This article is written by Yasar Arafath, pursuing a Diploma in Business Laws for In House Counsels from LawSikho.
Are you finally ready to turn your business idea into a reality? As we know, there requires a lot of preparation before actually launching the business.
Becoming an entrepreneur is never easy, it’s a path full of ups and downs. Creating a business plan and securing funding are common agenda items on the startup to-do list of an entrepreneur. One thing more that entrepreneurs should add to their to do list is to take time to review common business laws that could affect the business.
Starting a new business is no simple task. It includes many things where every entrepreneur should know the basic steps of the startup laws and should look at the vital business laws which helps you for a long journey. While there is no substitute for expert knowledge, a framework of basic concepts which helps as a ready reckoner for the daily challenges that entrepreneurs face.
Entrepreneurs need to fear a thousand matters and most important thing is the functional legality of the business in the country to avoid the potential failure that follows costly litigation.
Business laws that every entrepreneur should know
For the long term proposition and to keep the business honest every entrepreneur should keep in mind certain laws which need to be complied.
Planning to form a company (proprietor, partnership firm, LLP, private limited or limited) or if you are already in business, then every entrepreneur is liable to follow the basic Indian government’s legal rules, regulations and laws to function their business in the country. Usually, most of the entrepreneurs approach a legal business consultant to understand the necessary documentation required to frame a legal business entity, securing PAN number, GST and opening a current account and other guidelines to start functioning.
Most entrepreneurs don’t have a team of lawyers following around to help them to make every decision and going for a legal business consultant would be costly. There is no rule that to be a successful entrepreneur you need to be a law graduate. It’s just that entrepreneurs must have to learn the basics/essentials so you don’t get caught off guard.
Here are 5 business law that every entrepreneur should be aware of:
Business licenses and Company formation laws
- Company Formation Law
The most important thing is to understand what kind of organization you want to set up and apply proper business structure as different business structures have different business applications to be made while carrying out the business. Structuring the organization and business depends upon the business long term objectives, goals and visions. Before taking the decision of what kind of business you want to set up it is important to review the practicality, suitability and profits that are expected from the organization to achieve the goal of the business.
Depending on the nature of the legal business entity, entrepreneurs need to register a business name. In India, Companies Act 2013 states law for each type of company while starting up a business; you have to choose the type of company for ex: proprietorship, family business, partnership, LLP, private or public limited.
However, each entrepreneur needs to carefully evaluate the existing legal framework. Each form of business is governed by separate laws and not complying with these laws means loss in the form of heavy fines before an organisation can even start making profit. Read the laws and regulation governing these set-ups to carefully avoid penalization for non-compliance.
There some legal applications associated with every type of business and entrepreneur must be aware of it:
- Business Licenses
Based on the type of business carried a business needs licenses accordingly. Before launching a startup the entrepreneur must start applying for appropriate to stay away from the legal battles at the inception.
All the business licenses vary from business to each other. The common licensing applied for most of the business under the law is registration under the shop and establishment act, 1953. Obtaining Professional Tax registration, PAN, TAN registrations for commercial invoice and billing.
For some specific activities like manufacturing and export-import, you may need a bunch of licenses like Import and Export Code, STPI, Factory license etc.
For Example if you are starting a restaurant business you require a Food Safety License, Environmental Clearance certificate, Prevention of Food Adulteration Act, Health Trade License etc.
Entrepreneur can even register himself under the ‘Startup India programme’ launched by the Government of India, which offers tax exemptions that can benefit from. But before that, there are some conditions that needs to be qualified:
- Lifespan of the startup should not be more than 7 years and not more than 10 years for a biotech.
- Is registered as a Limited Liability Partnership (LLP), Public or Private Limited Company.
- Turnover should not exceed 25crores annually.
- The existing business shouldn’t be formed by split or reconstructed into a startup.
Accounting and Taxation Laws
- Finance laws
Entrepreneurs can fund the business largely in three forms – equity financing or self-financing.
When the business is getting fairer funding from enterprise capital businesses or angel investors you need to keep records like – letter of intent, shareholders contract and share subscription agreement.
If business is getting debt financing entrepreneurs have got to get software for mortgage sanction papers, sanction letter, loan agreement letter and collateral documentation in business location.
Businesses need to maintain books of accounts monthly or such intervals which help to analyze the cost associated with each segment and to improve the performance of the company. Financial data at the right time can help the entrepreneur to make important decisions which can increase profitability and reduce cost.
- Tax Laws
There are instances where a lot of businesses completely fail on this point and many entrepreneurs face massive fines, possibility of imprisonment and highly unproductive lawsuits and criminal cases with respect to tax bills, simply due to their negligence and ignorance, usually both combined. However, ignorance of law is no excuse.
Every organization, be it involved in any type of business, has to pay some or the other taxes to the State, Central, local/provincial governments, as the case may be.
Entrepreneur needs to have basic understanding of the Sector and area-specific knowledge of taxation which helps him in maintaining the financial & legal health of the organization.
Income tax Act
Income tax is the most important form of direct tax which is regulated by The Income Tax Act, 1961.
Computing the income is the first step, which can be carried out via the means listed above. The second step is to understand tax liability. There are specific schedule of taxes that businesses and individuals need to refer to in order to know their tax liability, as explained below:
Schedule of Income Tax Rates
Type of business entity
The applicable income tax
Proprietorship or individual
Taxes apply as per the income tax slab rates
Partnership/ LLP firm
30% of the income
25% of the income
It is crucial to file income tax returns before the due date using the forms mentioned below:
Income that has been computed under the presumptive taxation scheme
Income computed by calculating the revenue, expense and depreciation
ITR 3/ ITR 5/ ITR 6/ ITR7
As per section 270A of the Income Tax Act 1961, misreporting of income will have a penalty of 200 percent of the amount of tax payable on unpaid income.
