FinanceStarts-Up Tips

5 Legal Things to Keep in Mind While Creating a Startup

Starting a new business is exciting. But at the same time, it may leave you in doubts, nervousness and a lot of other legal dilemmas. Business newbies often trap themselves in knots, wondering whether to register private company in India for their startup or go with LLP registration.
I have encountered a number of questions on introducing capital at the earlier stage. Also, a question on whether to opt for loan or go the Angel way remains a colloquial paradox for startups.
Well, let us consider few of the legal scenarios that a startup needs to take care of.

1. Playing a fair licensing game

Startups d not operate in ambiguity. If your startup is into something that requires licensing, do it. Play the fair game or else be prepared for expensive, almost-infinite legal suits, slowed down investments, losing investor’s faith and even shutting down of business. Tad simple but pretty fatal – licensing awareness is a necessary hygiene that startups should strictly follow.

Check if you are a budding startup entrepreneur with your new business in the following domain:

  • Get the Shops and Establishments Registration done with respect to the Premises from where services are provided to customers.
  • FSSAI License or Food License is required in case of starting up a food truck, restaurants, food joints, food item or consumable item packaging, food item or consumable item delivery, etc.
  • GST Registration is advisable if not mandatory. Though, it is mandatory for all Business or Professional entities exceeding INR 20 lakh turnover a year (10 Lakhs for the north-eastern Indian States). You are bound to scale your startup with time. Therefore, it is best to have a voluntary registration.
  • You cannot reap the benefits of government schemes and subsidies without the registration under MSME Department. Do the same to avail benefits under schemes introduced by the Government for prescribed activities.
  • Business activities involving products’ import and export require the proprietor to obtain Importer – Exporter Code.

What will you require for business licensing?

The business incorporation certificate needs to be verified while applying for any specific license. Other documents may be requested by the concerned authorities upon initiating the licensing process.

2. Sources of Finance

Startup needs to introduce capital and funds in the business to match with the daily with the day-to-day business requirements. Ensure this by bringing in the working capital for your startup. But then, there are multiple ways to bring that finance. It is essential to keep a track of your finances on paper to acknowledge its legal stand.

During the business incorporation, the paid-up capital of INR 1 lakhs is introduced. But then, that is not enough to run a healthy startup so it will require finances from multiple sources.

Bring in Shared Capital:
It is possible to inflate share capital at future date with the consent of other members. A startup at incorporation pays the necessary fees or stamp duty based on the company’s authorised capital of the. The number for same must be mentioned in the MOA. Startups can choose from a variety of share capital like authorized share capital, issued share capital, subscribed share capital, and paid-up capital.

Raising further capital
Startups incorporated as a private limited company can bring more capital apart from routing it through shared capital way. Offering shares to existing employees through the ESOP program is a trending norm. Equity stakes extended to the existing company members and Private Placement is also another way to do so. The bigger route is of course getting it through an IPO for a Public Limited Company.

Startup business

What you need to understand for getting capital from external sources?

Most of the Indian startups rely heavily on equity holders for investment. The return to the equity holders is considered not as an expense for the Company but a profit distribution in the form of dividend.

Startups should make a note that funds raised from the external sources are charged against profit. It is because the predefined interest rate is paid irrespective of the profit earned by the Company. Though startups benefit from raising funds from external sources, it does not dilute the ownership of members. Moreover, such a route will help startups to get the best resources for the company’s growth initially.

Funds provided by the venture capitalists and term loan providers seek are in lookout for timely return from the Company. This is because they lend in money for longer term. Therefore, startups should consider presenting the financial planning well in advance and in a concise manner. This goes to build investors’ trust right from the initial funding stage.

3. Choosing a business structure

While it seems easy at a first glance, there’s a lot to ponder on this one. There are around 10 types of business structure in India that one can opt from. Choosing the right business structure for your startup is sort of a sweet headache.

