Legal Aspects of Start-up

Over the past decade, start-ups have become the talk of the town with growing support from the Government which has various initiatives to boost the entrepreneurial spirit and foster economic growth of the nation. But, to flourish a startup understanding and adhering to legal requirements is a very crucial step. So let’s discuss the legal aspects every Indian startup should follow to build a strong and compliant foundation.

The first big decision is selecting the right business structure. The choice influences your startup’s tax obligations, legal compliance, and growth opportunities. Here are the options:

• Sole Proprietorship: A simple choice for solo entrepreneurs but offers no separation between personal and business liability.

  
  

• Partnership: Ideal for small teams but involves shared and unlimited liability.

  
  

• Limited Liability Partnership (LLP): This type of partnership offers the flexibility of a partnership with limited liability for its partners.

  
  

• Private Limited Company: A popular choice for startups as it provides limited liability, easier access to funding, and is governed by the Companies Act,2013.

  
  

• One-Person Company (OPC): This type of company is designed for solo founders who want the benefits of limited liability and corporate status.

  
  

After deciding on the business structure, it is necessary to register it by first applying for a Director Identification Number (DIN) and a Digital Signature Certificate (DSC) and submitting the Memorandum of Association (MoA) and Articles of Association (AoA). After submission, the start-up will receive a Certificate of Incorporation (CoI). Being officially registered enhances credibility and is often a prerequisite for attracting investors.

Managing employees and labour laws 

Startups are engines of innovation and economic growth, powered by the dedication and persistence of their founders and teams. However, amidst the excitement of launching a new business, it is crucial for startups to prioritize compliance with labour laws. Ensuring adherence to employment regulations is not just a legal obligation but also essential for fostering a healthy work environment and achieving long-term success.

The application of labor laws to Indian startups is a multifaceted issue influenced by factors such as the size of the workforce, the nature of the business, and the location of the company. Startups need to carefully evaluate their employee count since certain labor laws apply only when the workforce exceeds specific thresholds. Smaller businesses may benefit from exemptions or simplified compliance requirements.

 Additionally, central labor laws, such as the Payment of Gratuity Act, 1972, The Contract Labour (Regulation and Abolition) Act, 1970, and The Employees’ Provident Funds and Miscellaneous Provisions Act, 1952, governing provident fund contributions and industrial disputes, require attention to maintain compliance and avoid potential legal challenges.

Tax obligations over startups in India 

Any startup incorporated between April 1, 2016, and March 31, 2023 (as extended by the Finance Act, 2022), qualifies for a 100% tax exemption on profits for three consecutive years within its first ten years of existence. This benefit is available only if the company’s turnover does not exceed ₹25 crores in any financial year.

This provision, known as a "tax holiday," aims to assist startups in managing their working capital needs during their early years of operation.

The Income Tax Act allows for the set-off and carryforward of losses incurred by startups in India. However, if there is a change in the company’s shareholding of 50% or more from the year the loss was incurred, the set-off is disallowed. This condition, however, does not apply to eligible startups that experience losses in their first seven years of operation. Instead, as long as the shareholders retain their shares in the company in the year of the loss and continue to hold them in the following year, the set-off is permitted.

Safeguarding the Intellectual Property Law

Innovation is the backbone of most startups, making intellectual property (IP) protection a top priority. Here’s how you can secure your ideas:

Trademarks, Patents, Copyrights, and trade secrets protect the brand name, logo, and tagline and Secure rights for the inventions and unique processes safeguard original content, from code to designs which is governed by The Indian Patent Act of 1970, The Trademarks Act of 1999, The Copyright Act of 1957.

Protecting the customer data

 In today’s digital world, data protection is critical. Startups must Comply with the Information Technology Act, 2000. Prepare for the upcoming Data Protection Bill, which will likely introduce stricter requirements. Implement privacy policies and secure data encryption. Failing to adhere by these laws and failure to protect data can result in hefty fines and loss of trust by the consumers.

Conclusion

Navigating India’s legal landscape can seem daunting, but it’s a necessary step toward building a successful startup as the trends today change in an instant therefore, by understanding legal requirements, safeguarding the interests, and ensuring compliance with a legal framework, a startup can move on a path of growth and stability.

This article is authored by Shivani Seth. She was among the Top 40 performers in the Cyber and Corporate Law Quiz Competition organized by Lets Learn Law.