IT startup

In this article, Lavanya Verma explains the required legal frameworks for an IT startup.

Required legal frameworks for an IT startup

Advancing a successful IT startup, an entrepreneur might faces many issues other than planning the most effective business strategy for the IT Company. Resolving legal issues ranging from brand protection to e-commerce is the basics of startup laws. In addition to this, a look into the tax regimes and regulatory environment involved in business is necessary.

The Central Government took the edge of promoting the IT start-ups by way of relaxing regulatory preconditions and tax exemptions. It was intended to help budding entrepreneurs primarily in transition stage of transforming their research ideas into business models.

The issues discussed below are an indication of the sort of tax, regulatory and legal points applicable to start-ups as they pace to maturity.

It must be remembered that the concerns mentioned may not be strictly applicable in all situations, and the rules will vary on case by case basis depending on the geography, type of activity and industry sought to be established by a start-up.

What is a “STARTUP.”

Following entities are considered to be a “start-up” –

  • From the date of its registration/incorporation up to five years
  • Turnover of less than 25 crores in any of the financial years
  • Working in the field of development, innovation or commercialization of new services products or processes guided by intellectual property or technology; that might create or add value in workflow or for customers.

Any entity born by reconstruction or splitting up of an already existing business shall not be considered a ‘start-up’.

Structuring of an IT startup

Knowing the kind of entity you want to set up is the most essential concern before pulling up an IT startup. The options prevalent includes the following,

  • A partnership firm,
  • A limited liability partnership (the Limited Liability Partnership Act, 2008),
  • Private limited company, or a public limited company (April 1, 2014, the Companies Act, 2013 has replaced the Companies Act, 1956).

Prior to this, it is crucial to analyze and ponder upon the sustainability, visibility, aptness practicality and related profits that are expected from this type of venture.

Incorporation Process as under companies act

  • Permanent Account Number (“PAN”), Digital Signature (“DSC”) and Director Identification Number (“DIN”)
  • Name Approval as off the provisions of the Emblems and Names (Prevention of Improper Use) Act, 1950
  • Filing of Charter documents of a company (MOA, AOA, Prospectus)
  • Certificate of Incorporation
  • Obtaining Permanent Account Number As per section 139A of the Income-tax Act, 1961
  • Board Meeting and Annual General Meeting
  • Appointment of Auditors
  • Central Excise Duty– Central Excise Act, 1944.
  • VAT, Service tax, and GST
  • Royalties & Fees for Technical Services

Structuring the entity and its business vehicle may take some time varying as per the entrepreneurs long term objectives and vision. Yet, an entrepreneur should be cautious of the finer points in the prevalent legal structure. Every type of business will be ruled by discrete laws and violation of which results in the loss by way of heavy fines even before you start making profit.

Following are the factors relevant for setting up of a startup

  • Location of business
  • Presence of management team/founders
  • Ease of doing business
  • Regulatory and tax considerations

Founder’s Agreement for your IT startup

Upon the formation your startup managerial team, next step is to design co-founder legal agreements to record founder’s legal relationship with the corporation, to one another and to the entity’s other participants. The contractual agreement between founder and partners is the most critical agreement which sets the platform for how you will run the IT startup.

Basic Documentation includes the following

  • Confidentiality & Non-Disclosure Agreement
  • Offer Letter/ Employment Agreements
  • Non-Competition & Non-Solicitation Agreements
  • Intellectual Property Assignment Agreement
  • HR Policy / Employee Handbook
  • Employee stock option plans (“ESOPs”)
  • Software License Agreement
  • Software Development/Services
  • Work for Hire Agreement
  • Equipment/ Technology Lease
  • Shrink Wrap/ Click-Wrap Agreements
  • Strategic Alliance Agreements
  • Outsourcing Agreements
  • Distribution Agreements
  • Vendor/ Supplier Contracts
  • Insurance Agreement

Business Licences for your IT startup

  • In India, several licenses are required before doing any business or even running any kind of office. Few of which are general tax registrations while others just necessitate Shops and Establishment Registration or a trade license.
  • You might require a bunch of licenses for some specific activities like export- import and manufacturing. Several labour and employment related registrations are a must for employing more than 10 employees. Such particulars are seriously looked into while any legal due diligence before foregoing investments.
  • Costly legal suits, hefty fines or business shutdown are a result of the violation of licensing norms. If you are a business owner in any sector, you better have a sense of what licenses are essential.

Securities laws and Business Finance

  • Know-how of Securities Laws becomes vital if you wish to list your IT startup, now or in the coming future. The Securities and Exchange Board of India (SEBI) issues various rules and regulations from time to time, precisely monitoring and regulating the securities market. Thus, possessing good working information of all these bylaws helps smoothen the listing process.
  • The management of all the various financial needs accruing during the multiple phases of the IT business life cycle dealing with all the possible options available for fundraising refers to Business finance.
  • Therefore, the know-how of problems like venture capitals, crowd funding, foreign direct investment, and angel investors, or even joint ventures, would assist in increasing the profitability of the IT startup.

Taxation issues

  • Each IT startup, must pay the required prescribed amount of taxes to the central, state and local authorities. Tricky tax laws vary across sectors, regions, and products. Misfeasance of tax laws by founder’s leads to heavy fines, with or without imprisonment and unproductive criminal cases and lawsuits with respect to tax bills.
  • A lot of businesses be it IT companies or others completely dwindle on this point. Hence, being abreast of accounting and taxation procedure it is obvious that entrepreneurs or other IT professionals will be profoundly profited.
  • Along with, the many of taxes applicable to various sectors, geographical regions or product greatly vary. So, area-specific and sector knowledge of taxation is beneficial in maintaining the legal and financial health of the business.

