Legal Compliances every Start-up should know

16 Sep 2021  Read 227 Views

The Indian startup sector, which redefined the statistics in the aftermath of the pandemic, has the potential to be the 'engines of growth'. According to the Nasscom Tech Start-up Report 2020-21, India has 38 unicorns-startups with a valuation of more than $1 billion.

Productive start-ups are pushed by enthusiastic business owners who are committed to creating one-of-a-kind remedies that satisfy its customers. While it is crucial to maintain a strong emphasis on customer base, it is also critical to have a solid understanding of the underlying laws, rules, and regulations that apply to the smooth operation of the business. From formalising a founders' agreement to protecting intellectual property and imposing business contracts, entrepreneurs must be cognizant of and up to date on the latest regulations surrounding their business and market.

Legal requirements for a Startup

Before starting a business, start-up and business owners in India should be aware of the following legal fundamentals:

  • Co-Founder Contract

One of the essentials of a start-up is a co-founder contract, if there is a presence of two or more founding members. This action is required by start-up company rules and regulations. Above all, the contract should accurately describe the equity share, responsibilities, roles, and so on. Simple contracts, on the other hand, aim to lower friction between co-founders to the greatest extent conceivable later on.

  •  Separate Legal Entity

When establishing a start-up, one should establish a separate legal entity under which he will function. It is the most significant part of the legal checklist for Indian start-ups. Start-up India has six different types of legal entities, which are Private Limited Company, Limited Liability Partnership, One Person Company, Sole Proprietorship Firm, and Partnership Firm with and without Registrar of Firms.

After determining where one wants to legally conduct business, he/she must set up his/her finances. Specifically, to keep the start up’s assets distinct from the personal assets. Finally, it is crucial to keep all of the necessary documentation for the setup. Preventing others from attempting to seize the owner’s personal assets as a result of a disagreement with the start-up.

  • Registration of Startup

The fact that it is very easy to register a Startup encourages budding entrepreneurs to have their own startup. There are two most important things to keep in mind while registration of a Startup. The first step is to incorporate the startup and the second is to register it with ‘Startup India Program’. Acquiring a Digital Signature Certificate and a Directory Identity Number is part of incorporating a startup.

There exists an eligibility criteria for DPIIT Startup India recognition. It includes as follows:

  1. Company's age: The timeframe of establishment and operational processes should not exceed 10 years from date of incorporation.

  2. Company Structure: It should be formed as a Limited Liability Partnership, a Private Limited Company, or a Registered Partnership Firm.

  3. Annual Turnover: It should not be more than INR 100 crore in any fiscal year ever since incorporation.

  4. Original Entity: It should not have been founded by rebuilding or dividing up a working business.

  5. Innovative and scalable: It should work on the development, processing, or improvement of a good or service and have a flexible business strategy.

Once the determination of eligibility of the startup has been performed, registration with all of the necessary documents is the next step, which shall be done by an online form on the Startup India website and getting an approval from the ministerial board.

  • Non-Disclosure Agreement

A non-disclosure agreement is one of the crucial components of a contract of a startup as the ideas of the startup are highly discussed with third-party such as potential investors, their employees, consumers and so on, which leads to an increased risk for the operational  privacy of the startup. The concepts and business data provided in goodwill may be misappropriated, as a result of which, startups need to use drafted NDA when addressing business data with third-parties to prevent risks.

  • Startup Licenses

Various Licences are required in India depending on the size and nature of the business. For instance, a Certificate of Environmental Clearance, Food Security Licence as well as a Prevention of Food Adulteration Act Certificate shall be needed for a restaurant startup, while an e-commerce startup must need a service tax and VAT registration. As a result, acquiring a permit for the startup is the finest way to get started. The lack of relevant licences can result in unwelcome legal battles and expensive lawsuits. Furthermore, licences also help in benefiting the startup from tax deductions.

  • Protection of Intellectual Property

Before individuals begin operations, development of trademark, patent, and copyright protection is a must as part of startup planning. This guarantees that no competitor or other entity snatches their products or methods, such as codes, research, algorithms, or designs derived from the original startup's ideas.

New entrepreneurs must understand the fundamentals of intellectual property rights, such as patent application, copyright protection, and trademark registration. Most importantly, any intellectual property formed during the startup's activity should be owned by the company rather than an individual. 

  • Labour Law Compliance

Every venture must be cognizant of labour laws and include them in their HR policies. In India, four new labour codes have been established to address issues such as industrial relations, employment, wages, social security, and so on. Employment Agreement clauses involve employment terms, intellectual-property protection, probation period, no-poaching, and non-solicitation, termination terms (standard and immediate), service contracts, and so on.

Startups can also provide a self-declaration for adherence with India's nine labour laws and three environmental laws. In the case of labour laws, however, there is no survey for three to five years.

  • Compliance with Information Technology Laws

Cloud computing, e-contracts, digital signatures, protecting privacy, and safeguarding confidential data from hackers are not only trendy, but also vital. The majority of startups offer app-based or web-based products or services. Simultaneously, there are several IT laws, such as startup legislation in India that technology-based entrepreneurs must follow in accordance with startup company rules and regulations.

Startups relating to online wallets, bitcoins, financial services, and so on must adhere to specific startup laws in India to avoid being penalised by government agencies.

  • Winding Down 

When a venture makes a decision to close down, all stakeholders, from distributors to workers to customers and stock holders, must be notified in advance, and the entire procedure must be appropriately designed and implemented to make the exit as seamless as possible for everyone. From a legal perspective, there are three options for shutting down a startup:

  1. Fast Track Method of Exit
  2. Courts/Tribunals
  3. Closure on a voluntary basis

Conclusion

Adhering to regulatory obligations is critical for any organisation; understanding and complying to relevant laws is the first step in ensuring uninterrupted operation. All the startup entrepreneurs shall have the knowledge of all relevant laws in order to start a business.  Hiring an expert legal counsel who can provide advice, supervise, and keep legal records is one of the finest ways to make sure that the corporation is always safe and avoids legal complications and ramifications.

About the Author: Sakshi Shrivastava | 15 Post(s)

Sakshi is a 3rd year student at Hidayatullah National Law University, with a keen interest in Corporate and Competition Laws. She describes herself as an extrovert known to be quite vexing!

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