Starting a business?
Starting a business?
Written By Lekha Kumar
It all begins with an idea. Maybe you want to launch a business. Maybe you want to turn a hobby into something more. Maybe you have an easy solution to an annoying problem. Or maybe you have a creative project to share with the world. Whatever it is, the way you follow your dream can make all the difference.
Starting a new business in India can be daunting. Particularly while navigating the country's labyrinth of regulations and laws. Complying with these regulations is critical to ensuring the success of a new business, and any failure in this regard can lead to severe penalties, which can cripple a start-up even before it gets off the ground. Thus, it is imperative to have an extensive knowledge and a thorough understanding of these regulatory requirements, before starting.
Let us take a closer look at what specific actions need to be taken while starting a new business and what legal licenses and regulatory requirements etc apply to it.
1. Business Idea and Market Research: The first step is to find a business idea that works for you, based on your knowledge and skills, strengths and weaknesses, lifestyles, tastes and passions, your motivation and discipline, your resources as well as your risk appetite. The best fit.
Market research should tell you if there’s a demand for your idea, and if there’s space for it. Ideally, you should bring something unique or something different to the table, that has value for the customer. This should translate into a business plan, that explains in simple easy steps your vision to translate this business idea into reality.
2. Company Set up, Name Availability & its Registration, Location, Bank Account and Website: It is crucial to check the availability of the name by which you want your brand to be known, because the brand name is going to represent you. To avoid trademark issues and establish your credibility, it’s a wise move to check whether a name is available or not. Find a location suitable for your business functions, as per its requirements. You would need to open a separate dedicated Bank account for operating the business, to move all financial transactions through it. Not only are there legal reasons to keep your business and personal funds separate, but there are tax ramifications to consider as well. While the nature of your business will determine whether you need one or not, having a separate business account is always advisable. In this digital age, all businesses have an online presence. Businesses would do well to set up their websites to directly communicate with their target audience about the company, its values, products and services, schemes, testimonials, new launches, prices and other important details including contact information. It is advisable not to forget to add ‘Terms and Conditions’ and ‘Privacy Policy’ to the website.
3. Funding Requirements & Sourcing: Detailed Business Plans includes market analysis, financial projections, organisation management, sales and marketing strategies. Its capital requirement can be sourced through several options like self-funding (bootstrapping), loans from friends and family or partners, Grants, angel investors, venture capitalists, business incubators, government schemes, crowdfunding, advance from customers, trade equity, Bank loan or business credit line etc.
4. Business Entity Structure & its Registration: Keeping in mind the nature of business, its market and your resources, select the structure which is the best fit. The right format will support your business plan and help accelerate its growth. It might also help you avoid high tax rates in addition to personal liabilities.
The options are Sole Proprietorship, One Person Company, Partnership Firm, Limited Liability Partnership, Private Limited Company or a Public Limited Company. Each structure has its pros and cons. For instance, if the market is limited and localized, and customers prefer personal attention and capital requirement is low, then Sole Proprietorship may be the right fit. It’s easiest way to start a business, there is no specific procedure to set up a proprietorship and it is not a legal entity. But it does require licenses and permits to run it, for instance, the proprietor has to obtain a Registration Certificate under the Shops and Establishment Act from the State where the business is located. One Person Company (OPC) is a new type of business entity introduced by the Companies Act 2013, it’s a legal entity which has only one Director who is also its sole shareholder, and whose ownership can be transferred to the nominee in case of death of owner. The structure under OPC has high compliance requirements and cost, and few tax advantages. A minimum of two persons can start a Partnership Firm, under the Indian Partnerships Act, 1932, with the registered partnership deed specifying their invested interest, their profit sharing ratios and other terms of the business, functions, duties etc, wherein each partner has unlimited liability. More suitable for small and medium sized businesses. Limited Liability Partnership (LLP), is a legal entity registered under the LLP Act 2008, that offers the benefits of limited liability and the flexibility of a partnership. LLP activities are managed as per LLP Agreement. There is liability protection as each partner is liable only to the extent of his capital contribution and he cannot be personally liable for any independent or unauthorized acts of any other partner. Private Limited Companies are separate legal entities, governed by the provisions of Companies Act 2013, registered with the Registrar of Companies. There are annual compliances under this Act required and failure to do so can attract serious legal repercussions. The shareholders are liable only to the extent of their shares. If you are looking to raise capital and have shareholders, this may be the right structure for you. Public Limited Companies are highly regulated and suitable for mature businesses. Appropriate structure should be selected after detailed analysis of each option.
5. Registration for Goods and Services Tax (GST): Any business in the sale of goods in India that has an annual turnover of over Rs. 40 lakhs (or Rs. 20 lakhs for businesses in Special Category states) is required to register for GST. If you are a service provider, for instance a consultant, then you need to obtain registration under GST when the aggregate turnover for the financial year exceeds Rs 20 lakh (Rs 10 lakh in the case of certain specified states). GST is a value-added tax that has replaced all the indirect taxes levied by the central and state governments.
