Legal Basics that Every Indian Startup Should Know

Successful startups are ones that are driven by passionate entrepreneurs who are focussed on
building unique solutions that deliver customer delight. While it is very important to have a strong
focus on customers and the market, it is equally critical to have a good understanding about the
basic laws, rules and regulations that are applicable for the smooth running of the business.

From formalising a founders’ agreement to safeguarding intellectual property to enforcing

business contracts, it is essential that entrepreneurs are aware and up to date with the latest laws
governing their business and market. Here are some important legal basics that startups and
entrepreneurs in India should be aware of before embarking on a business venture:

1. Formalizing a business structure and founders agreement

The first thing to starting any business is to be clear about the nature and type of the business.
Founders will need to incorporate the business as a specific business type – sole proprietorship,
private limited, public limited, partnership, limited liability partnership etc. It is very essential to
have this clarity at the very beginning as this will be integral to the business’ overall vision and
goals, both short term and long term.

Each business type comes with its own set of legal requirements and regulations and businesses
should pay special attention to them before incorporating the business.

Here is a quick look into the legal implications for the major business types in India:

Business Types
Legal Details
Limited Liability Private Limited
Proprietorship Partnership Company (LLP) Company

Has to be
registered with the
Has to be registered Ministry of
with the Ministry Corporate Affairs
No formal of Corporate under the
registration Registration is Affairs under the Companies Act
Registration required optional LLP Act 2008 2013

Not recognised as Not recognised Is a separate legal Is a separate legal

a separate entity as a separate entity. The entity. The
Legal Status and promoter is entity and promoters of the promoters of the
 personally promoters are LLP are not company are not
responsible for all personally personally liable personally liable
liabilities responsible for towards the LLP towards the
all liabilities company

Limited liability to
the extent of Limited Liability
Member Unlimited contribution to the extent of
Liability Unlimited liability liability towards to the LLP share capital

Minimum of Minimum of one

Number of two persons Minimum of two person required to
Members Can only have one required to start persons required to start a Private
Required person a Partnership start a LLP Limited Company

Ownership can be
transferred by
Not Ownership can be means of share
Transferability Not transferable transferable transferred transfer

Partnership
profits are Private Limited
taxed as per the LLP profits are Company profits
slabs provided taxed as per the are taxed as per the
under Income slabs provided slabs provided
Taxed as Tax Act, 1961 under Income Tax under Income Tax
individual, based plus surcharge Act, 1961 plus Act, 1961 plus
on total income of and cess as surcharge and cess surcharge and cess
Taxation proprietor applicable as applicable as applicable

No requirement Board and General

Annual No requirement for for annual No requirement for Meetings should
Statutory annual statutory statutory annual statutory be conducted
Meetings meetings meetings meetings periodically

Must file Annual Must file Annual

No requirement to No requirement Statement of Statement of
file annual report to file annual Returns & Returns &
with the Registrar report with the Solvency and Solvency and
of Companies. Registrar of Annual Return Annual Return
Income tax to be Companies. with the Registrar with the Registrar
filed on the income Income tax to every year. Tax every year. Tax
of the be filed for the returns must also returns must also
Annual Filings proprietorship partnership be filed annually be filed annually
 Partnership Existence not Existence not
existence is dependent on dependent on
dependant on partners. Can be directors or
partners. Can dissolved shareholders. Can
Proprietorship be dissolved at voluntarily or by be dissolved
existence is will or upon on order of the voluntarily or by
Existence or dependant on the death of Company Law Regulatory
Survivability proprietor partner(s) Board Authorities

Foreigners are Foreigners are

allowed in invest allowed to invest
with/without the with/without the
approval of the approval of RBI
Reserve Bank of and other
India (RBI) and applicable
other applicable permissions for the
permissions for the relevant
relevant Government of
Government of India authorities
India authorities depending on the
Foreigners are depending on the category of
Foreigners are not not allowed to category of business they are
Foreign allowed to be sole be part of a business they are interested to
Ownership proprietors partnership interested to invest. invest.
Another important question that startup founders should be asking themselves is if they are looking
to raise external funds or bootstrap their business. A private limited company is the best option for
startups looking to raise funds as it provides the required flexibility to manage external investments
and company stock.

Given how dynamic the startup ecosystem in India is, it is also advisable to draft a Founders
Agreement. A Founder’s Agreement is essentially a document that specifies important details
about the founding team and the business, such as, roles, responsibilities, executive compensation,
operational details and exit clauses among others.

