Legal Checklist for Startups in India – Business Structure, Compliance & IPR

Starting a business in India is exhilarating but requires traversing a web of legal obligations. Sadly, many entrepreneurs fail to fulfill various legal obligations, even at the early stages of the company. As a startup in India you cannot avoid legal obligations in relation to registering your business, complying with taxation regulations, contracts, intellectual property and acts with respect to labour. If they are not met, then it could lead to penalties, disputes or even jeopardize your business. A thoughtfully conceived legal checklist that meets the challenges of your startup’s growth will help to provide founders a safety net to build on solid foundations. This article refines complex business legislation and legal processes into workable steps, to simplify the topic ‘what legal checklists are involved to support a successful startup in India’.

Choosing the Right Business Structure

Choosing the right business structure is the first legal step to take for any startup in India, and possibly the most important. Each structure has legal implications for taxation, liability, ability to raise fund, and the day-to-day operations, so it is important to choose wisely.

1. Sole Proprietorship – The simplest structure, where one person owns and runs a business. Registration with the government is minimal; however, the owner has unlimited liability, meaning his or her personal assets may be used to pay for business debts.
2. Partnership Firm (Partnership Act, 1932) – Similar to a sole proprietorship, but here two or more people own, share profits, and losses from a business. Registration is optional however, it is recommended to register if partners wish to ensure their legal liability is limited. Partners also have unlimited liability for business debts, same as a sole proprietor.
3. Limited Liability Partnership (LLP) (LLP Act, 2008) – A relatively new structure in India, LLP’s are a very advantageous structure for startups. An LLP combines the flexibility and ease of doing business like a partnership, it offers the partners limited liability protection, meaning that partners are not personally responsible for business debts over and above their capital contribution to the business.
4. Private Limited Company (Companies Act, 2013) – The most recommend structure for startups who intend to raise investment. It provides limited liability, a distinct legal identity, and it is easier for fundraising. Compliance requirements are greater but your credibility is enhanced with investors.
5. The One Person Company, (OPC) – This is a new type under the Companies Act, 2013, for the solo entrepreneurs who want limited liability without requiring multiple partners.

Essential Legal Steps: Once the structure is determined, the founders must incorporate with the Ministry of Corporate Affairs (MCA) get a PAN and TAN with the Income Tax department. The founders must also register for the Goods and Services Tax (GST), if applicable.

Registration & Licenses Required

Once the business structure is established, the following step will pertain to the legal structure with obtaining your registrations and licenses to ensure that you can operate as a legal entity and avoid such penalties.

Business Registration (Incorporation)

With a Private Limited Company, LLP and OPC your registration will be done with the Ministry of Corporate Affairs (MCA) and depending on the structure would be subject to the Companies Act, 2013 or LLP Act 2008.

The registration process involves filing incorporation documents, the issuance of a Certificate of Incorporation and the registration of the directors with DIN (Director Identification number).

GST Registration (Goods and Services Tax Act, 2017)

• Mandatory when turnover exceeds ₹40 Lakhs per annum (₹20 Lakhs for service providers in certain states).
• This is a requirement for all kinds of e-commerce startups and for those supplying goods and providing services outside the state.

Shops and Establishment Act License

• State-specific, needed for offices, shops or commercial establishments.
• Regulates working hours, rights of employees and working conditions.

Trade licenses

• This is issued by the local municipal authorities.
• It ensures that the business activities are complying with local laws and zoning regulations.

Specific licenses

• FSSAI License: For food businesses (Food Safety and Standards Act, 2006).
• RBI / SEBI Approvals: Starts ups in the fintech or investments space.
• Environmental clearances: Manufacturing / pollution sensitive industries.

Taxation & Financial Compliance

For start-up businesses, managing finances is even more difficult than tracking profits, it’s ensuring that everything is compliant with the laws for taxation, and other rules in India. If your start-up ignores these rules, you can expect penalties, audits or even legal action can follow.

Income Tax (Income Tax Act, 1961)

• Start-ups will need a Permanent Account Number (PAN) and Tax Deduction and Collection Account Number (TAN).
• Businesses must also deduct Tax Deducted at Source (TDS) on certain payments, like salary, rent or professional fees.
• The start-up will have to pay advance taxes if liability is greater than ₹10,000 in a financial year. 

Goods and Services Tax (GST) (GST Act, 2017)

• Registered businesses have to file monthly or quarterly GST returns. 
• Provided if purchases are properly documented, Input Tax Credit (ITC) can reduce their tax burdens.

Startup India Scheme: Tax Benefits

• Eligible Startups recognised by the Department for Promotion of Industry and Internal Trade (DPIIT) can avail the tax holiday for three years, under Section 80-IAC.
• Investments above fair market value won’t be subjected to “angel tax”, Section 56(2)(viib) of the Income Tax Act.

