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THE STRUGGLE FOR START-UPS IN INDIA

Start-ups are young, raw yet rapidly expanding businesses in the economy. They are young entrepreneurial, scalable business models built on technology and innovation in which founders develop a product or service based on the market demand. But it is not easy to nurture, build and develop a start-up business, especially in a country like India. There are various compliances that the entrepreneurs have to adhere to in order to catch up on, in the competitive race. Even though the Indian government has taken several initiatives to promote employment and enterprise, still they have to go through a steadfast and rigorous pathway to establish themselves. A successful start-up requires clear understanding of the market, high level of leadership skills, ability to take calculated risks on the part of the entrepreneur.

START-UPS – LEGAL ISSUES

The law has a major impact on any business model. There are certain unforeseen pitfalls and issues that the young minds have to take into account before venturing into the real world. Here are some major issues -:

LEGAL ISSUES-
The law has a major impact on any business model. There are certain unforeseen pitfalls and issues that the young minds have to take into account before venturing into the real world. Here are some major issues -:

1.  License and Permits- Start-ups require a variety of licenses, approvals and permits to carry out their plans and the lack of legal awareness could result in huge penalties. Licenses differ from one business to another and are not always easy and quick to obtain. Therefore, one should be informed about the local laws, rules and regulations before starting a business. Here are a few important licenses for a start-up-

–GST registration – In the current scenario, every e-commerce business is mandated to have a GST registration. Businesses who have a turnover of equal to or greater than 40 lakhs should get themselves GST registered. Casual taxable persons, Non-resident taxable persons, e-commerce aggregators, those who are paying through reverse charge mechanism need to get GST registration.

–Start-up Registration – The Start-up India Scheme was enacted by the Indian government with the aim of promoting start-ups, assisting in creation of jobs and producing wealth. Numerous programmes were launched in order to create a robust ecosystem and produce more employment. A start-up should get registration under the start-up India registration scheme.

–Permissions – Every company is required to obtain necessary permissions and permits for the smooth functioning of the operations. It is necessary to obtain Fire permits and safety registration. Registrations not only help in avoiding legal hindrances but also benefits in availing various government schemes like MSME registration which can help in getting subsidies in loans, taxation and other schemes.

2. Protection of Intellectual Property Rights– IPR is the heart and soul of any start-up company. Being a rookie in the competition, start-ups are in the constant fear that their idea or strategy might get stolen. Therefore, it is important to secure intellectual property rights as soon as possible. Failure to comply may result in trademark infringement or other breaches after investing a large sum of money in the firm. Here are a few IP every start-up should be concerned with –

–Patents – The patent right allows the patent owner to make exclusive commercial use of his invention and prohibits others from using it. The owner gets the right for a period of 20 years and in case he forgets or ignores the patent registration, anyone else can copy his idea which will subsequently harm the firm’s goodwill and profit. A start-up dealing with any technical thing or a technical process of performing a thing should get the product patent or process patent.

–Copyright– Start-ups can get copyright over its software application, magazines, articles, any literary or artistic work or a research work. This will forbid others from using his creation during his lifetime and 60 years after his death.

–Trademark/ Service mark – Every entrepreneur should be discrete and careful while deciding their trademark or tradename. It should be attractive, distinctive and easy to pronounce. A trademark is the identity of a business or service provider. It helps the customers identify the goods or services in the market. Every start-up should seek registration for the trademark either for used or proposed to be used.

3. Infrastructure related Zonal laws – In India “land” comes under the domain of State list and so laws related to land vary from state to state. Allocation of property for the purpose of office use, or manufacturing unit or service centre comes under the domain of the state. The entrepreneurs should be aware of the local laws regarding the commercial use of school/ agricultural land/ hospital property. The zonal authorities divide a locality into eight parts, residential, commercial, industrial, public, semi-public, public utilities , open playgrounds, transport and agricultural use.

The zoning authority prescribes the height, location and the map of the building where the commercial work is to be carried out. The aim of zonal laws is to separate residential areas from commercial areas. If an entrepreneur plans to operate the business from his house, he is required to take necessary permissions from the local municipal authority, and town planning authority. When a residential area is used for commercial purposes, the property tax also varies. Normally the property tax will be higher in comparison to the residential property.

4. Tortious liabilities – Tortious liabilities arise when someone performs an act forbidden by law or omits to do any act he was obliged to do. Any start-up firm has to be very careful in performing its operations. The entrepreneur should be discreet while handling the matters related to fire, chemicals, raw materials, noise, smell, vibrations etc. The rule of strict liability will hold you responsible for any inherently dangerous activity on the land which damages the environment or mankind. For e.g. A start-up involved in delivering lunch boxes has to make sure that the gas cylinders are properly turned off and they don’t catch fire and burn down the roofs of adjoining houses. The business may have to pay a heavy penalty for the loss of property or life. Even a start-up involved in textile business has to make sure that it does not release harmful chemicals in the adjoining rivers.

5. Data Protection and Privacy issues – In an era of digitalization, and especially due to the Covid-19 pandemic, every business small or large has moved to the online regime. Every e-commerce website or application is collecting sensitive information from the customers with the motive to serve them better. They record personal details as well as search history. But no start-up should have access to the private details of the users without their permission or they should ask for permissions which are not needed by their website or application. The firm should prioritise the privacy of its users. This could be done by drafting a privacy policy in a short, simple and summarized form and also in local regional language so that before signing in to any application the user may easily understand the terms and conditions. The start-ups should also come into an agreement stating that they will not share or misuse the details of the users. This will help the firm in building goodwill and trust of the people.

