Startups are relatively new in India; trying to survive, sometimes
successful, in the Indian ecosystem. However, the legal challenges to the
startups are particularly unique due to its complex and ever changing business
policies. Let's explore and examine the complexities of various factors directly
impacting the startups in India.
Many startups face problem in determining what is an ideal business structure
for their startup as the business structure may vary from business to business
and one business structure could be good for one may be bad for the other in
terms of risk, a number of people involved, sharing of profits, liability,
taxation, annual meetings, and registration, etc.
The business structure of a startup may be:
- Sole Proprietorship:
- It is an ideal business structure for those who like to have total control
over their business and enjoy all the profits alone;
- It has an easier taxation structure based on the revenue earned by the
- It is not taxed as a separate legal entity. Rather, the proprietors file
their tax as parts of their individual tax returns;
- The liability of a sole proprietor is unlimited - as in case the
proprietor is unable to pay debts of the business then his personal assets
could be sold to meet needs as in its business assets are not classified as
private or personal assets;
- It has very limited capacity to raise capital for business.
- Partnership Firm:
- It is suitable when more than one people are involved in the business;
- It is one of the simplest forms of business structure governed by the
Partnership Act, 1932 and the Indian Contract Act, 1972;
- Its taxation is quite similar to the proprietorship firm;
- The profit is shared among several partners;
- There are several issues like conflicts in ideas of different partners
- Limited Liability Partnership ('LLP'):
- It is most suitable when the business is unstable or risky;
- It is governed by the Limited Liability Partnership Act, 2008;
- The liability is limited means that the personal assets and business
assets are considered separate and the personal assets could not be used up
for the recovery of the debts;
- In LLP at least two members are required and there is no limit on the maximum
number of members;
- The expenses involved in forming it are comparatively higher than sole
- The tax authorities treats LLP as a separate legal entity from its owners and
is legally required to be registered for taxation purposes with the Income Tax
- It is an advantageous as compared to private limited company as LLP is easier
to start and manage and it has a lesser cost of registration as compared to
private limited company.
- Private Limited Company:
- It is most suitable when there is possibility of business growth to
attract equity investors;
- It is governed by the Companies Act, 2013;
- A Private Limited Company is a company that is privately held for small
- The liability of the members of a Private Limited Company is limited to
the number of shares respectively held by them;
- The shares of Private Limited Company cannot be publicly traded;
- The expenses involved in forming a Private Limited Company are
comparatively higher than the LLP business;
- It is important to know that the tax authorities treats it as a separate
legal entity from its shareholders and is legally required to be registered
for taxation purposes with the Income Tax Department;
- It is suitable for an entrepreneur who needs external funding and are
aiming towards good turnover.
- Registration and Licenses:
- The key to a successful startup is to obtain all the documents and
licenses pertinent to run a business. Unavailability of license with the
business will lead to expensive law suits and settlements. Business
registration and firm licences differ fundamentally in that the former are necessary for listing a
business with the registrar, whereas the latter are the paperwork needed for a
business to operate.
- If the business meets the requirements set forth by the Department of
Industrial Policy and Promotion of India (DIPP), Startup India Registration is
another type of registration that is compulsory. Depending on the kind and size
of the firm, additional registrations like MSME, GST, Udyog Aadhar,
import-export codes, etc., may be needed.
- In addition to the aforementioned, Startups should keep in mind that,
depending on state legislation, they may need additional permits to
establish and operate a business.
- Property Laws:
- Another significant issue for startups in India is the allocation of
property for the purpose of the office, warehouse, service centre,
manufacturing plants, etc. Startups should be aware of local state rules
governing the commercial use of real estate or land as they differ from
state to state and are within the purview of the government. In a
residential area, for instance, the local municipal government may establish
a regulation barring the use of any property or land for industrial or
- Ordinarily, a locality is divided into eight sections by the municipal
zoning authority. These sections are designated for residential, commercial,
industrial, public and semi-public, public utilities, open
areas/parks/playgrounds, transport and communication, and agricultural use.
