In India, startups are still relatively new. They are attempting to survive and, occasionally, succeed in the local environment. However, because of its intricate and constantly evolving corporate policies, the legal issues faced by start-ups are particularly distinctive. Let’s investigate and analyze the complexity of many aspects that have an immediate influence on start-ups in India.
Many start-ups struggle to identify the best business structure for their venture because it differs from industry to industry and one business structure that works well for one may not work well for another in terms of risk, the number of participants, profit distribution, liability, taxation, annual meetings, and registration, among other factors.
It has an easier taxation structure based on the revenue made by the proprietor; It is not taxed as a distinct legal entity; It is the appropriate business structure for individuals who wish to have complete control over their business and enjoy all the earnings alone. Instead, the business owners include their tax filings in their tax forms; The responsibility of a sole proprietor is infinite since the business’s assets are not considered to be private or personal if the proprietor is unable to pay the debts of the company; Its ability to raise cash for businesses is extremely constrained.1
When multiple persons are involved in the business, it is appropriate; One of the most straightforward business structures, it is controlled by the Indian Contract Act of 1972 and the Partnership Act of 1932; Its taxation resembles that of a proprietorship firm quite a bit; several partners split the profit; Conflicts between the ideas of the different partners might be one of many problems.2
LIMITED LIABILITY PARTNERSHIP (‘LLP’)
When a business is unstable or dangerous, it works best; The Limited Liability Partnership Act of 2008 governs it; Because the liability is restricted, the business and personal assets are seen as distinct, and the personal assets cannot be depleted to pay off the obligations; There is no maximum number of members in an LLP, however, there must be at least two members; Its formation costs are considerably higher than those of a sole proprietorship business; The tax authorities treat limited liability partnerships (LLP) as a separate legal entity from its owners and require that they register with the Income Tax Department for taxation purposes. This makes LLP more advantageous than private limited companies because it is simpler to establish, manage, and register than a private limited company.3
PRIVATE LIMITED COMPANY
When there is a chance for corporate growth and equity investors, it is most appropriate; The 2013 Companies Act governs it; A privately held firm for small businesses is known as a private limited company; A Private Limited Company’s members’ liability is only as great as the number of shares they each own; Private Limited Company’s shares cannot be exchanged publicly; Compared to an LLP company, starting a private limited company has higher startup costs; It is crucial to be aware that the tax authorities view it as a separate legal entity from its shareholders and that it is legally required to register with the Income Tax Department for taxation purposes; it is appropriate for an entrepreneur who needs outside funding and is working toward a high level of turnover.4
REGISTRATION AND LICENSES
Obtaining all necessary paperwork and permissions before starting a business is essential for success. The absence of a license with the company will result in pricey legal actions and settlements. Firm licenses are different from business registration in that the latter is the paperwork required for a business to operate, whereas the former is required for listing a business with the registrar.
Another sort of registration that is required is the Startup India Registration, provided that the company satisfies the criteria established by the Department of Industrial Policy and Promotion of India (DIPP). Additional registrations like MSME, GST, Udyog Aadhar, import-export codes, etc. may be required depending on the type and size of the company.
Startups should be aware that, in addition to the aforementioned, they can require extra permits to set up and run a business depending on state regulations.5
The distribution of property for the use of offices, warehouses, service centers, manufacturing plants, etc. is a key problem for startups in India. Since local state laws governing the commercial use of real estate or land vary from state to state and fall under the jurisdiction of the government, startups should be aware of them. For instance, the local municipal government may create a rule prohibiting the use of any property or land for industrial or commercial purposes in a residential area.
Typically, the municipal zoning authority divides a community into eight divisions. Residential, commercial, industrial, public, and semi-public, public utilities, open spaces/parks/playgrounds, transportation and communication, and agricultural use are all permitted in these parts. For carrying out commercial work, the zoning authorities may choose to specify the height, position, and map of the building.
Startups must conduct the necessary due diligence for any local municipal zoning laws or reservations and obtain the necessary permissions or licenses from such authorities if they intend to operate from a property, whether it be for an office, warehouse, service center, manufacturing units, etc. These requirements vary from state to state.
Startups should practice strong contract discipline to control expenses, provide the maximum value, and reduce business risk; otherwise, they face expensive lawsuits.
