Basic laws to consider when starting and running a start-up company in India

Basic laws to consider when starting and running a start-up company in India

Numerous difficulties are faced by the founder of start-up with respect to the smooth functioning of business in future. A hardworking founder and their employees are the key of the successful business. A definite awareness of the fundamental laws, rules, and regulations applicable for the business’s smooth operation is just as important as having a strong focus on consumers and the market.

What is the procedure for establishing a business and the applicable law on every stage?

Type of Business: There are four types of companies that can be established under different enactments.

  1. Single proprietorship Business: Generally these types of business are acquired by the founders on a small scale business. There is no requirement to register the company. Moreover, the person running the business is solely responsible for its operation and the liability arises from the said business.
  2. Partnership Firm: Minimum 2 members can establish a partnership firm and it is completely optional to register the firm. The promoters of the company stand responsible for the operations of company.
  3. Limited Liability Partnership: The limited liability Partnership is different form partnership firm as the registration of LLP is mandatory. The LLP has to be registered with Ministry of corporate affairs under the LLP Act, 2008. Minimum 2 members can establish a LLP and they have limited liability towards the company to the extent they have contributed.
  4. Private Limited Company: The private company needs to be registered with the Companies Act, 2013. One person can start a private limited company and, it is advisable to start a private limited company if the company needs to raise funds from the external ways. This type of company has perpetual succession and the ownership can be transferred by transferring the shares.

In addition to it the company can avail the benefits of start-up India plan by making them register in the plan on portal.

Licensing: The business needs to be licensed according to the nature, size and type of business. There is different kind of licenses that needs to be obtained before starting any company such as drug license for establishing a business that deals with drugs. The lack of business license can create big troubles in the future that eventually lead to the lawsuits, therefore, it is always recommended to obtain license before starting any business if required under any legislation.

Labour laws: The founder or the employer needs to adhere different labour law legislation for the smooth functioning of the business, as the employees are the important human asset of the company that needs to be retained in the company for the long term. There are several laws related to the Gratuity, PF funds, Maternity benefits, hence it is advisable to consult a legal advisor to know get the information regarding labour laws that are applicable on that particular business. Some of the common labour laws are:

  1. Industrial Dispute Act, 1947
  2. Trade Union Act, 1926
  3. The Employee’s State Insurance Act, 1948
  4. Maternity Benefit Act, 1961 etc.

The company can seek exemptions from labour inspection for five years under nine different laws by registering themselves under start-up India Plan and submitting self declaration form within 1 year of incorporation.

IPR (Intellectual Property Rights) Laws: As the company is starting up with a creative ideas and products that needs to protected from competition and multiplication. The founder needs to be well versed with the IPR laws to protect the intellectual rights of the company. Also the Government of India provides various schemes and subsidies for start-up companies.

Taxation and Accounting Laws: Every company needs to pay tax as per the recent slabs, so it is important to know the laws that are applicable to the particular company with respect to tax and accounts, as the account have to be prepared according to the guidelines provided by legislation. The Government of India provides certain exemption to start-up companies in order to promote the start-ups in India. In order to avail certain condition the company needs to fulfil certain condition provided under law.   

FEMA (Foreign Exchange Management Act) Act, 2000: According to Sec 6 of the FEMA Act, investors from abroad can contribute 100 percent to the Indian start-up with or without the approval of Reserve Bank of India depending on the type of business.

Winding Up: If the company faces some unfavourable circumstances, then the founder needs to wind up the company by following any of the method prescribed by law. The company can be winded up by:

  1. Fast track exit mode: This is the most recommended type for winding up a company as it is the easiest and cheapest way to windup a start-up company. The company can be winded up by the Registrar of company by fulfilling certain conditions such as information about the assets and liabilities, their ongoing start-up companies etc.
  2. Court route: The founder of the company can approach court for winding up the company. It is the lengthiest procedure as it involves several meetings and long court proceedings.
  3. Voluntary closure: The Company can be winded up if the shareholders and creditors want to wind up with the mutual decision. It is difficult to wind up by this method as the approval of both is a big issue.

As there are different laws applicable on different business, the founder has to study all the aspects respected to his business and the applicable laws. Therefore, it is essential to consult a legal advisor for getting information about the applicable laws, the points to be added  in different agreements related to business to avoid future calamites that may lead to the legal suits or winding up of company.

-Surbhi Singla

-Associate at Aggarwals & Associates, S.A.S Nagar, Mohali.