Generally, a startup business in India can either be a limited liability partnership or a private limited company. The ball game is in identifying the business nature, corporate flexibility, tax efficiency, compliance requirements, and cost of formation, etc. A typical Indian scenario sees startups incorporating as a private limited company; purely because it gets easier to raise funds from investors.

What will you require for establishing a private limited startup?

Get a name approval for your business from MCA, have a registered office address and keep at least 2 directors having director identification numbers (DINs). The minimum authorized capital of Rs.1 Lakh is mandatory along with the memorandum of association (MOA) and articles of association (AOA), digital signature certificates (DSCs) wherever applicable.

Fulfil these requirements and you’ll have a certificate of incorporation by post delivered at your registered office.

4. Employee and Vendor Agreement

Startups should stick to standardised policies and procedures from the commencement itself. It is usual for companies to enter into agreements due to operational needs. The policies for the same should be set up.

The agreements; like shareholders’ agreement, non-disclosure agreement, terms and conditions for website usage, etc., represents business’ concern.

Recent startup trends in India is also witnessing shareholders’ agreement or co-founders’ agreement. This is highly preferred for clear demarcation of roles and responsibility of the co-founders.

Employee contracts must outline and formalize with details regarding salary, employees’ scope of work, and stock options (if any) even if it is one of your first few employees. Such clarity from initial level helps mitigating business risks when startup scales up. In early stage, hiring contract staff and vendors requires effective contract management; though not a legal mandate, it’s highly useful. This ensures that things are in its place and pace to conclude work/task work within the stipulated time. Also, compliance with labour laws requires having a dispute mechanism system in place to swiftly resolve any issues.

Imagine entering into a vendor contract that has some hidden clause(s) that possibly could trigger unpredicted price escalation, or give termination power to the other party without the notice requirements. This can create chaos within your startup. Therefore, though not mandatory, it is important to secure your business transactions with symbiotic contracts with third parties.

5. Adhering to auditing and taxation compliances

You will need to get used to taxation and accounting as it is a part of annual legal compliances. Get familiar with GST since all other taxes are now abolished. GST for different goods and services are classified under multiple tax slabs.

Check out ‘Startup India’ initiative by Indian Government. Under this initiative, a startup can claim tax exemption for 3 years even from capital gains and investments above Fair Market Value. But, ensure these conditions are fulfilled to leverage this initiative.

– A startup should not have an age of above 7 years (10 years for biotech) at the time of filing an exemption from the incorporation date.

– Your startup should either be incorporated as a Registered Partnership, or Limited Liability Company, or Private Limited Company.

– A turnover in any year (since incorporation) should be below INR 25Crores.

– Must be a fresh startup and not formed by reconstructing or splitting any existing business.

Books of accounting are also another aspect over here. Good startup hygiene involves maintaining correct books of accounts and auditing them from time to time. This is to ensure all the necessary accounting and taxation rules are adhered to. Negligence in doing so can lead to serious accounting discrepancies and problems in annual compliances for private limited company.

What will you require to follow audit and tax compliances?

Since most of the sprouting business these days go for Pvt. Ltd company registration or LLP, auditing becomes mandatory. The ideal scenario involves having an internal auditor and also hiring 3rd party auditor for annual audits.

Following GST regulations is of prime importance, from monthly GST filing, to quarterly, and annual filing. Taxation for startups also involves declaring tax liabilities at the time of incorporation.

Conclusion:

The steps of incorporating, registering, managing, and operating startup needs detailed attention. This should be focused on the provisions defined for governing the respective dealings, procedures, and business actions. This is a little frustrating for the entrepreneurs who are dedicatedly immersed in the primary business activities. But the importance of legal requirements and procedures shouldn’t be overlooked that essentially protects the business.

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Gerald Thomas

Gerald Thomas is a freelance writer, with years of experience, creating content for varied online portals. He has expertise in writing about lifestyle, food & many more.

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