In recent years, India has emerged as one of the world’s fastest-growing start-up ecosystems, with a vibrant and dynamic entrepreneurial spirit driving innovation and economic growth. As these start-ups continue to flourish, it becomes crucial for founders and entrepreneurs to navigate the complex landscape of regulatory compliance. This article aims to provide a comprehensive overview of start-up compliance in India by delving into the key regulatory frameworks, legal obligations and compliance checklists that start-ups need to consider.
Definition
According to the Department for Promotion of Industry and Internal Trade (DPIIT), which operates under the Ministry of Commerce and Industry, an entity will qualify as a “startup” if it meets the following eligibility criteria:
- It must have been incorporated as a private limited company (under the Companies Act, 2013) or registered as a partnership firm (under Section 59 of the Partnership Act, 1932) or a limited liability partnership (LLP) (under Limited Liability Partnership Act, 2008) in India within the last 10 years;
- For any of the financial years, the turnover of the entity since incorporation/registration has not exceeded 100 crore rupees; and
- The entity should be engaged in activities related to Innovation, development or improvement of products, processes or services, or it should have a scalable business model with a high potential for generating employment or wealth.[1] However, please note that an entity formed by the splitting up or reconstruction of an existing business will not be considered a startup.
Registering your startup
Different business structures have their own specific rules and regulations that determine the necessity of registration, tax obligations and licensing requirements. The aforementioned laws (i.e., the Companies Act, 2013, the Partnership Act, 1932, and the Limited Liability Partnership Act, 2008) govern the registration process for different forms of business.
An entrepreneur should select a form of business depending upon their goals, the capital available and the purpose of the startup. For instance, if an entrepreneur intends to start a homegrown venture alone and does not wish to get it registered, the ideal option for them may be a sole proprietorship, or if business partners seek funding from a foreign venture capital without the Reserve Bank of India’s approval (basis eligibility criteria), the ideal form of business can be a LLP.
- Registration via startup India Website: Any person can register their business and get the necessary registration by visiting the website, https://startupindia.gov.in/ and logging in/creating an account and entering information allied to the venture. By registering their business with the Startup India website, business owners have the opportunity to connect with investors, mentors, incubators etc.
- DPIIT Recognition: Although, DPIIT recognition is not mandatory for startups in India. However, getting recognised by the DPIIT will make a startup eligible for certain benefits such as fast-tracking patent applications,[2] rebates on patent and trademark filings,[3] getting recognised via the Government E-Marketplace (GeM) platform,[4] funding support,[5] etc.
- Complete the startup recognition form: As a founder, provide essential information such as the full office address, details of the authorised representative, partner/director details, startup activities, and self-certification. Once all the required details are filled, click on the ‘accept the terms and conditions’ button and submit the form.
- Await the registration certificate: All the details submitted will undergo a verification. Once the verification process is finalised, an e-mail containing the registration certificate will be sent to the founder.
Note: During the entire startup registration procedure, the founder(s), will need to gather certain documents. These documents include the Incorporation/Registration Certificate of their startup, PAN number, proof of funding (if applicable), authorisation letter from the authorised representative of the company, LLP, or partnership firm, proof of concept such as a pitch deck/website link/video, and details of any patents or trademarks (if applicable). Additionally, include any awards or certificates of recognition their startup may have received.
Compliance Checklist
- For entities registered under the Companies Act, 2013: Startups registered under the Companies Act, 2013 are obligated to fulfil specific mandatory compliances. This includes conducting an annual general meeting (AGM) once a year within 15 months of the previous AGM.[6] The AGM focuses on approving financial statements, appointing auditors and declaring dividends. Board meetings are also crucial, with the first meeting required within 30 days of incorporation, and at least four meetings per financial year. The gap between consecutive board meetings should not exceed 120 days.[7] There are several forms that must be filed. This includes filing Form ADT-1 for the appointment of auditors, at its first annual general meeting, who shall hold office until the conclusion of the company’s sixth annual general meeting. After that, they will continue to hold the position until the conclusion of every sixth meeting.[8] Form MGT-7 is mandatory for filing annual return details,[9] and Form AOC-4 is used for submitting financial statements.[10] Directors are required to prepare a Directors’ Report detailing the state of the company, operations, net profit, dividends, and more.[11] Directors must also file Form MBP-1 to disclose their interests in other entities.[12] Certain registers must be maintained, including minutes of board and general meetings, and statutory registers. Additionally, books of accounts or financial statements and registers of directors’ attendance at board meetings or committees must be maintained as per Section 44aa.
- For entities registered under the Limited Liability Partnership Act, 2008: Firstly, LLPs need to file the annual return or Form 11[13]. This form provides a summary of the LLP’s partners and any changes in management. The due date for filing Form 11 is within 60 days from the closure of the financial year.LLPs are also required to file the Statement of Account & Insolvency,[14] known as Form 8. This form consists of two parts: Part A includes the statement of solvency, while Part B contains the statement of accounts and statement of income & expenditure. Form 8 must be filed within 30 days from the end of six months of the financial year. Apart from the annual compliance requirements, there are also event-based compliances for LLPs. This includes filing the LLP Agreement with the Ministry of Corporate Affairs (MCA) within 30 days of formation. LLPs also need to file various forms for changes such as appointment/resignation of designated partners/partners, name changes, changes in the LLP agreement, and more, within specific time limits.