Some of the most important contracts that a business typically needs include employment agreements, non-disclosure agreements, services agreements, lease agreements, rent agreements, and leave licenses, among others.
Startups should avoid using traditional and time-consuming methods for contract drafting; instead, they should write their contracts in a clear, concise, and simple manner without the use of legal maxims or challenging legal terms, making them easier to understand for the average person or anyone without a background in law.6
DATA PROTECTION & PRIVACY
Startups and other online retailers track and make use of user data, including search history. Startups should ideally avoid requesting permissions that aren’t required for the proper operation of their website or app or gaining access to user’s private information without their approval.
Startups ought to treat user privacy highly, which can only be done by developing privacy policies that are succinct, clear, summarised, and available in the user’s local/native language. Before logging in to any app, users will be able to easily read and understand the privacy policies, terms, and conditions.
ADDITIONAL RESOURCES RELATED TO THE STARTUP INDIA PROGRAM
Identifying Startup The ability of an entrepreneur to exceed the competition in the market is essential, but doing so necessitates first comprehending the competition and creating an ominous business plan. When a company registers, it will become aware of all the other companies operating in the same industry, which will help it develop a development plan.
The business approach of “networking” pulls all the strings necessary to draw in investors, seize opportunities, increase customer awareness, and establish a strong brand identity.
Investors are also your company’s stock speculators. A startup that has registered will have the opportunity to introduce itself to a large group of investors and give them the chance to develop some level of trust in your company.
You can discover hope within yourself with the help of a mentor. A startup that has registered might look for the best mentor who has already been through all the difficult times that it will now face surviving.
After your business makes it through the start-up phase, accelerators offer financial support for building it up.
- Government Office
A large number of government agencies have enrolled with the platform so that the startup can easily reach them.
- Accessibility for Startup
A registered startup will have access to several online tools and be able to use resources on the Startup India platform without any hassles.
- The knowledge base
All the information needed for a company, including important words, stakeholders, legal requirements, statistical data, business analysis, and more, is available online.
- Associated services
This entails contacting every associated service provider, such as banks, law offices, and cloud computing services, and utilizing the best services offered by leading service providers.
It is possible to obtain templates for practically every function, including legal, human resources, and customer service, which could make it simpler to complete tasks with the least amount of people and money.
- Startup Programs and Events
Being constantly engaged and aware of your position in the company are now requirements. Consequently, the following program for startups is hosted by the government and various private entities:
- Online Programs
Learning never ends, thus an entrepreneur can always refresh his knowledge to stay consistent by enrolling in one of the many online courses offered on the website Innovative Challenges. Possibility to take part in various tasks that aid in identity formation, as well as interactions with mentors and incubators.
In conclusion, the Startup India Movement seeks to make lucid entrepreneurial ambitions and ideas a reality, which aids in the country’s overall development not just by creating more jobs or high-quality products but also by creating a standard for the global industrial development sector.
- ALEXANDRA TWIN, Sole Proprietorship, Investopedia (July 26, 2022) Available at: https://www.investopedia.com/terms/s/soleproprietorship.asp
- Arvind Manohar, India’s Startups And Legal Roller Coaster, Legal Service India(Last Visited: 16 September, 2022) Available at: https://www.legalserviceindia.com/legal/article-9182-india-s-startups-and-legal-roller-coaster.html
- Indeed Editorial Team, What Is A Private Limited Company? A Complete Guide,indeed(Last visited: 16 September, 2022) Available at: https://in.indeed.com/career-advice/career-development/what-is-private-limited-company
- Supra Note 2
- Bennett Conlin,The Fundamentals of Contract Management,BusinessNewsDaily(Last Visited: 16 September, 2022) Available at: https://www.businessnewsdaily.com/4813-contract-management.html
- The Editor, Data Protection and Privacy: 12 Ways to Protect User Data, Cloudian( Last Visited: 16 September, 2022) Available at: https://cloudian.com/guides/data-protection/data-protection-and-privacy-7-ways-to-protect-user-data/#:~:text=Data%20protection%20is%20a%20set,handles%2C%20or%20stores%20sensitive%20data.
This article has been written by Jay Kumar Gupta. He is currently a second-year BBA LL.B.(Hons.) student at the School of Law, Narsee Monjee Institute of Management Studies, Bangalore.