6. Other Registrations, Licenses and Regulatory Requirements: Obtaining a Permanent Account Number (PAN), Tax Deduction and Collection Account Number (TAN) & Taxpayers Identification number (TIN). PAN issued by the Income Tax Department (ITD) of India is mandatory for all businesses and individuals who engage in financial transactions, while TAN is mandatory for all persons responsible for deducting tax at source (from salaries, for instance) or who are required to collect tax at source. These are used as a unique identifiers for taxation purposes. TIN is unique identification number issued to businesses by the respective Indian States’ Commercial Tax Departments to track their transactions and is required by all the businesses that are registered under VAT. It’s used for collecting, processing, monitoring, and accounting information for direct taxes, whenever goods or services are sold within a state or between two or more states. TIN must be quoted for all VAT transactions, and is required by traders, exporters, dealers and manufacturers. ESI Registration will be mandatory when the number of employees in the business crosses 20. Proof of ESI Registration is often requested by businesses that outsource manpower requirements. Acquiring a Digital Signature Certificate (DSC), an issued electronic key that validates and identifies the holder of this certificate, is also required. Director’s Identification Number (DIN) is a unique identification number by Ministry of Corporate Affairs to a Director of a company or designated partner of an LLP, as part of a business registration process, which is specific to a person and has a life time validity. It is a mandatory requirement under the provisions of the Companies Act 2013 that DIN number is always required to be mentioned underneath the signature of the Director whenever any document, information, or a return would be submitted to the regulator under any law.
7. Shop and Establishment Act License: is mandatorily required for commercial and physical premises from the State in which the business is located, which grants the right to do business in a particular area. It aims to keep the interests of the consumers so that they will not be affected by any health hazard or nuisance. The municipal corporation of that area will issue this license. It is the proof of commerce document required to open the business current account or while applying for other licenses.
8. Registration for Professional Tax: Professional Tax is a state-level tax that is levied on individuals who earn a living through a profession or employment. The tax is levied by the state governments and varies from state to state. An employer must get a professional tax enrolment certificate to subtract and submit professional tax from their employees' pay.
9. Other Specialized Licenses and Registrations: Depending upon the nature of businesses, certain specific licenses may additionally be required, like the DGFT Department requires everyone importing or exporting goods or services from India to get an Import Export Code. Food Safety and Standard Authority of India (FSSAI) license must be obtained if you are planning to launch a food business, be it packaged food, restaurant, Cloud kitchen, or any other food business model. Registration for Udyog Aadhaar (Udyam or MSME) is required by start-ups who run a small company– micro, small, and medium-(based on their investment in plant and machinery), and it makes them eligible for various government benefits and initiatives. Businesses that deal with or provide insurance, financial services, broadcasting services, defence-related services, and so on would require regulatory permissions from agencies like the Reserve Bank of India, IRDAI etc. Moreover, a company may be required to get permission from the fire dept, the environmental control board, or the local health service. It all depends on what kind of business it is.
10. Compliance with the Companies Act, 2013: If a start-up is registered as a company, it is required to comply with the provisions of the Companies Act, 2013. The Act governs the formation, management, and dissolution of companies in India. Compliance with the Act includes obtaining incorporation certificate, having registered office and keeping the books of accounts at this office, conducting annual general meetings, maintaining statutory registers, maintaining and filing of profit and loss accounts, balance sheet and filing annual returns with the Registrar of Companies make the obligatory contribution in certain philanthropic activities under the Corporate Social Responsibility (CSR) provisions in the Companies Act, 2013 etc.
11. Compliance with the Income Tax Act, 1961: The Income Tax Act, 1961, is a law that governs the taxation of individuals and businesses in India. Compliance with the Act includes filing income tax returns and TDS Returns on time, getting Tax Audit Reports, paying taxes on time, maintaining proper accounting records. Some businesses, for instance start-ups registering with the start-up India program, enjoy tax exemptions and financial benefits to promote their growth. Initially, they can avail of exemptions on long-term capital gains, investments above their fair market value, tax holidays, and 100% tax rebates on their profits for three years out of the first ten years of their incorporation.
12. Adherence to Labour Laws: When businesses hire people to run a company, the Government has to ensure that they are organised and managed as well as compensated fairly and everything is followed as per legal standards. There should be no exploitation either way. In India several laws have been enacted for compliance, which have to be followed by the businesses to run smoothly, like Industrial Disputes Act, 1947, Contract Labour (Regulation and Abolition) Act 1970, Employees State Insurance Act, 1948, Employees’ Provident Funds and Miscellaneous Provisions Act 1952 etc.
13. Intellectual Property (IP) Registration and Protection: Intellectual Property is the creations of the mind including inventions, literary and artistic works, designs and symbols names and images used in business, mostly known as patents, trademarks, copyrights and trade secrets. It safeguards you against any kind of misuse of your IP by competitors. It is especially advisable in this digital era to protect your IPR with the help of an expert IP lawyer.
14. Non-Disclosure Agreement (NDA): This is a confidentiality agreement which is another safeguard for your business, in addition to IP protection, which provides a legal contract between two parties to protect sensitive information. Any breach of this would make the person liable to serious legal consequences, as per the clauses in the contract.
15. Winding-up Process: Design of a proper winding up process even while incorporating a business may sound strange as one does not think about shutting down at this stage, but one needs to be prepared for any situation. There are several legal compliances attached to the winding process of a company.
The list above is not exhaustive, it just gives you a glimpse into the complexities of this universe. Bring in the experts to navigate the deep and difficult waters, while you take the time to focus on the essentials and grow your skills to meet the challenges of your business, to convert your vision into reality.
Disclaimer: The above note is only indicative and not exhaustive. Readers are advised to read the relevant regulatory provisions and take professional advice.