The zoning authorities may opt to specify the building's height, location,
and map for carrying out commercial work.
- If a startup intends to run its operations from a property, whether it
be for an office, warehouse, service centre, manufacturing units, etc., it
must also perform the necessary due diligence for the purpose of any local
municipal zoning laws or reservations and obtain the necessary permissions
from such authorities to avoid any irregularities in the use of such property,
which vary from state to state.
- Contract Management:
- The startup should adopt good contract discipline that would manage costs
and produce the most value with the least amount of business risk; failing
to do so could result in a pricey litigation.
- The contracts such as Employment Agreements, Non-Disclosure Agreements,
Services Agreements, Lease Agreement, Rent Agreement or Leave License etc.
are among the crucial contracts required by a business frequently.
- Startups should avoid using conventional and time-consuming methods for
drafting contracts; instead, their contracts should be written in a clear,
concise, and simple manner without the use of legal maxims or difficult
legal terms, making them easier to understand for common man or anyone
without a background in law.
- Labour Laws:
- Labour laws can be divided into those that deal with social security programs,
salaries, working conditions, and prohibitive labour laws. For new businesses,
the rules in India that are designed to protect workers' rights might be
somewhat onerous. As a result, the DIPP issued a directive in year 2016 enabling
self-certification with respect to nine labour regulations and prohibiting
inspections for three years. However, the Ministry amended the law in year 2017
to change the self-certification compliance period from three years to five
years and to prohibit inspections under the six labour laws (instead of the nine
labour laws) from taking place during the first year of incorporation.
- Startups must also submit self-certified returns in accordance with nine labour laws that DIPP established in 2016. Startups may only be subjected to
inspection beginning in the second year and continuing for up to five years
after incorporation if a credible written complaint of a labour law violation
has been made and approved by a person one level above the inspecting officer or
by the Central Analysis and Intelligent Unit.
There are multiple tax benefits available to the startups in India that can help
to save on taxes such as:
- 100% tax exemption to the startups registered with DIPP, for the first 3 years
which gives startups time to build a business with added budget, which they
otherwise would have to pay as taxes.
- Benefits of 20% on capital gain tax to startups registered with DIPP, even
though the earnings from stocks, shares, and bonds are taxable.
- The 'angel investments' are tax-free so that the startups can now
collect the funds they require from angel investors without having to worry
about added taxation.
- The startup that has a turnover of under INR 2 crore is eligible to enjoy the
benefits of the 'Presumptive Tax Scheme', where the company is not required to
maintain any book of accounts.
- Intellectual Property Rights (IPR):
- In order to avoid issues like trademark infringement or other IP breaches after
investing a significant amount of money in their firm, it is critical for
startups to protect their IPR on its priority. Many entrepreneurs share the
common dread that their concept or strategy may be stolen by someone.
The Startups should ideally seek to protect the following IPR:
In case a startup is dealing with any technical thing or a technical
process of performing a thing then it should go for patent of product or method.
It is a negative right that will allow the owner to make exclusive commercial
use of his invention for the period of 20 years and prohibits others from using
it. Anyone can steal the inventor's concept if the inventor disregards the
patent registration, which will have a detrimental impact on the inventor's firm
by lowering their earnings and goodwill.
The startup may obtain copyright for its software, periodicals,
papers, research findings, ideas written down, and other creative or literary
works. It will prohibit others from using such a creation for as long as the
inventor is alive and for 60 years after his passing.
The trademark or service mark is an identity of a business or a
service provider which helps the customers to identify its goods or service in
the market. The startups should be careful while deciding their trademarks that
their trademarks or tradename should be easy to pronounce, attractive,
distinctive, and international implications of the marks should also be
considered. The startup should seek registration for a trademark or service mark
either for used or proposed to be used.
