8 Laws to Keep In Mind Before Starting a New Business In India

The path for an entrepreneur is usually considered a bumpy one. The beginning of this journey starts with fundraising and creating a business plan, which are top priorities on the startup to-do checklist. But before setting up a business, a potential business owner must understand that the business must be legal and abide by the government laws for business. Hence, for long-term success, an entrepreneur must keep in mind all the rules of starting a business. Although it’s always best to refer to an expert for understanding all the rules of starting a business, some basic rules along with new business laws should be kept in mind.

Here are 8 laws to keep in mind before starting a new business in India:

1. Formalisation of Business Structure

Before starting any business, you must determine the nature and type of the business. There are different types of business structures to choose from. The major types include proprietorship, private limited, limited liability partnership, public limited. The decision of formalising the business structure is important as it must not be misaligned with your ideas and the purpose of the business.

All these business structures follow different registration procedures along with distinct legal statuses. So, before starting a business, formalise your business structure to not conflict with your vision.

2. Licensing

After selecting the business type and nature, you have to take care of getting some particular licences. To begin with, you must understand the types of licences. These licences vary according to the type and nature of the business. In case of the absence of relevant licences, your business may face severe legal penalties.

Here are some basic but crucial licences that an entrepreneur must be aware of:

The licence that commonly applies to all businesses is the Shop and Establishment Act. This act is regulated by the Department of Labour, and it regulates the areas where trades and businesses are carried out. This act regulates aspects such as the rest interval of employees, opening and closing hours, working hours, maternity leave, etc.
If you are looking to start an e-commerce company, you must be knowledgeable about licences such as Service Tax registration, Value-Added Tax registration, etc. While service tax is applicable for a person or entity providing a taxable service of value that exceeds Rs. 9 lakhs, the value-added tax applies on products when the value is added at any stage of the supply chain. These tax registrations must be done by all service-providing businesses.
If you want to launch a restaurant, you may need some other licences in addition to the Shop and Establishment Act. These include the food safety licence and certificate of environmental clearance.

3. Taxation and Accounting Laws

One should be aware of the different types of taxes that are applicable for different types of businesses. A recently launched programme called ‘Startup India’ aims to empower startups in India. The new rules for businesses laid down by this programme outline many tax exemptions for startups. But some requirements are needed to qualify as a startup, and these are as follows

The business must be registered as a partnership company or as an LLP (Limited Liability Partnership) company or must be incorporated as a private limited company.
According to the new business laws, a business entity will be considered a startup only up to ten years of registration/incorporation.
The annual turnover must not have exceeded 100 crores for any of the financial years since incorporation/registration.
Lastly, the business must be highly innovative and have the capacity to generate employment and wealth.

So, any business eligible to be a startup is exempted from taxes for three consecutive years. There are exemptions on capital above fair market price, too.

4. Labour Laws

Whatever be the size of your business, you must always be aware of the labour laws. These laws encompass issues such as minimum wages, holidays, maternity leave, bonus payment, provident funds payment, etc. According to the new business laws under the Startup India programme, startups can be exempted from labour inspection if they complete self-declaration for labour laws. There are 9 labour laws, which are:

The Industrial Dispute Act, 1947
The Industrial Employment Act, 1946
The Trade Unit Act, 1926
The Payment of Gratuity Act, 1972
The Employees Provident Fund and Miscellaneous Provisions Act, 1952
The Contract Labour Act, 1970
The Trade Unit Act, 1926
The Employees’ State Insurance Act, 1948
The Inter-state Migrant Workmen Act, 1979

These startup company rules and regulations under the Startup India programme can aid businesses in acquiring experience and thereby boost productivity.

5. Intellectual Property Rights - Protection Rules

An intellectual property right is a company’s best friend as it protects a business from theft of personal data. If you own a company and have developed something innovative or an improved formula that is helping you to face the tough competition, this rule comes to your rescue. According to this law, you can patent your secret formula or innovation and sell your product under a particular name with a trademark. This makes copying your idea, formula, or innovation punishable by law.

Additionally, the Startup India programme has also laid down new business laws, SIPP (Startups Intellectual Property Protection) being one of them. This simplifies the patent application process for startups through registered facilitators, and business owners only need to pay statutory fees. The facilitators also provide advisory services and assistance to startups in filing or disposing of a patent application.

6. Taking Care of Contracts

Contracts are the legal recordings of business transactions between business entities. These contracts prove to be very effective for the smooth functioning of a project. A contract is deemed valid only if it complies with the conditions under the Indian Contract Act, 1872. The rules state that for a contract to be valid, it must result from the unrestricted consent of the parties, must be a lawful consideration with a lawful object, and must not be explicitly declared to be void.

Contracts such as employee contracts and NDA contracts are extremely crucial when the business is about to launch and in the later phases of the business as well. This is because employee contracts will save you from future risks. Every detail regarding the employee, such as the pay scale, extent of work, etc., are usually mentioned in the contracts. NDAs (Non-Disclosure Agreements) are contracts that help protect the ideas of a company from being stolen by third parties like investors, similar to the Intellectual Property Rights.

7. Winding Up Rules

It may seem difficult for you to think of winding up even before starting, but preparing for the worst is sometimes better for making new beginnings. Therefore, if things don't fall into place within an optimum, predetermined timeline, considering winding up the business would be the best decision. There are 3 ways to do it, which are:

Fast track exit mode

This is the best of all modes as it involves minimal costs and less time to wind up. But for this method, a company must not have any assets or liabilities, and there should be no business procedures for the preceding year.

Voluntary closure

This method is not usually practical, as, for this method, there must be a common understanding between the shareholders and creditors.

Court route

This is the least advisable method, as it involves a lot of discussions with the company’s stakeholders, which typically results in lengthy court procedures.

Apart from all these methods, startups registered under the Startup India programme have the ease of winding up in 90 days under one of the new startup rules, i.e., the Insolvency and Business Code, 2016.

8. Startup Rules

What about home-based startups and businesses? There are clear rules for a home-based business, as the Shop and Commercial Establishment Act, 1961, states that any business which doesn’t involve intellectual exercise is said to be a home-based business. Businesses practised by professionals such as lawyers, doctors, etc., are not considered home-based businesses. Those businesses that involve a lot of movement of goods at home can be considered home-based; therefore, they require licences from local authorities.

So, these were some basic rules you need to keep in mind before starting a business in India. Ensure these government laws are followed to ensure the success of your new business.

Also Read:

1) How to Get A Small Business Government Grant?
2) Here’s How to attract customers on social media?
3) Podcasting is the new blogging! Here’s how to get started
4) How to Start a Business with Less Than Rs 10000?

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FAQs

Q. Can an existing business entity register itself as a startup?

Ans. Yes, an existing business entity can register itself as a startup if it meets the criteria stated under the Startup India programme.

Q. What documents are needed to support registration as a startup?

Ans. The documents needed for registration are a copy of the certificate of registration/incorporation and a description of the nature of the business, highlighting its innovation.

Q. Is a PAN necessary for registration?

Ans. No, it is not compulsory, and an entity without a PAN can be registered as a startup.

Q. Can an entity formed by splitting up an already existing business be called a startup?

Ans. No, this kind of business entity cannot be called a startup.