The purpose of such an agreement is to reduce the possibility of surprises when the company is
fully functional. Having a clear Founders Agreement with all basic details clearly laid out forms a
solid foundation to start and scale a business. The agreement can also act as the go to guide should
disagreements arise.

2. Applying for business licenses

Licenses are integral to running any business. Depending on the nature and size of business, several
licenses are applicable in India. Knowing the applicable licenses for your startup and obtaining
them is always the best way to start at business.
The lack of relevant licenses can lead to costly lawsuits and unwanted legal battles. Business
licenses are the legal documents that allow a business to operate while business registration is the
official process of listing a business (along with relevant information) with the official registrar.

The common license that is applicable to all businesses is the Shop and Establishment Act which
is applicable to all premises where trade, business or profession is carried out. Other business
licenses vary from industry to industry.

For instance an e-commerce company may require additional licenses like VAT registration,
Service Tax Registration, Professional Tax etc. while a restaurant may require licenses like Food
Safety License, Certificate of Environmental Clearance, Prevention of Food Adulteration Act,
Health Trade License etc along with the above mentioned licenses.

3. Understanding taxation and accounting laws

Taxes are part and parcel of every business. There are a broad variety of taxes, such as, central tax,
state tax and even local taxes that may be applicable for certain businesses. Different business and
operating sectors attract different taxes and knowing this beforehand can prove to be useful.

Recently, the Government of India launched the ‘Startup India’ initiative to promote startups, and
introduced many exemptions and tax holidays for startups and new businesses. According to this
initiative, a startup can avail income tax exemption for a period of 3 years as well as tax exemptions
from capital gains and investments above Fair Market Value. The conditions that startups need to
qualify in order to leverage these exemptions are:
• The startup 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.
• Turn over in any year should not have exceeded 25 crores.
• The startup should not have been formed by splitting or reconstructing an existing business.
As far as business accounting is concerned, it is good hygiene to maintain proper books of accounts
and audit them from time to time in order to ensure that relevant accounting and taxation rules are
adhered to. Given the small size of business, many startups initially do not pay close attention to
accounting requirements. However, this situation cannot be ignored for long as it can lead to
serious accounting discrepancies.

Having a sound payment and invoicing system for customers is one part of ensuring a clear
accounting system. If you are an online business, take a look at Razorpay’s payment solutions that
ensure easy, effective and secure payment solutions.

4. Adhering to labour laws

Adhering to labour laws are integral to every organization, small or big. When you are established
as a company and have hired people to work for your organization, you are subject to several
labour laws regardless of the size of the organization.

Laws with regards to minimum wages, gratuity, PF payment, weekly holidays, maternity benefits,
sexual harassment, payment of bonus among others will need to be complied with. It is best to
consult a legal counsel to assess the laws applicable to your startup and ensure that your startup is
compliant to the required labour laws.

With regards to labour laws, startups registered under the Startup India initiative can complete a
self declaration (for nine labour laws) within one year from the date of incorporation in order and
get an exemption from labour inspection. The nine labour laws applicable under this scheme are:

• The Industrial Disputes Act, 1947

• The Trade Unit Act, 1926
• Building and Other Constructions Workers’ (Regulation of Employment and Conditions
of Service) Act, 1996
• The Industrial Employment (Standing Orders) Act, 1946
• The Inter-State Migrant Workmen (Regulation of Employment and Conditions of Service)
Act, 1979
• The Payment of Gratuity Act, 1972
• The Contract Labour (Regulation and Abolition) Act, 1970
• The Employees’ Provident Funds and Miscellaneous Provisions Act, 1952
• The Employees’ State Insurance Act, 1948.
Startups under this scheme will have to file self-certified return for the second and third year in
order to continue with the exemption.

Startups also often hire consultants or freelancers in addition to full time staff, hence employee
policies should cover all employment details with regards to employees both fulltime and part
time.

Having a well designed employee policy can be a major differentiator for startups. An attractive
employee policy can be the key to attract and retain good talent. Employee policies can also prove
to be the starting point for boosting employee morale and increasing productivity.

5. Ensuring protection of intellectual property

Intellectual property is the secret sauce for most businesses today, especially for tech centric
businesses. Codes, algorithms and research findings among others are some of the most common
intellectual property owned by organizations. Startups can leverage the ‘Scheme for Startups
Intellectual Property Protection’(SIPP) under the Startup India initiative.