- Trade Secrets and Confidentiality Agreements:
Trade secrets are the most
important IP right for the startups. Although, a secret will not be secret
anymore if it leaks and gets into the knowledge of many people. In order to
protect trade secrets, the startups should adopt a practice or policy of
entering into a confidentiality agreement / non-disclosure agreement with their
partners and employees or other stake holders.
Advertisement & Marketing:
Data Protection & Privacy
- Advertising and marketing are crucial for any startup, but making false
claims or running offensive, scandalous, or seditious ads can result in
harsh penalties and damage a firm's goodwill and reputation, which can be
likened to trampling over a little budding seedling.
- There are several prohibitions on advertisements such as:
- The Cigarettes and Other Tobacco Products (Prohibition of Advertisement
and Regulation of Trade and Commerce, Production, Supply and Distribution)
Act, 2003 (COTPA): prohibits all kind of direct or indirect advertising of tobacco and
tobacco products in all media;
- The Food Safety, And Standards Act, 2006 (FSSA): prohibits advertising of
infant formula in order to encourage breastfeeding of infants;
- The Prenatal Diagnostic Techniques Act, 1994 (PDTA): prohibits advertising
pre-natal sex determination services;
- The Cable Television Network Rules, 1994 (CTNR): prohibits all kind of direct
or indirect advertising of alcohol or alcoholic beverages;
- The Arms Act, 1959 (TAA): prohibits advertisement of guns and other firearms;
- Startups and other e-commerce companies keep track of and use customer
information, including search history. Ideally, startups shouldn't access
users' private information without those users' consent or shouldn't request
permissions that aren't necessary for the operation of their website or app.
- Startups should place a high value on user privacy, which can only be
achieved by creating privacy policies that are concise, clear, summarised, and available
in the user's local / native language. This will allow users to quickly read and
comprehend the privacy policies, terms, and conditions before logging in to any
- Additionally, the startup must make a pact with its users that they
won't reveal or use their personal information. This will assist the
business win the public's respect and trust. The company must specify in the
the website and how they will be shared or sold to third parties.
- Startups may be held liable for torts if they fail to take reasonable
care to avoid engaging in illegal activity or fail to carry out activities
required by law.
- Startups must exercise caution when handling and managing raw materials,
noise, vibrations, fire, and other factors. For instance, if a company is
creating and delivering lunchboxes to adjacent businesses and residences
when, by chance, a gas cylinder catches fire and burns down the roofs of neighbouring
homes, the firm may be subject to severe fines or losses under the notion of
- Winding up of any business structure whether partnership or company is
required when the purpose for which the partnership or company is formed is over
or it has become a defunct entity with low or zero assets and/or profits. When
such business structure needs or decides to shut down, all the parties or stake
holders involved, such as the partners or shareholders, employees, investors or
creditors, need to be informed in advance.
- To windup a startup, the fast track exit method is the most convenient
one. The Ministry of Corporate Affairs (MCA), recently released the
curtailed procedure of winding up a company through fast-track exit. This
new method is not only beneficial for the companies, as the application
regarding the winding up shall now be forwarded to the Central Government
instead of NCLT.
- Further, under the Startup India Action Plan, the companies, upon
application can be wound up within 90 days, wherein insolvency professionals
shall be appointed for the startup.
Although, the government of India has taken several initiatives to encourage the
growth of startups in order to promote entrepreneurship and employment by
providing easier IPR facilitation, a favorable taxation system, and easier
compliance for the setting up company, etc., even then Startups in India have to
deal with various obstacles like funding, insufficient skill, lack of marketing
strategies, etc. over that startups have obligation to operate in compliance
with laws and follow the ethical behavior.
Non-compliance with laws or ethical
misconduct may lend the startups to serious troubles like fines, punishments,
revocation of licenses, litigation expenses, etc. which may cause an adverse
effect on the limited capital of the startups. India's startups must therefore
unavoidably ride the legal roller coaster.
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