Contract Laws

It’s no exaggeration that no business organization would come to being without the use of contracts.  Contracts are requisite tools of entrepreneurs at some stage or the other, in some way or the other. Thus, basic information of certain fundamental principles as prescribed in the Indian contracts act of 1872 are a must.

Borderless Commerce

Technology companies can swiftly expand their operations into new countries due to the nature of the industry. However, organizations should comply the laws concerning security which differ greatly from country to country. Even though few regions have taken measures to reduce inconsistencies between jurisdictions, these efforts are limited in material and territorial scope.

Thus obligating the organizations to be aware of the legislation of each jurisdiction they wish to carry business and prove their compliance. Failure of which can open up the business to catastrophic risks for the success of the business. Hence, IT startup should strategically adapt while significantly investing in their policies and procedures to fulfill the requirements of any given territory.

Competition Policy

With large pool of experienced and professional investors, as well as industry leaders from around the globe, special focus must be given to the subject of the borders of competition policy in the high-tech sectors. To maintain a thorough implementation of both regulation and competition law, there is a need for continued co-operation with the national authorities.

Dispute Resolution

Owing to the inevitability of disputes in contemporary business world, being reactive and proactive to dispute is two completely different ends while prevention or minimization. You as the Founder and the CEO of the IT startup, would bat extremely well in hassles and regaining the power in your hands, by knowledge of court procedures and also methods like conciliation, mediation, arbitration, etc. as the means of dispute resolution.

Dissatisfied Customers

Dissatisfied customers have the right to file class action lawsuits against companies, in which they attack your business over faulty products, services or promises in large groups causing irreparable tarnish on your brand’s image. Prompt recalls for flawed products and proper redressal to customer issues is important to be safe from violation of provisions of the Consumer Protection Act.

Again, be proactive and keep a finger on the pulse of your customers through tech support, online message boards and e-mails. Corporate Governance

A start- up entrepreneur must possess firsthand -knowledge of corporate governance to facilitate effective management and formulation of additional expansion plans. The Indian Government is the compulsive spender as of the Indian economy. Thus, private businessmen share wonderful opportunities through bidding during public procurements. These biddings are a gold mine in creating steady flow of revenue since the government always orders in bulk and also portrays goodwill in the name of government contract in your market.

Employment and Labour Laws

Each IT startup with time needs to hire new people even if its aims to employ or outsource independent consultants, all such employee-employer relationships are guided by labour legislations. Breach of these will does not harm the entity financially rather spreads a bad review of the start up even before initiating it.

The ultimate success of the IT startup and productivity of the employees depends upon the happiness of employees working for the entity.

Applicable Employment laws for an IT startup

  • The Contract Labour (Regulation And Abolition) Act, 1970
  • Maternity Benefits Act, 196
  • Sexual Harassment Act enacted in the year 2013
  • Minimum Wages Act
  • Payment of Wages Act
  • Remuneration Act
  • Bonus Act
  • The Gratuity Act
  • Employee Provident Fund Act
  • Compulsory Notification of Vacancies (CNV) Act
  • Apprentices Act
  • Child Labour Act
  • Industrial Disputes Act, 1947
  • Trade Unions Act

Intellectual Property Laws

While engaging with innovations in designs, codes, research, etc. Timely audits of intellectual property (IP) are important. It’s crucial to file the right trademark/ patent/copyright claims to prevent theft.  In a global economy it is imperative to analyse and ascertain the nature and type of protection afforded to IPRs as they are country-specific. India, by amending existing statutes and enacting necessary statutes has complied with its obligations under the Agreement on Trade-Related Intellectual Property Rights (“TRIPS”).

Acts for leveraging IP are as follows

  • The Agreement on Trade-Related Intellectual Property Rights (“TRIPS”)
  • The Patents Act
  • The Copyright Act, 1957 (“Copyright Act”), along with the Copyright Rules, 2013 (“Copyright Rules”)
  • The Copyright Act and the Trade Marks Act, 1999
  • The Trade Marks Act, 1999 (“TM Act”) along with the TradeMark Rules, 2002 (“Rules”)
  • The Designs Act, 2000

Information Technology laws

E-contracts and digital signatures are included in IT laws. Upon use of cloud computing services and proprietary software bulk of consumer data is collected which requires protection for client’s privacy from hackers. At times, all the IP generated may be embedded in the IT used. Thus, protection from any infringers becomes quintessential. Acquaintance with IT laws comes to the business rescue.

Acts dealing with such risk management and content regulation are

  • The IT Act, 2000
  • The Indian Penal Code, 1860,
  • The Indecent Representation of Women (Prohibition) Act, 1986

The above compilation indicates that IT startup need to invest their time and resources to make sure that their products and services are not only in compliance with prevalent laws and regulations but should also continue to do so as the laws also evolve in response to innovation.

As such, it is crucial that a company seeks the advice of an experienced lawyer working with IT startup. Prevention of the legal pitfall necessitates following the above tips prior to the occurrence of the issues for triumph in your entrepreneurial IT startup at the end!

Did the article serve the purpose for all the future IT entrepreneurs? Please comment and share.

Want to explore more on startup laws? Read our exclusive articles on laws regarding startups.


Why you should never startup

How to tell which startup will work


Did you find this blog post helpful? Subscribe so that you never miss another post! Just complete this form…

Latest Posts