Legal Requirements To Start A Business In India

India is embracing startup culture and 1991’s LPG (Liberlisation, Privatisation and Globalisation) Reforms have played a significant role in this revolutionary change. Startup culture has led to extraordinary innovations which have been instrumental in making India one of the top startup-friendly nations in the world. In this digital era, starting a business appears quite an easy process. But there is a lot you need to know about that process. Yes, there are a lot of legal requirements to start a business in India. Failing to meet either one of them might land you in trouble.

Undoubtedly, it is understandable that as a business owner, you have to focus on an end number of things including customer base, USPs of your business, market research, financial needs, etc. Therefore, it is better advised to have an expert by your side. Yes, you need to retain an experienced corporate lawyer who can take care of all the legal procedures and compliances to start a business in India.

Important Documents Required To Start A Business In India

When you are planning to start a business, there is a lot of legal formalities that you need to fulfill. You cannot just start it straight away. Besides an innovative business plan, you also need to make sure you have the following documents ready with you.

Certificate of Incorporation
Licenses and MOUs
Trademark registration and IP agreements
Permanent Account Number (PAN), Tax Deduction Account Number (TAN), Digital Signature Certificate (DSC), Director Identification Number (DIN), Tax Identification Number (TIN), Goods and Services Tax Identification Number (GSTIN) and No Objection Certificate (NOC)
Non-disclosure agreement
Shareholder’s agreement
Employment contracts and offer letters
Startup’s Bylaws (set of working rules or principles to regulate its environment)
Founders/Co-founders’ Agreement
Terms of Use and Privacy Policy

All the very best for your startup but don’t forget to have these legal documents to enjoy a smooth entrepreneurial journey.

What All Are The Basic Legal Requirements To Start A Business In India?

Doesn’t matter how strong your entire team is or how impactful your business idea is. If you forget any of the legal requirements to start a business, a lot of problems are waiting for you on your journey. Complying with the laws is only going to protect you and your business against any kind of harm. Starting a business is an extremely exhaustive process where you will need to take care of a lot of legal aspects. Possibly, you might miss one or the other thing while launching and handling your startup. Therefore, it is better to have a professional business lawyer who can make this less stressful for you.

Let’s start with the basic yet most important legal requirements for starting a startup in India

Company Name Availability

The very first thing that comes to your mind when you think of starting a business is its name. The name which you want your business to identify with. Especially, in this era of online marketing, it is very crucial to check the availability of a name for your business. Because the brand name is going to represent you. To avoid trademark issues in the coming future or for the credibility of your business, it is the wisest step to check whether a name that you are thinking of is available or not. If a company already exists with the same name and they have trademarked its business name, you might face legal troubles along your journey.

Business Entity Registration

Then the next step is to decide on the type of business entity and its registration. It is the business structure. When it comes to deciding on the type or nature of your organization, these are the 6 major types of business entities you can opt for.

Sole Proprietorship
One Person Company
Partnership Firm
LLP
Private limited company
Public Limited company

What Is Sole Proprietorship?

As the name suggests, the business is owned by a single person in a sole proprietorship which is also known as an individual proprietorship. In this, the business and the owner are considered the same. Therefore, if the owner dies, the business also dies. It is the easiest way to start a business where sole proprietors can hire employees to work for their businesses.

A sole proprietorship is the easiest way to start a business as there are no specific laws that govern it. This business entity has no legal existence. Whether it is about profits or losses, a sole proprietor will take care of both of them. Most significantly, people prefer to register a business as a sole proprietorship when the market is limited, localized and customers prefer personal attention. Individuals prefer to register their businesses as sole proprietorship when both capital required as well as risk is lesser.

It is not mandatory to register a sole proprietorship business. But it is mandatory to obtain some licenses or permits to run it.

Documents Required to Register a Sole Proprietorship Business

PAN Card
Aadhar Card
Bank Account
Registered Identity Proof

Registrations And Licenses Required For Sole Proprietorship Business

Registering as SME: Though it is not mandatory, sole proprietors can register their businesses as Small And Medium Enterprise (SMEs) under MSME Act as there can be certain benefits of doing the same. You can register your business through Udyog Aadhar under the Ministry of MSME.
To register your sole proprietorship business, here is the link (https://udyamregistration.gov.in/UdyamRegistration.aspx)
The owner has to obtain a Registration Certificate under the Shops and Establishment Act from the state where the business is located. You can register your business through GST here – https://www.gst.gov.in/.
The sole proprietor should register for GST if the business turnover exceeds Rs.20 lakh.

What Is One Person Company?

