Startups’ Guide To Navigating Legal & Compliance Requirements

Starting a business in India can be an exciting venture, but it also comes with several legal and regulatory obligations that must be met to ensure smooth operations. 

This guide provides detailed information on the essential legal and compliance requirements that startups in India need to meet to succeed and carry on their work smoothly. Non-compliance with such requirements can lead to legal consequences, financial penalties, and reputational damage, which can be catastrophic for startups, especially those in their early stages.

Register Your Entity

One of the first and most important steps in starting a business in India is to register the entity with the Registrar of Companies (RoC). 

The Companies Act, 2013 and the Limited Liability Partnership (LLP) Act, 2008, govern registrations in India and require startups to submit several documents, including the company’s Memorandum of Association (MoA), Articles of Association (AoA), LLP Agreement, proof of identity and address of the directors/partners and details of the registered office address. The registration process can be completed online through the Ministry of Corporate Affairs (MCA) website.

Obtain Necessary Registrations & Licences

Depending on the nature of the business, startups may need to obtain specific licences and permits to operate legally. 

These licences and permits are issued by various regulatory bodies, such as Municipal Corporations, State Departments, the Food Safety and Standards Authority of India (FSSAI), the Directorate General of Foreign Trade (DGFT), and the Department for Promotion of Industry and Internal Trade (DPIIT), among others, upon application furnished by such startups. 

Formulation Of Necessary Legal Agreements

Startups, in order to carry out their day-to-day operations, need to formalise their arrangements with suppliers, vendors, customers and other stakeholders by entering into various agreements, including vendor agreements, employment agreements and service agreements, among others. 

Such agreements help the companies avoid future liabilities or any fraud that may arise in the future. Also, these agreements help limit their liabilities and obligations. Startups need to update such agreements on a regular basis in order to meet the legal requirements.

Comply With Tax Regulations

All businesses in India must comply with tax regulations. Startups must obtain a Permanent Account Number (PAN) and a Tax Deduction and Collection Account Number (TAN) from the Income Tax Department. 

Additionally, they are required to register for Goods and Services Tax (GST) if their turnover exceeds INR 20 Lakh or INR 40 Lakh, as may be applicable. 

Comply With Labour & Employment Laws

Labour and employment laws play a pivotal role as they give structure to the workplace, define what both employees and employers are responsible for and, in some cases, also outline the regulations in order to give both parties the direction necessary for resolving workplace conflict. 

An entity is required to comply with all the labour laws applicable to it, such as payment of minimum wages, maintaining proper records of employees, etc. and accordingly register itself under various labour law acts such as ESI. Along with these registrations, the entity is also required to develop various policies and manuals to regulate work conditions, such as the Prevention of Sexual Harassment at Workplace Policy (POSH policy) and the Employee Handbook.

Protect Your Intellectual Property

Intellectual property (IP) protection is critical for every entity, as it helps protect their ideas and innovations from infringement. In India, startups can protect their IP through registrations under patents, trademarks, and copyrights. 

The Controller General of Patents, Designs, and Trademarks grants these protections upon verification of the applications submitted by the startups. One must conduct a comprehensive search to ensure that their IP is not already protected before filing for protection. 

Maintain Proper Accounting Records

The Companies Act of 2013, mandates startups to maintain true and fair financial records, including balance sheets, profit and loss statements, and cash flow statements (collectively referred to as “records”). 

These records must be maintained for at least eight years from the date of the financial year to which they relate. Startups must file their tax returns under the Income Tax Act and their annual returns under the Companies Act 2013 on time and maintain accurate financial statements. 

Implement Data Protection Measures

Data protection is becoming increasingly crucial for businesses in India. The Personal Data Protection Bill, which is currently being reviewed by the Indian government, is expected to introduce strict data protection measures for businesses. 

As a startup, it is essential to implement data protection measures, such as secure storage of customer data and complying with data protection regulations such as GDPR, CCPA etc. Startups must ensure that they have adequate data protection policies and procedures in place to protect the company and its customers from potential data breaches. The said policies also need to be uploaded on the company’s website in due compliance. 

Tips For Making Compliance Easier

Compliance can be daunting, but there are several ways startups can make it easier:

• Investigate, comprehend, and abide by the laws and regulations of the jurisdiction in which it is incorporated. This includes obtaining the necessary licences, permits, and registrations, as well as adhering to tax and labour laws.  To comply with this, founders should seek professional guidance and advice from experts such as company secretaries, lawyers and chartered accountants to ensure that all applicable laws are followed.
• Prepare a compliance plan with due dates and track it on a regular basis to ensure timely compliance with the applicable laws. Compliance plans frequently include a review of the company’s processes and procedures, which can lead to improved efficiency, reduced waste, and lower costs.
• Founders or promoters must request that professionals notify them of upcoming compliances that must be met so that they can plan ahead of time and avoid missing any deadlines.
• Founders and promoters must ask for a list of Do’s and Don’ts from the professionals.
• The team will provide all details and data to the professionals so that they can prepare documents on an ongoing basis.
• To ensure smooth operation, a data room should be maintained at the end of the professional and the client company.

In conclusion, compliance is an important aspect of running a successful startup in India because it ensures legal and ethical business practices, protects the company’s reputation, and boosts investor confidence, all of which can lead to increased success and growth. Startups must be aware of the legal and regulatory requirements that apply to their business and take steps to ensure compliance. 

Startups can avoid legal consequences and financial penalties by registering the company, obtaining necessary licences, complying with tax regulations, protecting their intellectual property, maintaining proper accounting records, and implementing data protection measures. 

Furthermore, conducting extensive research, seeking professional advice, and developing a compliance plan can make compliance easier.  By prioritising compliance, startups can build a strong foundation for their business, set themselves up for long-term success in India’s competitive business environment and also gain a competitive advantage over other peer startups.