The scheme was set up to nurture and mentor innovative and emerging technologies among
startups and help in the protection and commercialization of intellectual property. For the effective
implementation of the scheme, facilitators have been empanelled by the Controller General of
Patents, Trademarks and Design.

Such facilitators help startups by providing advisory services, assisting in patent filing and disposal
of patent application among other services at a minimum charge. Complete details with regards to
SIPP can be obtained here
The Office of the Controller General of Patents, Designs and Trademarks controls all patents in
India and startups can also directly e-file their patents here.

6. Ensuring effective contract management

Contracts lie at the crux of running any business. A contract is required to ensure the smooth
functioning of work and is a great mechanism to ensure recourse in case of non-fulfilment of work.
Having basic knowledge about various aspects of contract management can prove to be useful for
entrepreneurs.

As per the Indian Contract Act, 1872, all agreements are contracts if they are made by the free
consent of parties competent to contract, for a lawful consideration with a lawful object, and are
not expressly declared to be void.

Employee contracts are one of the most crucial aspects to be looked into while starting a venture.
Founders many a time collaborate with their own trusted circle of friends in the beginning and
while this ensures a certain ease and efficiency to business operations, outlining and formalizing
employee contracts with details about salary, scope of work and stock options (if any) with even
your first few employees is always recommended. Having this clarity from the very beginning
helps startups reduce risks at a later point in time.

In the early stage of operations, startups also tend to hire contract staff and vendors and having an
effective contract management system will ensure that the right checks are in place for the timely
fulfillment of required work.

Another important contract that startups might find useful to have are NDAs. Startups often thrive
in a crowded market with stiff competition and they often discuss ideas with a host of people from
potential investors to employees to customers.
While this is much needed for the growth of the business, it exposes new startups to risks like the
theft of ideas and other proprietary business information. Ideas that might have been shared in
goodwill might be used inappropriately to the disadvantage of the business.

Hence, to avoid such scenarios, non-disclosure agreements or NDAs need to be drafted and used
by startups while discussing critical business information with people outside the organization.

7. Details about winding down the business

Closing a company is a difficult call to make for any entrepreneur. When a startup decides to shut
down, all the stakeholders from vendors to employees to customers and investors need to informed
in advance and the whole process must be properly planned and executed in order to make the exit
easy on everyone.

From the legal standpoint, there are basically three ways to shut down a startup:

• Fast Track Exit Mode

• Court or Tribunal Route
• Voluntary Closure
Of all the three ways, the Fast Track Exit Mode is the best suited for startups as it allows companies
to expedite shutdown at a lower cost and a shorter time period. In order to apply for a fast track
exit, a company should (a) not have any assets and liabilities (b) not have had any business
operation for the past year. If these two conditions are met, the company can be struck off the
registrar of the Registrar of Companies (RoC).

If you are looking at winding up your company via the Fast Track Mode, you can get all details
and forms here
Another quick way for a company to shut down is through Voluntary Closure; however, this
requires the shareholders and/or creditors of the company to be on the same page with regards to
the details of the closure. While it is an easy route, it might not always be practical or applicable
at all times. The traditional mode of closure via courts or tribunals is not the best suited for startups
as it involves several meetings with various stakeholders leading to prolonged court proceedings.

In addition to the above stated means, The Insolvency and Bankruptcy Bill, 2015 is a new closure
tool that entrepreneurs can use. Leveraging this bill requires startups to have simple debt structures,
where an insolvency professional is hired to liquidate the assets of the company within 90 days, in
accordance to the ‘Startup India Action Plan’.

If a startup does not wish to operate but also not shut down, it can apply to be a ‘Dormant
Company’, that allows a company to stay afloat with minimum compliance. However, a company
dormant for a period of 5 years is automatically struck off from the RoC.
Adhering to legal requirements is very important for any organisation; knowledge and compliance
to applicable laws is the first step to ensure smooth business operations. Hiring a professional legal
counsel to provide advice, oversee and maintain legal records is one of the best ways to ensure that
your company is always safe and does not face legal complications and consequences.

How to register your startup with Startup India

Step 1: Incorporate your business
You must first incorporate your business as a Private Limited Companyor a Partnership firm or
a Limited Liability Partnership. You have to follow all the normal procedures for registration of
any business like obtaining the certificate of Incorporation/Partnership registration, PAN, and
other required compliances.

Step 2: Register with Startup India

Then the business must be registered as a startup. The entire process is simple and online. All you
need to do is log on to the Startup India website and fill up the form with details of your
business.Next, enter the OTP which is sent to your e-mail and other details like, startup as type of
user, name and stage of the startup, etc. After entering these details, the Startup India profile is
created.