One Person Company (OPC) is a new type of business entity that was introduced under Section 2(62) of the Companies Act 2013. It is a type of business entity which can feature as a separate legal entity. In One Person Company, ownership can be transferred to the nominee in case of the death of the owner.

There is no scope for raising equity funding in an OPC. No foreign directors and nominees are allowed in One Person Company. When the annual revenue of the business is over 2 crores and paid up capital is over 50 lakhs, then the company needs to be converted into a Private Limited Company. Besides this, an OPC cannot perform Non-Banking Financial Investment activities.

Documents Required To Register A “One-Person Company” In India

Passport or PAN card
Voter ID
Drivers License’
Passport size photo
Specimen signature
No objection certificate
Rental agreement
Address proof of directors
Identity proof of directors For NRIs and foreign nationals, a passport
Updated gas or electricity bills
Bank account statements, and phone bills for mobile or landlines
A sample signature.

Registration And Licenses

Digital Signature Certificate (DSC)
Director Identification Number (DIN)
Approval Of Company Name
Incorporation Of One Person Company
Obtaining A Certificate Of Incorporation

Partnership Firms

A minimum of two partners can start a partnership firm to work and earn profits. There are unlimited liabilities which are borne by the partners. Though it is not mandatory, it is good to get it registered under Partnership Act, 1932.

In this type of business entity, a foreigner cannot become a partner. Also, there is no perpetual succession. A partner in a partnership firm has the right to file a suit against the firm as well as any partner within the firm. These firms can operate with or without a license.

Their partnership deed specifies the invested interest of each partner and their profit-sharing ratios along with other terms of business functioning and operations. A partnership deed in the form of a verbal contract enlists the functions, duties, powers, and number of shares held by the partners. The details that will be included in the partnership deed are

Name and address of the firm and all the partners.
Nature of business.
Date of starting of business Capital to be contributed by each partner.
Capital to be contributed by each partner.
Profit/loss sharing ratio among the partners.
Interest on capital invested, drawings by partners or any loans provided by partners to the firm.
Salaries, commissions or any other amount to be payable to partners.
Rights of each partner, including additional rights to be enjoyed by the active partners.
Duties and obligations of all partners.
Adjustments or processes to be followed on account of retirement or death of a partner or dissolution of the firm.
Other clauses as partners may decide by mutual discussion.

Documents Required To Register A Partnership Firm In India

Application for registration of partnership (Form 1)
Certified original copy of Partnership Deed.
Specimen of an affidavit certifying all the details mentioned in the partnership deed and documents are correct.
PAN card of the partners.
Address proof of the partners
Proof of principal place of business of the firm (ownership documents or rental/lease agreement).

How To Register A Partnership Firm In India?

Step 1- The partners have to file an application to the Registrar of Firms of the State which should be signed and verified by all the partners. The application form will include the details

The name of the firm.
The principal place of business of the firm.
The location of any other places where the firm carries on business.
The date of joining of each partner.
The names and permanent addresses of all the partners.
The duration of the firm.

Step 2- Name Selection For The Company
Step 3 – After Registrar is satisfied with all the provided information and documents, a Registration Certificate will be issued.

Limited Liability Partnership

A Limited Liability Partnership has to be registered with the Ministry of Corporate Affairs under the LLP Act 2008. It is a separate legal entity where promoters are not personally liable towards the LLP. It can be started with a minimum of two persons and ownership can be transferred. The profits gained by this business entity are taxed as per the slabs mentioned under Income Tax Act, 1961 plus surcharge and cess as applicable. The partners may come and go as an LLP has perpetual succession.

This type of business entity is suitable for small and medium-sized businesses which have the advantages of both a limited liability company and the flexibility of a partnership. The liability of each partner depends on the number of share capital. Obligations related to the repayment of debts or lawsuits incurred by LLP, lie on the firm and not on the owners. In addition to that, the partners are not liable to be sued for dues against the firm. Therefore, there are very less compliances in this type of business entity. LLPs are only obligated to submit only two documents including Annual Return Statements and Statements of Accounts.

Documents Required For LLP Registration In India

Proof of identity (PAN card and passport in case of foreign national) of all partners;
Residential address (AADHAAR card/Driver’s license/Passport/ Voter’s ID) of all partners;
Proof of office address (Conveyance/Lease Deed/Rent Agreement etc. along with rent receipts);
No Objection Certificate from the owner of the property;
Subscription sheet including consent;
Copy of utility bills of the registered office (not older than 2 months);
Detail of LLP(s) and/or Company(s) in which partner is a director/partner;
Copy of approval in case the proposed name contains any word(s) or expression(s) which requires approval from Central Government or if the proposed business required any regulatory approval.

