STARTUP LEGALITIES

In India, the startup ecosystem was realized after the LPG reforms of 1991, but the real spike in
the startup ecosystem was seen after the 2008 economic recession. Now, India is among the
most startup friendly nations in the world. Their number is on the rise and they are now
considered as important engines of growth and job creation.

India is often described as the poster child of emerging markets for its vast commercial
potential for startups. Setting up a startup is not easy and to keep it afloat requires a lot of hard
work. It has to comply with various laws and regulations.

What is a Startup?

Startup is a project which is still in its initial stage of operations, struggling to find its business
model, through trial and error, or doesn't have a fully developed business model. It is founded by
one or more entrepreneurs to develop a product or services for which they think there is
demand for it. It isn't like a regular company. Moreover, it is not necessary that it should be a
company. It can be a:
● proprietorship,
● partnership,
● one person company
(OPC),
● limited liability
partnership (LLP), or
● private company

The Indian government has realized the importance of startups in an economy and has gotten
up to the task of promoting startup culture by launching the Startup India initiative in 2015. The
eligibility criteria for startups to be recognized under this initiative is:
1. The startup should be incorporated as a private limited company or registered as a
partnership firm or a limited liability partnership, but it can't be a sole proprietorship.
2. Turnover should be less than INR 100 Crores in any of the previous financial years
3. An entity shall be considered as a startup up to 10 years from the date of its
incorporation
4. The Startup should be working towards innovation/ improvement of existing products,
services and processes and should have the potential to generate employment/ create
wealth.

An entity which is formed by splitting up or reconstruction of an existing business shall not be

considered a "Startup".

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Setting up a business is not a child's play. There are various legal compliances which need to
be fulfilled by a startup as well as an established business to work without any hindrance of any
kind. Before drafting agreements, the founders should be aware and updated about the laws
governing their business and market.

Below are mentioned the legal compliances and regulations one must be aware of for starting a
startup:

● Type of Business
● Registration /Incorporation of startup
● Founder’s agreement
● Applying for business license
● Adhering to labour laws
● Employees contract
● Non-Disclosure Agreement
● Safeguarding intellectual property
● Taxation
● Website terms and conditions/Privacy policy
● Having a prudent winding up process

1. Type of Business
Before setting up a business, it is very important to choose what type of business you
want to pursue whether it is partnership, LLP, private company or proprietorship.
However, a sole proprietorship is not recognized as a startup under Startup India
initiative. Each business type has its own merit and demerits and comes with its own set
of legal requirements and regulations, so one should be very cautious while choosing a
business type.

2. Registration /Incorporation of startup

After deciding the business type the founder wants to proceed with, the next and one of
the most important steps is to register the startup.
This process involves 2 steps:
Incorporating the startup:
It involves incorporating the business as a partnership or limited liability partnership or a
private company. In case of partnership, it has to be registered with the registrar of firms
of the state in which the firm is situated, in case of LLP and private company, all
designated partners/directors have to obtain Director Identification Number (DIN) and
Digital Signature Certificate (DSC) and then incorporate it with the registrar.

Registering with Startup India Initiative:

This has to be done after incorporating the business. The entire step is simple and
online. After uploading required documents and fulfilling certain conditions, the startup
will get the recognition of the Department for Promotion of Industries and Internal Trade

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 (DPIIT). This recognition will help in availing a number of benefits like tax exemption for
3 consecutive years, access to high quality Intellectual Property services and resources,
relaxation in public procurement norms, self-certification under labour and environment
laws, easy winding up process etc.

3. Founder’s agreement
Founder's agreement is a document which specifies all the necessary details about
founders and business such as roles and responsibilities of the founders, operational
details, executive compensation, conflict resolution clause and exit clauses among
others. Founders' agreements also help in tackling uncertain occurrences like the death
of the co-founder, resignation, which directly affects the sustained growth and smooth
running of the business or firm.

4. Applying for business license

Licenses are important to run any kind of business. Depending on nature and size of
business, several licenses are applicable in India. Business licenses are the legal
documents that allow a business to operate while business registration is the official
process of listing a business with the official registrar.

5. Adhering to labour laws

Every business when it grows requires more and more employees. Founders have to
keep in mind their responsibilities as an employer and ensuring compliance with all
requisite labour regulations which includes laws on payment of wages, provident fund
and gratuity, workplace sexual harassment, maternity benefits, etc.

6. Employees contract
It is also necessary to sign a contract with the employees to make sure the role and
responsibilities along with the respective jurisdiction of the work done by the employee
for the startup. An employment agreement should include:
● term of employment,
● intellectual-property safeguard,
● probation period if any,
● no-poaching
● non-solicitation
● Terms of termination (standard and immediate termination)
● Contract of service or for service clause

7. Non-Disclosure Agreement
A non-disclosure agreement is a must for a new startup which is just beginning to
establish its presence in the competing world by providing unique products or services or
both. A non-disclosure agreement is a written contract between two parties that prohibits
the sharing of confidential information shared between the contracting parties. It ensures
that the privacy of the company, as well as that of the other party, remains protected.

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 There are generally three types of NDA:
● Unilateral
● Bilateral
● Multilateral

8. Safeguarding intellectual property

Intellectual property is the secret ingredient for most businesses today, especially for
tech centric businesses. Codes, algorithms and research findings among others are
some of the most common intellectual properties owned by organizations. It covers
copyrights, patents and trademark laws which are crucial for every startup.

9. Taxation
There are several tax benefits under the Startup India initiative to startups with the aim to
promote the startup culture in the country. These benefits include income tax exemption
for 3 years as well as tax exemptions from capital gains and investments above the Fair
Market Value. Having a good knowledge of taxation laws can save the startup handsome
amounts of capital.

10. Website terms and conditions/Privacy policy

If a startup has its website, then it becomes mandatory to put a customized and
mandatory terms and conditions / privacy policy. Privacy policy is a website's legal
document which details the company's views and procedures on information collected
from visitors whereas terms and conditions provide clarity about what should happen in
any given situation. Terms and conditions establish a legal binding contract between the
company and its clients.

11. Having a prudent winding up process

Having a clear and prudent winding up process is also crucial for a startup. Although
making a decision of winding up is most difficult, it also requires a lot of compliances.
When a startup decides to shut down, all the stakeholders from vendors to employees to
customers and investors need to be informed in advance and the whole process must be
properly planned and executed in order to make the exit easy on everyone.

Adhering to legal formalities is very important for any business; knowledge and compliance to
applicable laws is the initial step to ensure smooth business operations. This is where a
professional and experienced lawyer will serve the needs of the startup by safeguarding it from
any legal implications or consequences.

References:
https://www.legalserviceindia.com/legal/article-6811-legalities-in-starting-a-startup.html
https://www.kanakkupillai.com/learn/legal-procedures-required-for-startup-company-in-i
ndia/