Once, your profile is created on the website, startups can apply for various acceleration,
incubator/mentorship programmes and other challenges on the website along with getting access
to resources like Learning and Development Program, Government Schemes, State Polices for
Startups and pro-bono services.

Step 3: Get DPIIT Recognition

The next step after creating the profile on the Startup India Website is to avail Department for
Promotion of Industry and Internal Trade (DPIIT) Recognition. This recognition helps the startups
to avail benefits like access to high quality intellectual Property services and resources, relaxation
in public procurement norms, self-certification under labour and environment laws, easy winding
of company, access to Fund of Funds, tax exemption for 3 consecutive years and tax exemption
on investment above fair market value.

For getting DPIIT Recognition, click on ‘Get Recognised’ button if you are a new user. If you are
an existing user click on ‘Dashboard button’ and then ‘DPIIT Recognition’.

Step 4: Recognition Application

The ‘Recognition Application Detail’ page opens. On this page click on ‘View Details’ under the
Registration Details section. Fill up the ‘Startup Recognition Form’ and click on ‘Submit’.

Step 5: Documents to be uploaded for Registration

• Incorporation/Registration Certificate of your startup
• Details of the Directors
• Proof of concept like pitch deck/website link/video (in case of a validation/ early
traction/scaling stage startup)
• Patent and trademark details (Optional)
• PAN Number

Step 6: Immediately get recognition number

That’s it! On applying you will immediately get a recognition number for your startup. The
certificate of recognition will be issued after the examination of all your documents which is
usually done in 2 days after submitting the details online.
However, be careful while uploading the documents. If on subsequent verification, it is found to
be obtained that the required document is not uploaded/wrong document uploaded or a forged
document has been uploaded then you shall be liable to a fine of 50% of your paid-up capital of
the startup with a minimum fine of Rs. 25,000.

Step 7: Other areas

a) Patents, trademarks and/or design registration

If you need a patent for your innovation or a trademark for your business, you can easily approach
any from the list of facilitators issued by the government. You will need to bear only the statutory
fees thus getting an 80% reduction in fees.

b)Funding

One of the key challenges faced by many startups has been accessing to finance. Due to lack of
experience, security or existing cash flows, entrepreneurs fail to attract investors. Besides, the
high-risk nature of startups, as a significant percentage fail to take-off, puts off many investors.

In order to provide funding support, Government has set up a fund with an initial corpus of INR
2,500 crore and a total corpus of INR 10,000 crore over a period 4 years (i.e. INR 2,500 crore per
year). The Fund is in the nature of Fund of Funds, which means that it will not invest directly into
Startups, but shall participate in the capital of SEBI registered Venture Funds.

c) Self Certification Under Employment and Labour Laws

Startups can self certify under labour laws and environment laws so that their compliance costs
are reduced. Self-certification is provided to reduce regulatory burden thereby allowing them to
focus on their core business. Startups are allowed to self-certify their compliances under six labour
laws and three environment laws for a period of 3 to 5 years from the date of incorporation.

Units operating under 36 white category industries as published on the website of Central Pollution
Control Board do not require clearance under 3 environment related Acts for 3 years.

d)Tax-Exemption

Startups are exempted from income tax for 3 years. But to avail these benefits, they must be
certified by the Inter-Ministerial Board (IMB). The Startups incorporated on or after 1st April 2016
can apply for the income tax exemption.

Requirements which are Waived Off

Startup India has changed the procedure of registration since its inception. It has exempted most
of the previous requirements now. Many documents which were required to be filed previously
are waived off. The list of documents which are not required to be filed at the time of the
registration are-

• Letter of Recommendations
• Letter of funding
• Sanction Letters
• Udyog Aadhar
• MSME Certificate
• GST Certificate

AQ on Startup Registration India

• Who can register with startup India?

An entity incorporated as a Private Limited Company, Partnership Firm or a Limited

Liability Partnership can register themselves under the startup India scheme. The annual
turnover of these business entities should not exceed 100 crores, and they should have been
in existence for up to ten years from the date of its incorporation/ registration. Such an
entity should be working towards innovation, development or improvement of products or
services or processes.

• What are the benefits of signing up with startup India?