- For entities registered under Section 59 of the Partnership Act, 1932: In the case of a partnership startup firm, it is mandatory to get it registered within a period of 1 year since the incorporation of the firm[15] via Form I. Furthermore, a partnership firm is bound to inform the Registrar (as defined under Section 2 (c-1) of the Partnership Act, 1932) that it has discontinued its operations or is beginning its operations in a new place within a period of 90 days from the date of such discontinuation or commencement respectively[16] via Form II. A partner and an employee are subject to paying professional tax on the gains made in accordance with the respective state law.[17] Furthermore, similar to professional tax, a partnership startup firm may be mandated to pay a certain amount to the Labour Welfare Fund (LWF) in case state legislation mandates.[18]
Other applicable compliances
Labour law and tax-related compliances: Startups must comply with labour laws regarding wages, working hours, safety standards and other employment-related regulations such as the Payment of Gratuity Act, 1972; the Contract Labour (Regulation and Abolition) Act, 1970; the Employees’ Provident Funds and Miscellaneous Provisions Act, 1952, the Maternity Benefit Act, 1961 etc.) and environmental law compliances.[19] In addition, the entities are required to create a range of policies and manuals to govern working conditions. These include the Prevention of Sexual Harassment at Workplace Policy (POSH policy) and the Employee Handbook.
To ensure compliance, it is advisable to seek guidance from a legal expert who can access the relevant laws applicable to your startup.
Furthermore, startups that are registered with the DPIIT can also avail of tax exemptions under Section 80 IAC (which allows Start-ups to claim a deduction of one hundred percent of the profits and gains derived from any eligible business for up to three years) and Section 56 of the Income Tax Act, 1961(taxation of income from other sources).[20]
Industry specific compliances: In the business realm, various occurrences necessitate adherence to industry-specific regulations to ensure compliance. For example, startups that receive Foreign Direct Investment (FDI) are obligated to follow the guidelines set forth in the Foreign Exchange Management Act, 1999 (FEMA). Likewise, businesses engaged in import-export activities must adhere to Customs laws. If a startup deals with hazardous products or processes, obtaining clearance under Environmental law becomes imperative. Similarly, startups operating in the real estate sector must obtain approval from the Real Estate Regulatory Authority (RERA) and fulfil other property law obligations. Additionally, in cases involving mergers and acquisitions or significant transactions that could potentially have a substantial adverse impact on competition within India, obtaining approval from the relevant Competition law authorities is mandatory. These event-based compliances play a pivotal role in ensuring legal and regulatory adherence in the business landscape.
Legal documentation: A lot of emerging businesses often neglect the formalisation of contract structures and essential incorporation-related documents, which can result in legal complications when disputes arise or during the investment-raising stages of startup growth. To avoid these issues, startups should prioritise drafting incorporation documents like Founder’s Agreement, Shareholder’s Agreement, Memorandum of Association, and Articles of Association. Startups must establish formal arrangements with suppliers, vendors and customers such as vendor agreements, employment agreements and service agreements to effectively carry out their day-to-day operations.
Application for licenses: Depending on the nature and scale of the business, startups may be obligated to register their business under various licenses as mandated by different laws in India. One commonly required license for many businesses is the Shop and Establishment license, which applies to all premises where trade, business, or profession takes place.
Intellectual Property Protection: Managing intellectual property through the registration of copyrights,[21] patents, and trademarks,[22] Safeguarding domain names and combating counterfeiting and piracy are crucial. Infringements can be addressed through legal remedies like injunctions and damages. Developing an IP strategy and conducting audits are vital for comprehensive IP protection.
Conclusion
As the startup ecosystem continues to grow rapidly, founders and entrepreneurs must be aware of the regulatory frameworks, legal obligations, and compliance checklists specific to their business structure. Registering the start-up through appropriate channels, fulfilling annual compliances, maintaining necessary documentation, obtaining licenses and protecting intellectual property are critical steps to ensure legal and operational stability. By understanding and adhering to these requirements, startups can mitigate risks, access benefits and create a strong foundation for long-term success in their respective fields.
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[1]Department for Promotion of Industry and Internal Trade, G.S.R. 127(E), Ministry of Commerce and Industry, dated 19th February, 2019.
[2] Department for Promotion of Industry and Internal Trade, Start-up India Kit, Ministry of Commerce and Industry, Government of India, Page 4 <https://www.startupindia.gov.in/content/dam/invest-india/Templates/public/startup_kit%20(2).pdf> dated May, 2022.
[3] Ibid, Page 4.
[4] Ibid, Page 5.
[5] Ibid, Page 14.
[6] Section 96, The Companies Act, 2013.
[7] Section 173, The Companies Act, 2013.
[8] Section 139, The Companies Act, 2013.
[9] Section 92, The Companies Act, 2013.
[10] Section 134 and Section 137, The Companies Act, 2013.
[11] Section 134, The Companies Act, 2013.
[12] Section 184, The Companies Act, 2013.
[13] Section 35, The Limited Liability Partnership Act, 2008.
[14] Rule 24, The Limited Liability Partnership Rules, 2009.
[15] Section 58 (1A), The Partnership Act, 1932.
[16] Section 61, The Partnership Act, 1932.
[17] Section 16 (iii), The Income Tax Act, 1961.
[18] Section 2, Mica Mines Labour Welfare Fund Act, 1946.
[19] Department for Promotion of Industry and Internal Trade, Self Certification, Government of India <https://www.startupindia.gov.in/content/sih/en/startupgov/self-certification.html> last accessed on 12th July, 2023.
[20] Department for Promotion of Industry and Internal Trade, DPIIT Startup Recognition & Tax Exemption, Government of India <https://www.startupindia.gov.in/content/sih/en/startupgov/startup_recognition_page.html>last accessed on 12th July, 2023.
[21] Section 45, The Copyright Act, 1957.
[22] Section 18, The Trade Marks Act, 1999.