6. Determining Business Structure – Many start-ups struggle to realise the best business structure for their venture. Any entrepreneur has to take into consideration a lot of factors like profit sharing, liability, registration and taxation. Here are few business models one must go through, before stepping into the real world-

–Sole Proprietorship– This is one of the oldest and most common models for business. A single person owns, controls, and manages the entire business. There is no separate legal entity here, all the profits accrued are gained solely by the proprietor. When we talk about the advantages and disadvantages even though the owner has freedom to take all the decisions, on the contrary he has limited financial resources. It becomes very difficult for the owner to raise outside capital. This business form gives you tax advantages, as the owner pays taxes in his individual capacity and not for the business entity. This also comes with a disadvantage as this highlights that the business has limited life, and no perpetual succession; enterprise will die with the proprietor. The tax slab for the owner is as follows-

Net Income Range Income Tax
Upto Rs. 2,50,000
Rs.  2,50,000 – 5,00,000 5%
Rs. 5,00,000 – 10,00,000 20%
Above 10,00,000 30%

Partnership Firm– Partnerships are governed by the Partnership Act 1932 in India. It can be defined as a relation between two or more persons who have agreed to carry on a business and share the respective profits. Two or more persons can form a partnership, subject to 20-member maximum capacity. When we talk about the merits and demerits of the partnership firm, one must take into account that there may be conflict of interest between the partners. Partnership offers confidentiality, flexible operations and easy dissolution of the business. A partnership firm is obligated to pay 30% income tax plus a 12% surcharge if the total income exceeds Rs. 1 crore. Moreover, education cess @ 1% and secondary and higher education cess @ 1% is applicable.

Private Limited Company– This is governed by the Companies Act, 2013. Company is a separate legal entity having perpetual succession. This is a highly regulated form of business structure and more transparent as it requires compliance and disclosure at various stages. No minimum capital requirement is necessary as per the latest change. The great feature about this structure is that the liability is restricted which means that personal and business assets are treated separately and personal assets cannot be used to repay debts. But dissolving a company is a rigid and time-consuming task.
The tax slab for private companies in India is given in the following table-

For Domestic Company Turnover > 400 crore

Net Income Slab (Gross Taxable income – deductions) Income Tax Rate  Surcharge  Health and Education Cess
Upto 1 crore 30% NIL 4%
Above 1 crore but upto 10 crore 30,00,000 + 30% 7% 4%
Above 10 crore 3,00,00,000 + 30% 12% 4%

For Domestic Company Turnover < 400 crore

Net Income Slab (Gross Taxable income – deductions) Income Tax Rate  Surcharge  Health and Education Cess Rebate u/s 87A  
Upto 1 crore 25% Nil 4% Nil
Above 1 crore but upto 10 crore 25,00,000 + 25% 7% 4% Nil
Above 10 crore 2,50,00,000 12% 4% Nil

7. Legal contracts and agreements – Every start-up has to be very cautious and careful while drafting contracts as well as signing it. All these contracts need to be regularly renewed and checked every year or in every 5 years. The following contracts enumerated below are significant before a start-up ventures into its business operations-

–Agreement with co-founders– The contract with the founders each of their roles, ownership and investments. This is done to prevent any future dispute or conflict. Founders’ agreement specifies the working coordination between various parties and sets boundaries. During the incorporation stage, a founder’s agreement lays out the duties and tasks for each co-founder. It is advisable to have a written format for the same, because generally do away with this due to personal relationships.

–Employment contracts – Employment contracts serve as the basis for the workforce the organisation. It determines an employee’s rights and responsibilities as well as rules for resolving internal conflict. Every start-up must get signed an offer letter with its employee while hiring him. These should be explicit defining the rules and norms regarding the working hours, salary, job position, terms for termination of employment.

–Contract with service providers – While drafting a contract with any service provider or supplier, the firm must include all the major and minor details which include quantity, quality, timings, cost, court of jurisdiction in case of any conflict. The entrepreneur must keep his mind that he should keep his liabilities limited and state the dispute resolution mechanism in case of conflict.

–Non-disclosure agreement – Start-ups are established with the aim of introducing a new good or service in the market. An NDA is significant in order to save and protect your commercial interest. The parties involved agree to protect the company’s sensitive information and secrets by signing the contract. The NDA agreement states the consequences in case of a breach. The primary goal is to protect the confidential information of the company and everyone including the founders, employees, and whoever holds the idea of the start-up should sign it.

CONCLUSION

It is a generally known fact that start-ups start their journey with a tight budget and have even tighter monetary limits to spare on numerous compliances required by the law. However, it is important that every start-up understands the importance of ensuring proper legal compliances before venturing into the market. A one-time investment in the filed of legal compliance and due diligence shall save and protect them from any future conflict or form being shut down. Moreover, drafting clear, unambiguous watertight agreements will prevent any future litigation pertaining to employment or service providers. Hence it would be important that the start-up’s research and make themselves aware of all the necessary law requirements at the time of incorporation.
The Indian government has been welcoming as well as observant of the growing start-up culture in India. It has launched various schemes and policies in order to promote enterprise in the country. Therefore, it would be wise move for start-ups to take advantage of the friendly policies and reforms to save themselves from any future losses or shutdowns.

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