Conditions To Set An LLP In India

The minimum number of partners should be two
To start an LLP, the minimum authorized capital amounting should be up to ₹1 lakh
One of the designated partners must be an Indian resident
There should be at least one individual partner if the rest are corporate bodies
No requirement for shared capital since each partner must have an agreed contribution.

Private Limited Company

As per Section 2(68) of the Companies Act 2013. “private company means a company having a minimum paid-up share capital as may be prescribed, and which by its articles,

(i) restricts the right to transfer its shares;
(ii) except in the case of One Person Company, limits the number of its members to two hundred:
(iii) prohibits any invitation to the public to subscribe to any securities of the company.

It is a privately held small business entity and is considered an independent legal entity on incorporation. It has to be registered with the Ministry of Corporate Affairs under the Companies Act 2013. A PLC is prohibited to raise funds through the issue of a prospectus. The declaration has to be filed before the commencement of business. It has to file annual statements of accounts and annual returns with ROC. The company also has to file tax returns and an audit is mandatory for such business entities.

Minimum of two persons and a maximum number of 200 members can start a PLC.
It can have a minimum of two and a maximum of 15 directors.
As the company is a legal entity, it can sue and can be sued under the company name.
An authorized capital fee amounting to at least ₹1 lakh
Its borrowing capacity is higher in comparison to LLC. Besides enjoying the privilege of obtaining loans easily, a Private Limited Company has also the option of issuing debentures and convertible debentures are always available.
It is easier to sell or transfer the company, either partially or in full, without any disruption to the current business.
Because of perpetual existence, the company will continue to exist even after the death of any member.
Shareholders cannot claim to be owners of the company because the company itself is the owner.
An individual can be a director, shareholder, and employee at the same time.
A Private Limited Company has to maintain records of all transactions. It gets tax exemption for the first three years of the business establishment which enhances the company’s growth.

Documents Required to Register A Private Limited Company In India

Scanned copy of PAN card or passport (foreign nationals & NRIs)
Scanned copy of voter ID/passport/driving licence
Scanned copy of the latest bank statement/telephone or mobile bill/electricity or gas bill
Scanned passport-sized photograph specimen signature (blank document with signature [directors only])
Scanned copy of the latest bank statement/telephone or mobile bill/electricity or gas bill
Scanned copy of the notarized rental agreement in English
Scanned copy of the no-objection certificate from the property owner
Scanned copy of sale deed/property deed in English (in case of owned property)

How Can I Register A Private Limited Company In India?

Choose a unique name that needs to be submitted to the Ministry of Corporate Affairs. You can submit 1-2 company names which usually get approved within 5 working days. In case the names are rejected, you can resubmit your choices again.
Obtain Digital Signature Certificate (DSC) and Director Identification Number (DIN).
Submit a Memorandum of Association (MOA) & Articles of Association (AOA).
After February 1, 2020, different forms including Simplified Proforma for Incorporating the Company electronically (SPICe-INC-32) (2) Electronic Memorandum of Association (eMOA) under INC-33 (3) Electronic Articles of Association (eAOA) under (INC-34) must be compulsorily filed for company registration.
Through the SPICE+ form, a minimum of 3 company directors can apply for DIN (Director Identification Number). In the case of registering a company with more than 3 directors and more than 3 persons don’t have DIN, the application will be for the registration of the company with 3 directors only and can appoint the new directors later after the incorporation of the company.
The next step would be to apply for and obtain Permanent Account Number (PAN) and Tax Collection Account Number (TAN).’
You’ll get a Certificate of Incorporation along with PAN and TAN.

Public Limited Company

As per Section 2(71) of the Companies Act, a public company means “a company which is not a private company”.

This business entity offers its shares to the public or whose securities are traded in the stock market. In order to incorporate a Public Limited Company, a minimum of three Directors, seven shareholders and a registered office are required. A PLC enjoys almost all the benefits of a Private Limited Company which include the ability to have an unlimited number of members, ease in transfer of shareholding, and more transparency.

The company can list its securities on Regional Stock Exchanges for selling and buying purposes. These companies have better access to capital and funds. The business entity must comply with the requirements of the SEBI (LODR) Regulations, 2015. A subsidiary of a PLC is also treated as a public limited company.

Directors And Shareholders: To incorporate a Public Limited Company, there should be a minimum of three directors and a minimum of seven shareholders. In this type of business entity, there is no limit on the number of shareholders.

Perpetual Possession: It has perpetual succession which means that the company will continue to exist even if the owner dies. The company is going to enjoy the same privileges, immunities, estates and possessions.

Paid Capital: As per the Company Amendment Act of 2015, there is no minimum capital requirement for starting a public limited company. The amendment had removed the words “five lakh rupees or such higher paid-up share capital”.

