Legal Requirements for starting a new Business & startups
- lexperspective10
- Dec 24, 2020
- 9 min read
There are a number of people who are loaded with ideas but are stuck up when it comes to getting to start with or launching the idea and making it a business. The term ‘business’ has always been a buzz to the world. For example, you like to travel a lot and you wonder how to make money out of it. As a traveler, you can document your travel journey, become a photographer or videographer and there are wide other options on the table. Even if you decide to sell your quilling work, you can establish a business out of it and develop it. Although, I am not focusing on how to widen your business, following these steps devotedly will ultimately take your business to a higher position.
It is pertinent to note that registration for sole proprietors is not required. The same is optional for partnership firms, however, mandatory for LLPs and private limited companies. Only a private limited company, partnership firm, or an LLP can be considered as a start-up, as per the Indian law. Non-compliance with the following legal requirements may attract heavy penalties on such start-ups. Thus, it is essential to overlook the same, and maintain the company's goodwill.
Before anything you start with, it’s crucial to ensure the legality of the business itself that you have chosen to start or the business activities you carry out. It is appreciated to approach a lawyer at this stage. It is easy to drop your effort and stop the reading here since you can leave all the work to the lawyer. But it’s very important to develop knowledge on every step of establishing and developing your business. So, it is important you are aware of what your next step is all the time even at the absence of a lawyer.
When you start a business, consider factors like:
a) How many people are involved in the business?
b) What is the long-term plan?
c) What is the structure you want to incorporate? and such basic foundation matters.
During this pandemic, people have started home cooking business which actually requires FSSAI (Food and Safety Standard Authority of India). These are small matters which is better to get done when in the initial stage of the business rather than when this matter becomes a barrier during busy and peak times of the business.
The first thing that could possibly cross one’s mind while planning to start a business is ‘drafting a contract’. Every business should have drafted a contract before establishing their business. A typical contract would entail points that concern:
a) What is the service you are receiving/providing
b) What is the payment that is to be made and when
c) If there is a delay in payment, what would be the penalty clause
d) How can you terminate the contract
e) Indemnity clause ( in case you’re incurring a loss, then who’s going to pay for it)
f) Dispute clause
What will happen if you do not have a contract?
If one admits to pay money (admission of liability). If one do not honour that, then under the insolvency code, one can initiate the corporate insolvency against a particular company. If one is a Plc, and there is an insolvency process initiated against that company when there is no contract, they loose management control of the company.
Patent, Copyright and Trademark
People often confuse with these three. But they are branches of one tree. Copyright provides protection for one’s original work only. The moment a person has created something, they all stand protected under copyright even without registering. But when a person registers the same, it acts as a proof in the court of law and the person can provide better protection to his/her work. Patent provides the owner legal right protecting them from their innovation for a limited period of time. However it’s a daunting process and time consuming. Trade mark is another form of intellectual property. It is not a complicated process, although it requires awareness and people need to be educated about it. This will secure the brand of the business.
Some Mistakes Founders Make
- They come too late to a lawyer
- They’ve entered into a particular contract and have purchase order, but do not have a written contract. If there is an inability to pay for a particular business matter, then a dispute will arise.
- Lack of co-founder agreement
- Not taking compliances seriously
- Not having legal agreement with the founders, vendors, and so on which will impact in the later life of the business.
The legality of the idea in terms of how you interact with customer require all legal agreements in place. Find a professional who is ready to grow and work with you.
Advocate Aashira Singh has listed out the important legal requirements for start-up:
1. Registration Process
It is the first and the most important step in complying with the legal requirements required for the start-ups in India. Also, it is essential for proving that the business is legitimate, rather illegal. The start-up shall follow the needed registration procedure like obtaining a certificate of incorporation or partnership registration, as the case may be.
1.1 In case of partnership, it is advisable to make a founding agreement including details of the roles and responsibilities of each founder, as well as other operational details such as compensation, non-compete, contingency plans in cases of disagreements, etc. To avoid any complications in future, it is best to include all the terms of employment like remunerations, work outputs, and other related details in a written contract.
1.2 Registering with the government scheme i.e., “Start-up India”2 can help the start-up avail great benefits like tax exemptions, but such registration is subject to the following conditions:
- It is either incorporated as a private limited company, registered as a partnership firm or a limited liability partnership in India.
- Its incorporation or registration was less than ten years ago.
- Its turnover for any of the financial years since incorporation or registration has not exceeded Rs 100 crore.
- It is working towards innovation, development or improvement of products or processes or services, or if it is a scalable business model with a high potential of employment generation or wealth creation.
2. Business Contract Management
Legal contracts are governed by the Indian Contract Act, 1872. For making a valid contract the conditions in Section 10 of the Contract Act must be fulfilled. The first contract in business is the employment contract which should be effectively made. The salary, stock options, scope of work, etc should be discussed properly.
The non-disclosure agreements would also prove beneficial for the start-up as for setting up the start-up host has to share ideas about the working to investors, suppliers, customers and from this, there is a huge possibility of misuse of ideas. So, the nondisclosure contracts help in preventing the information from getting spread.
3. Taxation and Accounting Laws
The government scheme of “Start-up India” provided many tax exemptions for start-ups. Different businesses need different tax policies to be applied according to the tax and business structure applied. For tax exemptions in a start-up, the first 7 years' lifespan can be availed for tax benefits. The organization must be registered as a limited liability partnership company. The total turnover for the starting years must not be more than 25 crores annually.