Books of Accounts & Audit – Companies Act 2013 – Section 128

• A company and an LLP must keep proper books of accounts.
• A Company must statutorily audit its statements, while an LLP must consider conducting an audit if the turnover exceeds ₹40 lakhs, or contribution exceeds ₹25 lakhs.

ROC Filings (Registrar of Companies)

• Companies must file annual returns (MGT-7) and financial statements (AOC-4) each fiscal year. Non-compliance poses the risk of heavy penalties and also the disqualification of directors.

Intellectual Property Rights (IPR) Protection

Intellectual property, whether a brand, technology, content or design, is probably one of the most valuable resources of any startup. However, this is often not understood or considered by founders until someone basically copies it. Protecting intellectual property, sponsored by your country, is essential. It reduces the chance of a dispute and it increases a startup’s valuation, many investors will find out whether a company is protecting its IP when assessing a startup.

Trademark protection, the first and most common form of intellectual property protection, is governed by the Trade Marks Act, 1999. A trade mark protects a business’ brand names, logos, slogans, or even distinctive packaging. Trademarks provide the business owner a way of preventing impersonation in the same category of goods or services by other businesses. This protection is especially valuable for consumer-led startups, as it is often the brand name and its communication which takes precedence for customers.

Patents provide a statutory right to make use, and commercialize an innovation, as found in the Patents Act, 1970. Some startup owners may be reluctant to file patents because of the inherent complexity and costs associated with the process. Patent protection may provide startups with exclusive rights which can be beneficial as a competitive advantage and be attractive to investors or other businesses that value proprietary technology. Startups should seek to file patent applications if they have invented something, if they do not, their competitors could patent before them and lose the competitive advantage the startup was going to rely on.

Similarly, copyright protects creative works, and is covered by the Copyright Act, 1957. Copyright can be used for protecting a software code, website content, mobile applications, designs and layouts, videos and marketing products. In particular, startups in sectors like IT, media and design need to be diligent that copyright is secured. The Designs Act, 2000 protects aesthetic features of products from competitors. For startups in fashion, lifestyle and consumer goods sectors, this can be of significant value.

In addition to registration, startups should also consider use of contracts, such as a Non-disclosure Agreement (NDAs) and clauses that assign intellectual property rights in their respective employment contracts. This protects and retains the ideas, code or design, created or developed by employees and freelancers, with the company.

Employment & Labour Laws

As start-ups increase in size and begin their hiring of employees, ensuring compliance with labour laws becomes a significant task. Initially, small teams are likely to be informal, but it is critical to have the right contracts with the very basic regulations to avoid potential disputes.

1. In most states, registration under the Shops and Establishments Act is legally required which regulates working hours, holidays, leave policy, and working conditions of commercial establishments. Even if a start-up is operating from a co-working space, there will be a requirement for this registration.
2. When a business grows to a certain size, it has a legal obligation to comply with employee benefits legislation. For example, when a business has 20 employees or more, it must comply with the Employees’ Provident Fund (EPF) Act, 1952, which obliges the employer to begin a process of arranging retirement savings contributions from both the employer and employees. Likewise, the Employees’ State Insurance (ESI) Act, 1948, obliges a company to provide medical benefits when it has 10 or more employees. The Payment of Gratuity Act, 1972 also applies when a company has 10 or more employees, and it may provide a gratuity benefit for long-term service.
3. The compliance with the Sexual Harassment of Women at Workplace (Prevention, Prohibition and Redressal) Act, 2013 (commonly referred to as the POSH Act) is also important. Under this law, if you have more than 10 employees, you are required to form an Internal Complaints Committee for the purpose of handling cases related to workplace harassment.

Contracts & Agreements Every Startup Needs

Contracts are an essential layer of legal protection for startups. The most important contract for legal protection is the founders’ agreement, which outlines the role of each founder, the equity they will receive, how decisions are made, and the exit rights of each founder to avoid disputes between co-founders. Startups should also have employment agreements that clearly outlines the responsibilities of the employee and the relevant clauses on termination and ownership of intellectual property before hiring anyone.

When dealing with outsiders, NDAs will provide protection for any confidential information that needs to be shared with outside parties (for example, investors, vendors, freelancers, etc.). Vendor or supplier contracts limit your liability and also outline timelines, payment methods, and specifics of deliverables. When investors are onboarded, shareholders’ agreements (SHAs) will outline how voting rights are allocated, rights to exit, and how profits are allocated.

Lastly, online businesses should have Terms of Service and a Privacy Policy, as they are now required by law under the Information Technology Act, 2000 to protect the customer and business. Overall, the agreements outlined above will provide clarity, certainty and reduce risk, and increase the overall credibility of your business.

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