This article is written by Shreya Tripathy.
Supported by a wide range of Government initiatives and backed by new funding mechanisms, India is indeed in the midst of a startup boom breaking even into the global lists. In the year 2017, India shot up to be the third largest tech startup location globally, trailing only behind the UK and USA.
The three cities of Bangalore, Delhi-NCR and Mumbai play host to 66% of all startups in the country, each of which is vying for the top spot. With 72% of the Indian startup founders below the age of 35 years, India is also making a name for itself as the youngest startup nation in the world. Lacking only in the aspects of gender equality (only 9% of entrepreneurs are women), India seems to have it almost right in the startup ecosystem.
While the world of startups maybe unconventional, enthusiastic and fast-paced, if you are aiming to start one or already have one, you must keep in mind certain regulations and compliances that need to be religiously adhered to keep it that way. The rise in the number of startups also led to a need for operational transparency consequently giving rise to the need for statutory compliances. The following comprehensive checklist that most startups follow will help you avoid any legal complications in the future as well as help you with you maintain the traction of investors:
1. Business Registration
Registration of your startup with the right business structure in India is essential to the smooth functioning of your company. Registration of companies in India is a legal compliance that needs to be done by all businesses. You may register your startup as a partnership, sole proprietorship, private limited company, Limited Liability Company or a one-person company. You must opt for the structure that best suits your company as it will determine your Income Tax Return as well as the level of compliances that you need to adhere to. The Limited Liability Partnership form and the Private Limited Company form of registration is generally seen to be best suited for startups in India.
A Limited Liability Partnership in India has unique features which are useful for small and medium enterprises. It is the favoured business set-up for the service industry or for such activities where professionals are involved. The benefits of an LLP are:
- It allows its members to independence over their internal management and at the same time provide such benefits which limited liability companies have.
- LLP functions as a separate legal entity with perpetual succession.
- The partners in an LLP are only liable to the extent of their agreed contribution to the company and not accountable for the unauthorized actions of any of the other partners.
Private Limited Company is the most preferred form company registration. There are many benefits of registering your startup as a Private Limited Company in India:
- It acts as a separate legal entity (has a separate identity from that of its members) with perpetual succession.
- The members have limited liability to the extent of the face value of the shares that they own.
- It provides for easy and free transferability of shares to any other person by a shareholder.
- A private limited company can own, acquire and alienate property in its own name. This limits the power of the shareholders any claim upon such property as the company itself is its true owner. It can also sue and be sued in its own name.
- The scope for borrowing funds also increases.
The structure of the business also determines the investment that you will be raising therein. Having an investor-friendly structure helps to gain the trust of investors and hence, it is essential that you think this over carefully and make an informed decision.
2. Funding for the Startup
Funding is an essential aspect of the success of a startup. As many as 65% of venture capitalists have stated the major roadblock for startups is the lack of funding. Here are a few documents that you should essentially maintain:
- Term Sheet: A term sheet outlines the terms and conditions of the agreement between potential investors and a startup. It includes such details as the structure of payment, conditions precedent, confidentiality clauses, etc.
- Share Subscription Agreements: This agreement lays down all details of a share issue including any representations or warranties made to the subscriber.
- Shareholders Agreements: This is an agreement laying down the shareholders’ rights and obligations and the modus operandi of the company.
- Share Purchase Agreements: This agreement lays down the terms and conditions of the purchase and sale of shares.
3. Internal Management Structure of the Startup
It is essential that you define the roles and architect the internal management structure of your startup early on so as to prevent conflicts when your startup scales. A few things that you should factor in are as follows:
- Co-founders Agreements: Co-founders Agreement is an agreement laying down the terms and conditions between the co-founders laying down how the business will be executed between them. It is a written agreement giving insurance to any potential dissonance and the rights and liabilities of the co-founders.
- Employment Agreements: Employment agreement or employee agreement is a legally binding contract laying down the stipulations regarding the duties, rights and responsibilities of the employees during the course of employment.
- Board of Directors: depending upon the registration of the company under the Companies Act, 2013, a Board of Directors must be created and such adherence to the provisions of the Act such as holding Board meetings, Annual General Meetings, etc.
- Employee Stock Option Agreements: ESOP Agreements lay down rules regarding which employees are eligible for the stock purchase program and other specifications regarding the same such as when they become eligible to start buying, etc.
4. Shop and Establishment Certificate
All commercial establishments and shops are needed to be register under the Shops and Establishment Act of the respective states. Under this Act, all commercial establishments including any commercial, banking, trading or insurance establishment have to get registered. All states have their own Acts and have specific amendments in accordance with the necessities of that state, so you have to be careful so as to adhere to all the provisions of the Act in your State. A current bank account for your startup can only be opened after obtaining the Shop and Establishment Certificate. Moreover, there are provisions in the Act for regular inspection of registration and registering pronto will prevent you from being harassed by inspectors later.
5. Labour Law Compliances
The Government of India has come up with a policy on labour law compliances for startups to encourage startups in the country. The Government allows self-certification of 9 labour and environmental laws. Exemption from complying with certain laws such as The Payment of Gratuity Act, 1972, The Employees’ Provident Funds and Miscellaneous Provisions Act, 1952, The Water (Prevention & Control of Pollution) Act, 1974, etc.
The provisions of the Factories Act, 1948, Payment of Wages Act, 1936, Employees’ State Insurance Act, 1948, Payment of Bonus Act, 1965, Minimum Wages Act, 1948, Maternity Benefits Act, 1961, Sexual Harassment of Women at Workplace (Prevention, Prohibition and Redressal) Act, 2013, etc., also have to be adhered to.
6. Website Documents
If you are a startup based around web startup ideas or you are a startup looking to get a head start in the game, you must create a website that reflects you and your company appropriately. Additionally, you must ensure that your website has the following legal documents laid out for the website users:
- Disclaimer: Disclaimers are mostly used for two purposes, to warn the customers of such actions that may raise liability and limit liability on the user of the website.
7. Special Permissions for Specific Startups
You may need certain specific permissions or have to fulfil certain compliances depending upon the nature of your startup and you must ensure that you take careful consideration of all such provisions and fulfil them. For instance, if you want to set up a food truck business, it involves many activities such as manufacturing, storing, selling and transporting food and food products. You must ensure that you take vending permits, FSSAI license, etc. You must also look into all health and safety rules and ensure that you abide by them and ensure that you are not violating any laws that are in place. Similarly, if you have a health startup, you have to take permits for the land and construction, permits regarding electricity and water supply, waste disposal, fire and health licenses, etc.
In a country abound with new startups, you need your startup to be ahead of the rest. While having a brilliant idea and putting together a team of dedicated and like-minded individuals is necessary, ensuring that your procedural and organizational structure is equally important. By following the above tips, you can ensure that you have laid down the groundwork to be able to build up and establish a startup that is able to sustain in this competitive market.