Thus, every firm or business needs to maintain proper accounts and tax audits to adhere to the taxation rules applied and adhered to in the country.
4. Compliance with Labour Laws
The next requirement is to ensure the compliance with all requisite labour regulations. This includes following laws on payment of wages, provident fund and gratuity, workplace sexual harassment, maternity benefits, etc.
If the start-up has been registered with the Start-up India initiative, for the first one year from the date of incorporation or registration of partnership, one can sign a self-declaration form and exempt from being inspected under the labour laws such as the Industrial Disputes Act, 1947 The Contract Labour (Regulation and Abolition) Act, 1970, and many others. For the second and third year, a self-certified return can be filed to continue to be exempted under this initiative.
5. Protection of Intellectual Property Rights
Start-ups many times come up with unique unusual ideas that can be protected in this world using certain laws. Thus, it is also important to protect one’s innovative ideas that form the basis of the start-up. These new ideas are legally referred to as Intellectual property. While registration for a trademark, patent, or copyright can often be a complex process, there are government schemes in place under the Start-up India initiative that make these processes easier and affordable. For more information, a reference can be made to the government handbook on IPR Facilitation for startups.
6. Foreign Investments
For encouraging foreign investment in start-ups, there are regulations for foreign venture capital investors (FVCI). Schedule VI of the Foreign Exchange Management Act (FEMA), 2000, and the Third Amendment in this same act in 2016 is being used for regulating investments. Any investor from abroad may contribute to the 100% capital of the Indian start-up engaged in any activity or business under Schedule VI of Notification No. FEMA. The equity or debt instruments can also be issued instead of foreign remittance in a firm.
There are various steps that need to be followed in order to legally set up a business in Nigeria. Ezimora Benita has listed The steps to be followed depending on the nature of the business. Please note that this is not a legal opinion).
1. CHOOSE AN AREA OF SPECIALIZATION:
Before setting up a business, you have to determine your area of focus in order to identify your target market. For instance, an individual who wants to venture into the cosmetics industry may decide to specialize in the importation of make-up products because he or she feels that most Nigerian women adore make-up.
2. CHOOSE A COMPATIBLE AND BENEFICIAL BUSINESS ORGANIZATION:
There are various kinds of business organizations available in Nigeria. One can register as a business name or as a company. A business name may be registered as either a sole proprietorship or a partnership. A sole proprietorship is a type of business enterprise that is owned and run by one person. It is the easiest and least costing type of business structure in Nigeria. A sole proprietorship is very different from corporations and limited partnerships, in that no separate legal entity is created. As a result, the business owner is not exempt from the liabilities incurred by the entity.
A partnership is presumed to exist if the persons agree to share proportionally in the business capital, profit and losses.
On the other hand, a company may be registered as either a private company limited by shares, a public company limited by shares, a private company limited by guarantee or an unlimited company.
A private company limited by shares is a separate legal entity in its own right and is considered separate from its owners and shareholders. The personal possessions of the shareholders are considered separate from the company and the risk of the shareholders is minimized to the point of the amount invested by them.
Section 24 of the Company and Allied Matters Act provides that “Any company other than a private company shall be a public company and its memorandum of association shall state that it’s a public company”. It can raise money from the public by offering its shares or debentures to the public and inviting them to subscribe.
A private company limited by guarantee is an alternative type of corporation used primarily for non-profit organizations that require legal personality.
3. CHOOSE A NAME FOR THE BUSINESS ORGANIZATION:
Choosing a name is an important task when starting a new venture. A name will help define the image of the company. A name should convey the expertise, value and uniqueness of the product or service you have developed. The first step after choosing a name is to request the CAC to reserve the name pending completion of registration.
4. PURCHASE RELEVANT EQUIPMENT'S TO YOUR AREA OF SPECIALIZATION:
Without the relevant equipment’s, a business may not be able to function properly. For instance a cosmetics production company may need to purchase; propeller mixer, cowles dissolver, diffuser pumper, laboratory balance, lipstick mold etc.
5. HIRE COMPETENT STAFF:
In order for a business to achieve its goals, there needs to be a pool of human resources. Without competent staff, a business may not function effectively.
6. DEVELOP A WORKSHOP SPACE FOR YOU ARE YOUR TEAM:
It is required for every business to have a standard workplace.
7. REGISTER WITH THE CORPORATE AFFAIRS COMMISSION (CAC):
The corporate affairs Commission (CAC) of Nigeria was established in 1990 by the Companies and Allied Matters Act (CAMA) 1990 as amended. It is the body charged with the regulation and formation of companies in Nigeria. The commission also registers business names, and incorporated trustees as well as provide a wide range of ancillary services. The structure of the business would determine the steps to be followed during registration.
8. REGISTER WITH THE FIRS AND OBTAIN A TAX IDENTIFICATION NUMBER (TIN):
It is important for a business to register with the Federal Inland Revenue Service in order to obtain a tax identification number.
Depending on the nature of the business, one may have to obtain an importation license from the Nigerian custom, obtain the relevant certificates from Standards Organization of Nigeria (SON) and NAFDAC. It may also be relevant for the business owner to register as an exporter with the National Exports Promotion Council (NEPC), Nigerian Custom Service, Nigerian Ports Authority, and the Manufacturers Association of Nigeria Export Group.
1 https://yourstory.com/2020/05/basic-legal-compliance-every-startup-know
- SWAMINI MURALI
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