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10 things to keep in mind before starting a company

November 19, 2019 09:10 IST

Did you know that the Government of India has granted certain tax exemptions to start-ups for a prescribed period?
Illustration: Dominic Xavier/Rediff.com

Legal considerations to start a business in India

Acknowledging that entrepreneurship is a key driving factor for the Indian economy, the Government of India has introduced several schemes and legislations for creating a conducive environment for entrepreneurs.

Below are 10 key regulatory considerations which potential entrepreneurs could consider before starting a business in India:

1. Structure

A business entity can be incorporated/registered as a private limited company or a partnership firm or a limited liability partnership (LLP) in India, depending on several factors such as ease of fund infusion, regulatory supervision and tax efficiency.

The requirements for formation of the entity would vary depending on the nature of the entity i.e. shareholders and directors in a private company, designated partners and partners in a LLP and partners in a partnership firm.

2. Start-ups

An entrepreneur may classify his/her business as a start-up as start-ups have been granted several incentives and exemptions under schemes, various laws, including tax and foreign exchange regulations.

As per the notification issued by the Department for Promotion of Industry and Internal Trade, an entity would be considered a ‘start-up’ if:

  • upto a period of 10 years from the date of incorporation/registration, it is incorporated as a private limited company or registered as a partnership firm or an LLP in India;
  • its turnover for any of the financial years since incorporation/ registration has not exceeded Rs. 100 crore; and
  • it is working towards innovation, development or improvement of products or processes or services, or if it is a scaleable business model with a high potential of employment generation or wealth creation.

3. Registration and licenses

The entity would need to obtain certain registrations in order to carry out business in India (depending upon the nature of the entity and number of employees) such as PAN, TAN, GST, shop and establishment license, registration under labour laws for gratuity/provident fund, and so on and this would entail dealing with different government authorities.

4. Compliances

The start-up entity would need to ensure periodic compliance with several laws and regulations (including various corporate, tax and labour laws).

The nature of the entity would determine the volume and frequency of compliance, that is, a private company needs to adhere to more reporting and filings requirements than an LLP and a public company more than a private company.

5. Intellectual Property (IP)

It is of utmost importance that the new business ensures that its IP in its brand, logo, software, product(s) and so on is registered with the Trade Mark Registry and is adequately protected.

6. Foreign Direct Investment

Investment in an Indian entity from overseas would be governed by the foreign exchange laws of India including the Foreign Exchange Management (Non-debt Instruments) Rules, 2019.

Start-ups are additionally permitted to issue convertible notes which are debt instruments either repayable at the option of the holder or which are convertible into equity shares within 5 years upon occurrence of a specified event.

7. External Commercial Borrowings

Indian entities eligible to receive foreign direct investment are also permitted to receive external commercial borrowings (ECB) from overseas, subject to conditions laid down by the Reserve Bank of India.

There are several relaxations provided to start-ups for raising capital from overseas especially with respect to average maturity and end usage. However, LLPs may not be able to raise ECBs.

8. Contract Management

Watertight contracts (which are adequately stamped and registered, where necessary) with vendors, distributors, lessors and employees (including non-compete and non-solicitation obligations) are imperative in order to protect the business. Further, non-disclosure agreements would be necessary in order to protect sensitive and confidential information.

9. Tax

Tax efficiency should be considered before incorporating a business.

Start-ups have been granted certain tax exemptions such as a tax holiday for a prescribed period and angel tax exemption.

10. Government Support

Depending on the business sector the Central and the State Governments have issued schemes and policies for new businesses or start-ups in order to boost an environment for growth and it is important to explore these to assist the business.

India is currently 63rd in the World Bank’s ease of doing business ranking. This ranking is expected to further improve over the next few years with several liberalisation measures that are expected to be introduced by the Indian Government.

Gopika Pant and Abhimanyu Kaul are partner and senior associate at Indian Law Partners.

Gopika Pant and Abhimanyu Kaul
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