Legal Checklist for Founders Before Starting a Company in India

Legal Checklist for Founders Before Starting a Company in India

Legal Checklist for Founders Before Starting a Company in India

Are you an Innovator, who has an Idea, but don’t to how to get the Idea rolling into a Business? 

Here’s a comprehensive legal checklist for founders before starting a company in India. This list covers essential steps and legal aspects to ensure your startup is compliant with Indian laws from the outset, reducing potential risks and liabilities.

1. Choose the Right Business Structure

The first and most crucial step is deciding on the business structure. The choice of structure impacts legal compliance, tax liabilities, fundraising ability, and ownership. Common business structures include:

• Private Limited Company

• Limited Liability Partnership (LLP)

• One Person Company (OPC)

• Sole Proprietorship

  
  

Each structure has different legal requirements and tax implications, so make sure to assess what’s best for your business goals. For more details on each one of the entity check our blog on “Legal Structures for Startups in India”.

2. Register the Business Entity

Once the business structure is selected, register the entity with the Ministry of Corporate Affairs (MCA). Key steps for incorporation include:

• Private Limited Company: Register through the SPICe+ (Simplified Proforma for Incorporating a Company Electronically) form.

• LLP: Register using the FiLLiP form.

  
  

Documents required:

• Digital Signature Certificate (DSC) for directors/partners.

• Director Identification Number (DIN) for directors.

• Memorandum of Association (MOA) and Articles of Association (AOA) for companies.

• Identity and address proofs of directors/partners.

  
  

3. Obtain Tax Registrations

Several tax registrations are necessary for compliance:

• Permanent Account Number (PAN): Obtain a PAN for the business entity.

• Tax Deduction and Collection Account Number (TAN): Required for deducting tax at source (TDS).

• Goods and Services Tax (GST) Registration: Mandatory if your turnover exceeds the threshold (₹40 lakh for goods, ₹20 lakh for services) or if you engage in inter-state supply.

  
  

Startups engaged in specific sectors may also require additional tax registrations, such as Professional Tax or Import Export Code (IEC) for businesses involved in cross-border trade.

4. Draft Essential Legal Agreements

Founders should ensure that critical agreements are in place from the beginning to avoid potential disputes and define the roles and responsibilities. Key agreements include:

• Founders’ Agreement: Outlines the roles, responsibilities, equity ownership, decision-making authority, and exit terms for founders.

• Non-Disclosure Agreements (NDAs): Protects sensitive business information and intellectual property (IP) from being shared by employees, consultants, or business partners.

• Employment Contracts: Set clear terms of employment, including roles, compensation, notice period, confidentiality, and non-compete clauses.

• Vendor and Client Contracts: Ensure legally binding agreements with suppliers and customers are in place to protect business interests.

  
  

5. Intellectual Property (IP) Protection

Protect your startup’s intellectual property early on to avoid future legal disputes. IP can include your brand name, product designs, technology, software, etc.

• Trademark Registration: Protects your brand name, logo, and other brand identifiers.

• Patent Filing: For unique innovations, products, or technology, patent protection ensures no one else can use your invention.

• Copyright Registration: For original content such as software, books, or media, copyright offers protection from unauthorized usage.

  
  

6. Register Under Startup India Initiative

To avail the benefits provided by the government under the Startup India Initiative, register your business on the Startup India portal. Recognized startups can benefit from:

• Tax exemptions (including Angel Tax).

• Self-certification for compliance with labor and environmental laws.

• Access to government tenders and funding opportunities.

  
  

Eligibility criteria include having innovative business ideas, and the company should be registered within the last 10 years with a turnover of less than ₹100 crores.

7. Compliance with Labor Laws

If you have employees, ensure that your startup complies with India’s labor laws, which include:

• Employee Provident Fund (EPF) Registration: Mandatory for companies with 20 or more employees.

• Employees' State Insurance (ESI): For employees earning less than ₹21,000 per month. Registration is mandatory if your company has 10 or more employees.

• Gratuity: Mandatory for companies with more than 10 employees. Gratuity is payable to employees who have worked for the company for five years or more.

• Shops and Establishments Act: Register under this act to comply with local labor laws for businesses operating in commercial spaces.

  
  

8. Setup Accounting and Record Keeping System

Maintaining accurate and up-to-date accounting records is essential for legal and financial compliance. Ensure your company has:

• Bookkeeping System: Implement a proper system to track financial transactions, income, and expenses.

• Compliance Calendar: Keep track of various statutory filings such as GST returns, TDS returns, annual ROC filings, and income tax returns.

• Audit Requirements: Ensure compliance with audit requirements, which are mandatory for Private Limited Companies regardless of turnover and for LLPs with turnover exceeding ₹40 lakh.

  
  

9. Industry-Specific Licenses and Permits

Depending on your business, you may need additional licenses or approvals. For example:

• FSSAI License: Required for food-related businesses.

• Drug License: Required for pharmaceutical startups.

• Telecom Licenses: If you’re providing telecom or internet services.

• Environmental Clearances: Required for businesses with a potential environmental impact (such as manufacturing units).

  
  

Ensure that all industry-specific regulations are met to avoid legal issues.

10. Compliance with Foreign Direct Investment (FDI) Regulations

If your startup plans to raise capital from foreign investors, it is essential to ensure compliance with Foreign Direct Investment (FDI) regulations as outlined by the Foreign Exchange Management Act (FEMA). Some sectors allow automatic FDI, while others require government approval.

Steps to follow:

• Ensure your business falls under the automatic route (most startups do, but certain sectors like defense or media may require approval).

• File necessary compliance forms with the Reserve Bank of India (RBI) if raising funds from foreign investors.

  
  

11. Apply for Other Government Schemes

The Indian government offers various schemes for startups under Startup India and Make in India initiatives:

• Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE): Provides collateral-free loans to startups.

• MSME Registration: Small and medium enterprises can benefit from easier access to loans, subsidies, and tax benefits.

• Startup India Seed Fund: Apply for seed funding from the government to support early-stage startups.

  
  

12. Prepare for Tax Audits and Annual Filings

Ensure timely filing of:

• Annual ROC Filings: File annual returns and financial statements with the Registrar of Companies (ROC).

• Income Tax Returns (ITR): File annual returns and ensure compliance with the tax regulations.

• GST Returns: Monthly, quarterly, and annual GST filings must be done in a timely manner.

  
  

13. Privacy and Data Protection Compliance

If your business deals with consumer data (e.g., in e-commerce or SaaS businesses), ensure compliance with India’s data protection laws.

• IT Act, 2000: Understand the provisions relating to cybercrime and protection of sensitive personal data.

• Personal Data Protection Bill (PDP): Stay updated on the requirements to ensure data privacy and protection as the bill is expected to become law soon.

By following this legal checklist, startup founders can ensure that their business is compliant with Indian laws and regulations, minimizing the risk of penalties or legal disputes in the future. Engaging with legal and financial professionals can also help navigate more complex areas such as IP protection, taxation, and compliance with industry-specific regulations.

Disclaimer: This article is provided solely for informational purposes and should not be considered as legal advice. For accurate legal guidance, please consult a qualified professional.

Article by Tanya Shree A-O-R Supreme Court of India