In a rapidly developing world where capitalism have stemmed its roots deep in
the economic development of nations, the idea of startup is its wonderful
product. Concept of startup is not new but rather all big players today were
startups at their initial stage. Now, more and more countries are providing an
inclusive environment for startups to grow and to compete with other big
In India, the startup ecosystem was realized after the LPG reforms of
1991, but the real spike in startup ecosystem was seen after the 2008 economic
recession. Now, India is among the most startup friendly nations in the world.
Their number is in the rise and they are now considered as important engines of
growth and job creation.
India is often described as the posterchild of
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 which we will discuss later, but first,
let us discuss what actually is a startup.
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 entrepreneur 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:
- one person company (OPC),
- limited liability partnership (LLP), or
- private company.
Indian government has realized the importance of startups in an economy and
had gotten up to the task of promoting startup culture by launching Startup
India initiative in 2015. The eligibility criteria for startups to be
recognized under this initiative is:
- 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.
- Turnover should be less than INR 100 Crores in any of the previous
- An entity shall be considered as a startup up to 10 years from the date
of its incorporation
- 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".
Setting up a business is not a child's play. There are various legal compliances
which needs 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:
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.
Although there are also provisions regarding conversion from one business
type to another
Registration/Incorporation of Startup:
After deciding the business type the founder wants to proceed the startup with,
the next and one of the most important step is to register the startup. With the
ease in startup registration process, many aspiring entrepreneurs wish to bring
their startup into reality.
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 Department for Promotion of Industries and Internal Trade
(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
If there are multiple partners, it is advisable to draft a founder's agreement.
Although it is not necessary, but having a founder's agreement will come in
handy in the long run. 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
Applying for Business Licence:
Licences are important to run any kind of business. Depending on nature and size
of business, several licences 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.
Ex- a restaurant may require licenses like Food Safety License, Certificate of
Environmental Clearance, Prevention of Food Adulteration Act, Health Trade
License and an e-commerce company may require additional licenses like VAT
registration, Service Tax Registration, Professional Tax etc.
Adhering to Labour Laws:
Every business when it grows require more and more employs. 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,
If the startup is registered with the Startup India initiative, for the first
one year from the date of incorporation or registration of partnership, founders
can sign a self-declaration and be exempted from inspection under the following
- The Industrial Disputes Act, 1947
- The Contract Labour (Regulation and Abolition) Act, 1970
- The Employees' Provident Funds and Miscellaneous Provisions Act, 1952
- The Employees' State Insurance Act, 1948.
- 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 Trade Union Act, 1926
- Building and Other Constructions Workers' (Regulation of Employment and
Conditions of Service) Act, 1996
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
- term of employment,
- intellectual-property safeguard,
- probation period if any,
- Terms of termination (standard and immediate termination)
- Contract of service or for service clause
A non-disclosure agreement is 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. Many-a-times, ideas and business
information shared in goodwill may be misused. Hence, to avoid such situations,
startups must use the drafted NDA while discussing critical business information
with people outside the organisation.
There are generally 3 types of non-Disclosure agreements:
- Unilateral NDA- it is between 2 parties but only one party discloses the
confidential information and expects other party not to disclose that
- Bilateral NDA- it is also between 2 parties and both of the discloses
confidential information to each other with an intention protect that
information from external parties.
- Multilateral NDA- here more than 2 parties are involved where only 1
party shares the confidential information with others while others are obliged
not to disclose that information.
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. IP rights are important because they can:
- set a startup apart from competitors
- be sold or licensed, providing an important revenue stream which is crucial for
- offer customers something new and different
- form an essential part of marketing or branding
- be used as security for loans
Startups can make use of the 'Scheme for Startups Intellectual Property
Protection'(SIPP) under the Startup India initiative. The objective of this
scheme is to reduce the cost and time taken to acquire a patent by the startup,
making it financially viable for startups to protect their innovation and
encouraging them to innovate further.
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. GST also forms part of this regime. Different business and
operating sectors attract different taxes and knowing this beforehand can prove
to be useful.
There are several tax benefits under the Startup India initiative
to startups with 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.
If a startup has its website, then it becomes mandatory to put a customized and
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 condition establish a legal
binding contract between the company and its clients.
It should cover all the
aspects relating to the product or service which a startup is engaged in and
should protect against any future claims or disputes. A well-drafted contract
includes limitations on how the site can be used, disclaimers, liability
information, copyright protection warnings, the jurisdiction where any disputes
must be brought etc.
Having a Prudent Winding Up process
Having a clear and prudent winding up process is also crucial for a startup.
Although taking 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 informed in advance
and the whole process must be properly planned and executed in order to make the
exit easy on everyone.
There are 3 ways to shut down a startup:
Fast Track Exit Mode:
It is best suited as it requires companies to shutdown at a lower cost and
lesser time. To apply for this mode, company should not have any assets and
liabilities and have had no business operation in the past year.
For voluntary closure, the shareholders and creditors must be on same page
with regards to details of closure. It is generally not preferred.
Courts or Tribunal:
It is the traditional mode and can lead to prolonged court proceedings and
is generally not suited for a startup.
Startup India initiative also provides for mechanism to wind up operations with
ease. Its objective is to allow entrepreneurs to reallocate resources and
capital to new avenues faster. As per Insolvency and Bankruptcy code,
2016, startups with simple debt structures, or those meeting certain income
specified criteria can be wound up within 90 days of filing an application for
insolvency. It will encourage entrepreneurs to experiment with new and
innovative ideas, without having to face complex and long-drawn exit processes
where their capital becomes interminably stuck in the event of business failure.
Having met with all these compliances will not ensure success of the startup
automatically. It is upon the hard work of its members that will bear the fruits
of success. However, having met with all these legal compliances with utmost
precision will definitely improve the chances of success of the new
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 complications