore.

Long-term capital gains are exempt from taxation (LTCG)

Start-ups are exempt from LTCG tax under Section 54EE of the Income Tax Act. This is only applicable if the capital gains invested in are a part of a fund notified by the Government of India within 6 months of the asset's actual transfer. Tax breaks for investments worth more than their fair market value

If an eligible start-up makes an investment, the government waives the tax on the portion of the investment that exceeds the fair market value.

Individual/HUF tax exemptions on LTCGs derived from equity shareholding

Individuals and HUFs are exempt from tax on LTCGs if they sell their property and then invest the proceeds in a minimum of 50% or more of an existing start-up. According to the MSME Act of 2006, the enterprises must be small/medium sized.

Conclusion

Legal compliance is critical for any organization; knowledge and compliance with applicable laws is the first step to ensuring smooth business operations. Compliance with the relevant laws in the location where the startup is doing business is critical for the successful establishment and efficient growth of startups. Compliance ensures that no penalties are imposed on a start-up at any stage of its development and assists it in avoiding any other potential risks/difficulties. One can conclude that the legal foundation of a stable determines its longevity.