Achieving success in a startup venture requires entrepreneurs who are passionate about creating unique solutions that exceed customer expectations. While it is crucial to have a strong focus on customers and the market, it is also essential to have a thorough understanding of the legal & regulatory aspects of startup funding that apply to the operations of the business.
Entrepreneurs should be familiar with the legal & regulatory aspects of startup funding of their business and market, from creating a founders’ agreement to protecting intellectual property to enforcing business contracts. Here are some key legal considerations that startups and entrepreneurs in India should be aware of before launching a business venture or turning a startup idea into reality:
1. Formalizing a business structure and founders’ agreement for startup business–
The first and most important stage for any successful firm is to consider beginning business ideas. In a word, a person needs to be certain about the kind of starting firm they intend to expand. As they work on their startup ideas, the founders must incorporate the company as a certain business kind, such as a sole proprietorship, private limited company, public limited company, partnership, limited liability company, etc. In order to achieve the entire vision and goals of the company, both short- and long-term, it is essential to have this clarity from the very beginning. Additionally, it aids the founder in foreseeing the course they should go to secure startup funding.
Before incorporating, firms should pay close attention to the specific legal requirements and rules that apply to their particular starting business type.
2. Applying for startup business licenses–
Running a business requires obtaining licences or registering as a startup. Several licences are applicable in India depending on the type and size of business. The ideal strategy to launch a business is always to be aware of the necessary licences and to acquire them.
Legal disputes and expensive lawsuits may result from a startup business’s absence of the necessary permits. While startup registration is the formal process of officially listing a firm (together with necessary information) with the official registrar, licences are the legal documents that provide a business permission to function.
The Shop and Establishment Act, which is applicable to all locations where trade, business, or profession is practised, is the common licence that is applicable to all beginning businesses. The requirements for additional business licences differ by sector.
A restaurant may need licences such as a food safety licence, a certificate of environmental clearance, a licence under the Prevention of Food Adulteration Act, a licence for the health trade, and other licences in addition to the permits already mentioned,for example, if you have a startup e-commerce business you may need additional licences like VAT registration, Service Tax Registration, Professional Tax, etc.
3. Understanding taxation and accounting laws–
Every beginning business has taxes as a necessary component. Before starting a firm, an entrepreneur needs to be familiar with all legal & regulatory aspects of startup funding. There are several different taxes that may be applicable for some new businesses, including federal taxes, state taxes, and even local taxes. Knowing this in advance can be helpful because different business and operating sectors attract varying taxes.
The government of India recently offered numerous tax exemptions and holidays for new and startup firms as part of the “Startup India” campaign to support startups. A new business can benefit from this effort by receiving a three-year income tax exemption, as well as tax exemptions from capital gains and investments exceeding Fair Market Value.
The conditions that startups need to qualify to leverage these exemptions are:
- The startup business should not be more than 7 years old (or 10 years for biotech) from the date of incorporation.
- Is incorporated as a Registered Partnership, Limited Liability Company, or Private Limited Company.
- Turnover in any year should not have exceeded 25 crores.
- The startup business should not have been formed by splitting or reconstructing an existing business.
Maintaining appropriate books of accounts and conducting periodic audits to check for compliance with pertinent accounting and tax laws is good practice when it comes to startup business accounting. Many startups initially pay little attention to accounting regulations because of their tiny size. However, given the potential for significant accounting inconsistencies, this problem cannot be disregarded for very long.
4. Adhering to labour laws-
Every new firm, no matter how big or small, must follow labour rules. Regardless of the size of the organisation, once you have employees working for your business and are incorporated as a legal entity, you must abide by a number of labour rules.
Compliance with laws governing minimum salaries, gratuities, PF payments, weekly holidays, maternity benefits, sexual harassment, and bonus payments, among others, is required. It is advisable to seek legal advice to determine which regulations apply to your starting business and to make sure that it complies with all applicable labour laws.
In order to receive an exemption from labour inspection, startup businesses registered under the Startup India initiative must complete a self-declaration (for nine labour laws) within one year of the date of formation.
5. Ensuring protection of intellectual property–
The secret ingredient for the majority of startup companies today, particularly tech-focused companies, is intellectual property. Some of the most typical intellectual property that organisations own include codes, algorithms, and research discoveries. Startup businesses may benefit from the Startup India initiative’s “Scheme for Startups Intellectual Property Protection” (SIPP).
In addition to assisting in the protection and marketing of intellectual property, the programme was created to foster and mentor unique and developing technologies among startup businesses. Facilitators have been appointed by the Controller General of Patents, Trademarks, and Design for the efficient implementation of the plan.
Such intermediaries support new businesses by offering inexpensive advice services, assistance with patent application filing, and disposal of patent applications, among other things. IPR Facilitation for Start-ups contains comprehensive information about SIPP.
6. Ensuring effective contract management–
According to the Indian Contract Act, 1872, all agreements established by newly formed businesses are considered contracts if they are freely entered into by parties who are legally able to do so, are made for a lawful consideration with a lawful purpose, and are not clearly stated to be void.
One of the most critical things to look into when beginning a business is employee contracts. In the beginning, founders frequently work together with their own circle of reliable friends. While this ensures a certain ease and efficiency for startup business operations, it is always advisable to outline and formalise employee contracts with information about salary, the range of work, and stock options (if any) with even your first few employees. Having this understanding right away assists new businesses in minimising risks down the road.
7. Details about winding down the startup business–
Any entrepreneur knows how difficult it is to decide to close a business or shut it down because of a poor business concept. All parties involved in a startup company’s decision to close up shop must be informed beforehand, and the entire process must be carefully planned and carried out to make everyone’s exit as painless as possible.
From the legal standpoint, there are basically three ways to shut down a startup:
- Fast Track Exit Mode
- Court or Tribunal Route
- Voluntary Closure
The Fast Track Exit Mode is the greatest option for beginning businesses out of the three because it enables them to hasten shutdown at a reduced cost and in less time. A corporation must (a) have no assets or liabilities and (b) not have started any new businesses in the previous year in order to be eligible to apply for a fast-track exit. The company may be removed from the Register of Companies if these two criteria are satisfied (RoC).
Conclusion-
legal & regulatory aspects of startup funding such as tax laws, employment laws, and intellectual property laws should be followed for smooth running of business operations.