Limited Liability: A Public Limited Company enjoys the benefit of limited liability. The liability of the members differs from the liability of the company. The liability of debts incurred lies with the company itself.

Documents Required To Register A Public Limited Company In India

Identity proofs of directors and shareholders, such as a PAN card, voter ID, Aadhaar card, or driver’s licence.
Address proof of all directors and shareholders.
Water, telephone, gas, or power bill of the registered office which can’t be more than two months old.
It is necessary to have a “No Objection Certificate” (NOC) from the building’s actual landlord to use a location as a Registered Office.
All Directors’ Taxpayer Identification Numbers (DINs).
Obtain the Directors’ Digital Signature Certificates.
Articles of Association and Memorandum of Association.

How To Register A Public Limited Company in India?

Fill the form and submit it online on the Ministry of Corporate Affairs portal along with all the documents.
Apply for Digital Signature Certificate (DSC) and Director Identification Number (DIN).
Then, the next step is to check and verify as per the MCA. The name of the company must not breach any IPR provisions.
After the approval of the company name, file SPICe form for securing the certificate of Incorporation. As the applicant files the SPICe form, DIN number would also be allocated to the company directors.
After obtaining all the documents, the documents including MoA and AoA will be submitted to the MCA. Besides this, the company also has to submit documents which include the mission, goals, objectives and long-term aspirations of the company.

Founder’s Agreement

A founder agreement is a document that contains vital information about a venture’s/founding business’s participants. It acts as a contract which underscores the roles and responsibilities of the founders, operational details, executive compensation, conflict resolution clauses and exit clauses. It ensures the smooth running of a business in the long run.

Legal Licenses And Permits

After you are done choosing a name and business entity, start applying for licenses and registrations that will safeguard you and your business against any kind of legal complexities. Below mentioned are some general and specific licenses that you need to start a business in India.

General Licenses And Registrations

GST Registration (if your annual turnover exceeds Rs.20 lacs) (Rs.10 lacs for north-east states)
Permanent Account Number (PAN)
Tax Account Number (TAN)
Bank Account
Shop and Establishment Act License (for commercial and physical premises)

Specialized Licenses And Registrations

IEC Code (Import-Export License)
FSSAI License (businesses dealing in food and food items)
Kosher Registration (To deal with kosher goods)
Halal Registration (To deal with Halal goods)
Other licenses as per a business type

Adherence To Labour Laws

It is difficult for a single person to run a company and when you have a bigger vision, you have to hire people who can contribute to turning your dream business ideas into reality. To keep these people organized and managed, you have to ensure that they are compensated fairly and everything is followed as per legal standards. There should be no exploitation on both ends.

When a startup is registered under the Start-ups India initiative, the founder can complete a self-declaration (for nine labour laws) within one year from the date of incorporation and get an exemption from labour inspection. Below mentioned are some of the major employment/labour laws and compliances in India that you need to follow to run a business smoothly.

Intellectual Property Registration and Protection

Intellectual property, as the name suggests, is the creations of the mind including inventions; literary and artistic works; designs; and symbols, names and images used in business. The most renowned types of intellectual property are patents, trademarks, copyrights, and trade secrets. Amid this digital era, it is always advisable to register and protect your intellectual property with the help of an expert IPR lawyer. It safeguards you against any kind of misuse of your intellectual property by competitors. Entrepreneurs who have registered their business under the Start-up India initiative can leverage the scheme for Start-ups Intellectual Property Protection (SIPP).

Non Disclosure Agreement

Procedures including safeguarding intellectual property and creating a Non-Disclosure Agreement are the ones which are going to protect you and your business. Non Disclosure Agreement (NDA) which is also known as a confidentiality agreement is a legal contract between two parties to protect sensitive information. The person who breaches the contract will be liable to face the legal consequences as per the clauses mentioned in an NDA.

Conclusion

Summing up, this is a great thought to start a business and be instrumental in economic development. Abovementioned are the major legal requirements to start a startup in India. As we all have websites to have an online presence, it is advisable to not forget to add “Terms and conditions” and “Privacy Policy” to the website. Equally important is to have a clear and proper winding-up process designed during the company incorporation stage only. You might never think of shutting your business down but we should be prepared for every situation. Because there are several legal compliances attached to the winding up process of a company too. There are three ways to shut a company which includes voluntary closure, fast-track exit mode and by courts or tribunals. Besides these, you’ll come to know about more licenses, registrations, legal compliances and everything that you’ll need to set up your business legally.

This article is written by Varsha. You can reach out to the author via email at bnbvarsha@gmail.com.

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