Legal Requirements for Starting a Business in India

Legal Requirements for Starting a Business in India

With initiatives like Start-up India and Make in India, the central government has made business-friendly policies to increase economic growth. Similarly, the government has allowed up to 100% FDI (Foreign Direct Investment) in Indian start-ups. However, there are certain legal requirements for starting a business in India that you must know. The conditions by central government agencies are enforced across the country. You may also be required to fulfil certain formalities with the local authorities for the smooth running of your business.


There are many developments in the economic sector in India, and several incubators and active angel investors are looking for potential start-ups in India. Nevertheless, due to the government’s policies that have made doing business in India rather simple, new entrepreneurs should know some things. Also, the companies willing to invest in another start-up will look into the business’ legal checklist. Even if you are not looking for another investment and want to start your own business, you must have a business plan that includes legal requirements for starting a business in India.


Setting Up a Business Start-up in India


Registering Your Business


The registration process for a business in India is under the Ministry of Corporate Affairs. Similarly, you can consider registering your business as an MSME. The Micro, Small and Medium Enterprise Act can help you avail beneficial schemes and incentives from the central government. The majority of the registering process is via the online module, and you can register your company as an MSME by self-declaring your documents.


However, before that, you need to register your company name with the Ministry of Corporate Affairs. The documents that are required to register depends on the type of the company. For instance, you can register as a private company, a partnership firm, a sole proprietorship, or an LLP (Limited Liability Partnership). Remember that if you’re planning on raising investment funds from venture capitalists, or angel investors, you will need to register your business as a Private Limited Company.


You will need to produce the Aadhaar Cards, residential addresses, PAN cards, scanned photographs, and sale agreements, along with the latest bank statements and electricity bill or telephone/mobile bill as documents for registering. The documents of the one business owner will be required in case of a sole proprietorship. Similarly, as a legal requirement for starting a business in India, a Private Limited Company will require a minimum of two directors and their documents for the registration process.


Co-founder Agreement


If you are going to be involved in running a business as a partnership firm, or a Limited Liability Partnership entity, you will need to draft a co-founder agreement. Professional services will help you prepare the co-founder agreement. However, several modules need to be a part of the agreement. The contract should state the ownership roles, responsibilities, and the investment funded by each co-founder.


The document has to be duly signed by all the co-owners and, to be on the safer side, the manuscript should be notarised. As the agreement will clarify the roles and responsibilities of each co-owner, it will help you form a proper business structure.


Raising Funds


A business requires funds to get started. No matter what type of business you are setting up, you will need capital to purchase or rent land, machinery, or equipment. However, the funds invested in your start-up have to be legally sourced. Most start-up entrepreneurs look for funds from family and friends. Similarly, some start-ups raise investments from angel investors, venture capitalists, or banks.


A professional service provider will help you determine what kind of funds can be invested in your venture and make sure that meets the legal requirements. Also, once your business is registered, you can look for further investments from banks and other financial institutions that lend loans to companies at an affordable interest rate. However, to be eligible for a lower interest rate, your company should be MSME-certified.


Maintaining Books of Accounts


One of the primary legal requirements for starting a business in India is maintaining your books of accounts. A company must ensure that they have a Chartered Accountant, or in the case of a small business, the company can look at other firms who provide accounting services. The main aspect of maintaining a company’s accounts is it can help in identifying transactions involving incomes and expenses.


Similarly, the books of accounts will also record your taxes and help you comply with government regulations. Also, in case any problem with a particular transaction arises, you can always get it checked with your book of accounts. And if your company is registered as an MSME, you will need to update your transaction history to the Ministry of MSMEs. Furthermore, your books of accounts will help during auditing after the end of a financial year.


Registration for Goods and Services Tax and Permanent Account Number


The recent inclusion of the Goods and Services Tax by the central government is an essential business checklist before you begin selling your products or services. The cap for GST differs for various products and services. Nevertheless, GST is charged nationwide, and due to it, you can commence the sale of your products or services throughout the country. Hence, it is important to register for GST as the unique identification number provided to the company will help avail various incentives and schemes laid by government agencies.


The PAN or Permanent Account Number of the company is equally important. As per government regulations, a company must have a PAN card as proof for transactions exceeding two and a half lakhs. Furthermore, the PAN card is an essential document of evidence for various incentives and schemes. Applying for GST and PAN is an important legal requirement for starting a business in India.


Trademark Your Business Name


Trademarking your business is important to ensure that anyone else does not use your name to start another company with your name. The trademarking process is simple and can mostly be done within a matter of weeks. A start-up can also apply for patents or copyrights in case they are making unique products or software. By patenting and copyrighting, a company can safeguard itself in case someone else tries to commercialise the products they are selling.


Compliance with Labour Laws


A professional service provider will help you with labour laws essential to a start-up’s checklist. No matter what kind of products you are producing, the labourers in your company must be protected by central government regulations. Also, your company must formulate work hours, pay scales, and other requirements to comply with labour and employment laws.


A start-up company must have policies that include terms for employment, provident funds, probation period, and termination of employment. Therefore, it is important to hire a skilled professional who has immense knowledge of labour laws to ensure your company’s policies are in sync with the labour laws enforced by the central government. Also, make sure that all other parameters of your company are included in the procedure for work and thoroughly checked by a lawyer for compliance with labour laws.


Cybersecurity


Like most start-ups today operating using cloud computing, apps, and websites, it is important to consider developing your website or mobile application with cybersecurity modules. An essential part of business structure is to ensure that none of your data or your customer’s data is hacked or misused in the virtual environment.


Hence, your company should ensure that cybersecurity rules and regulations are imparted to customers accessing your website or mobile application. Additionally, you can add a policy on your website or application to comply with IT laws. Once the IT laws are complied with, you can also accept digital transactions from your customers directly on your website or mobile application.


Once you have understood all the legal requirements of starting a business in India, you can go ahead and conceptualise your start-up. Remember to ensure that you are taking professional guidance from the right people to help you comply with all essential legal requirements that are a part of your business checklist.


Once you are sure that your business is on the right track, with all the necessary legal requirements, you will be able to overcome any hurdle that comes your way and reap the benefits of your start-up.


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