There are a number of benefits startups receive by the Startup India Scheme. Nevertheless,
in order to avail these benefits, an entity is needed to be set up by the DPIIT as a startup.
 Startups are allowed to self-certify their compliance for six labour laws and three
environment laws. This is allowed for a total period of five years from the date of
incorporation/registration of the entity. Startups are allowed a three-year tax exemption and
the best intellectual property services and resources solely built to help startups protect and
commercialise their IPRs.

• What kind of business structure should I choose for my startup?

The most preferred business structures for a startup are Private Limited companies and
LLPs. A Private Limited company is legally recognized and generally favoured by
investors. However, it has stricter compliance and may have a higher cost of incorporation.

Whereas incorporation cost is lower for LLPs and they tend to have relaxed compliance in
comparison to Pvt. Ltd. Co. In addition to that, LLPs have limited liabilities and are equally
recognised by investors and all over the world.

• What can I do to attract investors for a start-up?

To attract investors, not only do you need a stellar product with a scalable model, but you
also need visibility. Make sure that your product receives healthy engagement and traction.
You’ll need to register your startup on startup India and proactively seek out investors.
Make sure you are able to effectively communicate your business idea to the investor and
the sustainability of your business model.

• Can a foreign company register under the Startup India hub?

Any entity that has at least one registered office in India can register itself on the hub, since
the location preferences, for the time being, are only created for Indian states. However,
soon the government hopes to start registrations for stakeholders from the global ecosystem
too.

• What is the difference between an accelerator and an incubator?

Startup incubators are typically institutions that help entrepreneurs by developing their
business, especially in the initial stages. Incubation function is usually carried out by
institutions who have experience in the business and the tech world.

Startup accelerators support early-stage, growth-driven companies. These programmes

usually have a timeframe in which individual companies spend anywhere between a few
weeks and a few months working with a group of mentors who are educated and may also
provide financial help.

• For how long is a company recognised as a startup?

 Any business entity that has completed 10 years from the date of its
incorporation/registration, and has exceeded the previous years turnover of 100 crores shall
stop to be a startup on completion of 10 years from the date of its registration/incorporation.

• Can an existing entity register itself as a “Startup” on the Startup India Portal?

Yes, as per the law an existing entity can register itself as a startup, provided that it meets
the prescribed criteria for a startup. They will also be able to avail various tax and IPR
benefits that are available to startups. The criteria are the same as those mentioned in the
article above.

• How do I know my registration is complete?

Once the application is complete, and the startup gets recognised, you will receive a
system-generated certificate of recognition. You will be able to download this certificate
from the Startup India portal.

https://cleartax.in/s/7-steps-to-register-your-startup-in-startup-india#How

HOW TO PITCH?

Recently, the term “business pitch” has become as popular as the term “startup.” A pitch is
essentially a business plan that one presents verbally to potential investors of a business. A
shorter summary of the complete pitch is an elevator pitch. The startup owner has to clearly
explain the business opportunity to the investors, so that they can make the most appropriate
decision.

Here are 10 necessary steps to create a winning pitch for your business.

1. Time span
The pitch should be clearly explained to the investors in a short time. You should know
that you only have a few minutes to sell your business idea. This is a do-or-die situation,
which requires the utmost composure.

2. Make your presentation realistic

Presenting a realistic picture of the future prospects of the business is preferred. You have
been running the business with your own funds up until now, so you have had your share
 of successes and failures. Your projections must be based on those experiences and must
sound absolutely realistic.

3. Savingsattitude
One of the most important qualities of a startup founder is financial control. Having an
understanding of where each and every penny is being spent in the business will add to
your brownie points. You have to make the investors know that you have a grip on the
business and its operations. They should feel that you are a dependable leader and are
passionate about your vision.

4. Thebusiness opportunity
The most important aspect of pitching for your business is to highlight the business
opportunity and how are you going to tap it. Your business is out there to fill gaps, but it
is the size of the market and its affinity to the product that will fetch you the investor’s
trust. Highlighting the opportunities and challenges would help you put forth your
arguments more assertively.

5. Understanding of the competition

Understanding the competition is important for every business owner, which must be
showcased while presenting the business pitch. An in-depth competition analysis must be
presented and you must highlight how your product stands out and has better future
prospects, as compared to others.

6. Marketing strategy
Knowing your marketing plan is another very important aspect of pitching your business.
Your goal is to build a market for your products and services. The strategy has to be
clearly explained to the investors, so they know how are you going to position the
product in the market.

7. Target audience
Being focused about your business and knowing who exactly you wish to sell to is
important for the business. This lets you earn the investors’ confidence so they know that
you are going to reach out to a tangible audience and achieve the desired profitability.