Before the implementation of GST, business needs a VAT registration if the turnover is more than Rs. 5 Lakh business needs to obtain the VAT registration. However now, any business whose turnover crosses Rs 40 lakh in a financial year is required to register under GST and the limit is Rs 20 lakh for service providers.
Increase in threshold under GST has brought compliance relief for many small businesses, including startups in India.
Also government introduced a composition scheme under GST for small businesses operating in India. Under this scheme business provides for a lower amount of tax having turnover up to Rs 1.5 crore in a year.
- Labour or employment Laws
Every organisation irrespective of how big or small have to adhere to labour laws. When a company has established and has hired people to work for the organization, the organization is subject to several labour laws regardless of the size of the organization.
If an organization breaches any of the stipulated labour laws, then it will not only attract penal liabilities but will also have to face negative reviews.
Entrepreneur need to aware of the following Labour laws for the business to prosper:
- Minimum Wages Act, 1948
- Payment of Wages Act, 1936
- Payment of Bonus Act, 1965
- Payment of Gratuity Act, 1972
- The Employees’ Provident Funds and Miscellaneous Provisions Act, 1952
- The Employees’ State Insurance Act, 1948.
- Factories Act, 1948
- Maternity Benefits Act, 1961
- Employee Compensation Act, 1923
- The Sexual Harassment of Women at Workplace (Prevention, Prohibition and Redressal) Act, 2013
- The Industrial Disputes Act, 1947
- The Trade Unit Act, 1926
- Building and Other Constructions Workers’ (Regulation of Employment and Conditions of Service) Act, 1996
- The Industrial Employment (Standing Orders) Act, 1946
- The Inter-State Migrant Workmen (Regulation of Employment and Conditions of Service) Act, 1979
- The Contract Labour (Regulation and Abolition) Act, 1970
Entrepreneurs should keep an eye on the new rules that are framed by the Central Government that will replace the existing Labour laws.
Central Government is in a process of consolidating various labours laws in India into following four codes, which are yet to be implemented:
- Code on Wages, 2019: This code was passed by both the houses of Parliament and received Presidential assent on 8th August, 2019. However, it is yet to be enforced by way of notification by the Central Government of India. Payment of Wages Act, 1936, Minimum Wages Act, 1948, Payment of Bonus Act, 1965 and Equal Remuneration Act, 1976 are the Labour laws that are being replaced by new Code.
- Occupational Safety, Health and Working Conditions Code, 2019: This code has been placed before the Lok Sabha as 23rd July 2019 and it has been pending before the standing committee for its comments. It will replace 13 labour laws relating to health, safety and working conditions. Factories Act, 1948, Dock Workers Act, 1986, Mines Act, 1952, Inter Migrant Workers Act, 1979 and Contract Labour Act, 1970 are the laws which are being replaced.
- Industrial Relations Code, 2019: The code was placed before Lok Sabha on 28th November 2019 and it has been pending before the standing committee for its comments. The Industrial Disputes Act, 1947, The Trade Unit Act, 1926 and Industrial Employment (Standing Orders) Act, 1946 are the laws which are being replaced.
- Code on Social Security, 2019: The code was placed before Lok Sabha on 11th December 2019 and it has been pending before the standing committee for its comments. This will replace 9 labour laws like Employee Provident Fund Act, Maternity Benefit Act and Unorganized Workers Social Security Act, 2008.
- Information Technology and Privacy Laws:
We are living in an advanced technological world and organization should be high in a digitalized world where IT laws in the business can handle things like e-contracts, digital signatures, protecting the private data of the organization and this is also an extremely important job. So having the knowledge of Information Technology laws will help the organization in exploring the business opportunities. Adapting technology in the organization helps a lot in achieving the goal of the organization.
The government of India has introduced the Information Technology Act – cyber laws that help protect on-line privateness and identity. If a business deals with sensitive personal information from its customers, entrepreneurs must have a sound security plan in place. All the required care needs to be taken care of to avoid any data leaks.
- Intellectual Property Laws:
Intellectual Property is the legal right of the business that every business should have. It deals with the rules which will secure the invention, innovative idea, and artistic work of any person. Intellectual property gives a legal right to the innovative idea so that no one can copy the same and that’s why intellectual property is a very important business. Intellectual property includes, copyright, trademark, patent, etc.
Intellectual property of the organisation in the form of codes, designs or programs has to get the right patents and copyright claims to protect such assets. Intellectual property rights such as patents should be filed at the patents office. Failure in doing so could give a competitor to file for the same patients first, but there is no punishment for not having IP rights. First person to file for a patent generally obtains the patent rights. Intellectual property rights can be sold or licensed and thus has a financial value apart from technological application.
Trademark is a symbol used by a brand/organisation on its goods and services so that customers can identify with that good and/or service just by looking at the symbol and can differentiate products based on quality, aesthetics, packaging, etc. No two companies can possess the same trademark, but its ownership can be changed. A registered trademark holder has legal protection against infringement on their trademark.
All entrepreneurs embarking a journey of success must search and go through all the legal factors involved and affect their business and does not face any legal problems while running its operations. Most entrepreneurs spend a lot of time developing their business and tend to neglect various legal and regulatory compliances. Therefore, it is important that the entrepreneurs follow all the legal requirements which are necessary for the proper functioning of the organisation.
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