Start-up Funding Companies Compliance in India

What Is Start-up Funding Companies Compliance in India

BRIEF INTRODUCTION

• Startup Funding Companies Compliance in India basically refers to abiding by the principles. In today’s world of business, compliance has become integral for survival. Failing this, businesses are prone to various fines and penalties under varied regulations and laws.
• With the laws getting amended on an everyday basis so as the limit the slip-ups made by businesses within the past, one cannot ignore the growing importance of compliance in this day and age. Moreover, wherever any startup receives funding, it becomes their legal duty, to ensure that the investor’s money is in safe and sensible hands.

ELIGIBILITY CRITERIA FOR STARTUP

• The Start-up should be incorporated as a private Ltd. Or be registered as a partnership firm or LLP under the relevant acts.
• Their turnover shall not exceed Rs. 100 Crores in any of the previous financial years.
• An entity is termed as a Start-up for a maximum of 10 years from the date of its incorporation.
• The entity shall be working towards innovation/ improvement of any of the existing products, services, and processes and be having the potential to get employment/ create wealth.
• They must also obtain a certification from the Inter-Ministerial Board set up for such a purpose.
• An entity formed by means of splitting up or reconstruction of an existing business shall not be considered as a “Start-ups”

LEGAL ASPECTS OF STARTUP

More often than not, early-stage founders tend to approach investors way too early, before they’re truly ready. Here are some of the pointers in order to have a strong pitch presentation –

1. Introduction

An introduction about the corporate provides the investors with a thought of who they’re and what are their plans. Investors always want to grasp more about the people behind the scenes, working towards the success of the company; therefore, an introduction of the team is additionally important.

2. What is the matter you’re addressing?

A detailed description of the matter that the corporate aims to eliminate or offer an answer to, what the impact of this problem has been thus far, and its effect on commerce, industry, and society.

3. What is your solution?

Investors must be educated regarding the innovative solution that the corporate is bringing about to tackle the matter.

4. Marketing Plan

The marketing plan looks to answer the questions regarding who the audience is, what markets the corporate is looking to enter into, what the proposed pricing strategy is, and what the varied distribution channels are.

5. Projected Financials

An estimate of where the corporate aims to be, in financial terms, some years down the road, thereby outlining the feasibility of the business yet. The financials will include an income statement, a statement of profit and loss, and a balance sheet.

6. Sources of Finance

• Funding plays a significant role in an exceedingly startup’s ability to scale and grow at a gradual pace. It talks about what the capital structure of the corporation shall be, whether primarily comprising equity or debt or both.
• The primary goal of any start-up is to maximize its profit. While doing so, they have a tendency to ignore the mandatory legal requirements which can affect their business adversely in the longer run. Legal compliance is a necessary wheel that keeps a check on any going needs of a business.

Incorporation Related Compliance For Start-up

Each structure has its own set of rules and regulations that decided whether registration is required or not, what proportion of tax a corporation must pay, and what all licenses does it require? for example, sole proprietors don’t need any registration whereas it’s optional in partnership firms, however, it’s compulsory for LLPs and private limited companies.

Companies have a compulsory registration requirement under the laws of India. a corporation may be registered as a legal entity under:

• The Companies Act, 2013 – for private, public, not-for-profit, and one person companies
• Indian Partnership Act, 1932
• Limited Liability Partnership Act, 2008

Various companies also prefer to register their businesses under different government schemes and laws to avail the benefits and concessions provided under the laws. Companies, as per their nature of the business, be also registered under the MSME Act, the GST Act, or under the Start-up India Scheme.

Business Licenses For Start-up

• Licenses are integral for running any business. based on the character and therefore the size of the business, start-ups are also required to register their business under various licenses applicable under different statutes in India.
• The common license that applies to several businesses in the Shop and Establishment license is applicable on all premises where trade, business, or profession is carried out.
• Other business licenses vary from industry to industry. Various laws in the sector of environment, food and safety, labor and employment laws and import-export laws, FDI Policy, FEMA, SEBI/RBI regulations have impacted the procurement of licenses in India.
• For instance, an e-commerce company is required to fulfill additional requirements like GST registration, Professional Tax, etc., while, a restaurant would be required to have licenses like Food Safety License, Certificate of Environmental Clearance, Prevention of Food Adulteration Act, Health Trade License, etc.

Documentation Requirement For Start-up

A lot of emerging businesses tend to ignore the formalization of the structure of the contracts and basic incorporation-related documents. This indeed creates a plethora of legal complications, and therefore in case any dispute arises or in case of raising investment, at any stage of a start-up’s growth.

Some basic documentation that each start-up should be sure of is:

• Drafting of the incorporation documents like the Founder’s Agreement, Shareholder’s Agreement, Memorandum of Association, and Articles of Association, is formed for the registration of the companies under the Companies Ac, 2013, etc.
• Contracts like the Non-Disclosure Agreement (NDA), Confidentiality Agreement, MoU, Letter of Intent, and others.
• Work Agreements like the Employment Agreements, Lease/Rent Agreement, Service Agreement, Consultancy Agreements.
• Technical Agreements like the Technology Assistance Agreement, Licensing and Assignment Agreement, Outsourcing and Hosting Agreements.
• Company policies like the sexual harassment Policy, Employee Grievance Management Policy, Data Privacy and Protection Policy, Whistleblower Policy.
• Intellectual Property Management in the form of Registration of Intellectual Property like the Copyrights, Patents, Trademarks, etc. in India and also internationally, Licensing and Assignment Agreements associated with their Intellectual Property.

COMPANY LAW-BASED COMPLIANCES FOR STARTUP

Start-ups registering under the Companies Act, 2013, are required to comply with certain compliances. Some of these compliances include:

1. Annual General Meeting (AGM)

There should be one AGM each year and there must be a gap of a maximum of 15 months between 2 AGMs. Approval for Financial statements, Appointment of Auditors, Declaration of Dividends, etc. is the main objective for such meetings.

The annual general meeting must take place in the city where the company’s registered office is situated.

2. Board Meetings

The first board meeting shall be conducted within 30 days from the date of incorporation of the corporate entity. Besides that, four board meetings are purported to take place every financial year in a manner, so that the gap between two consecutive board meetings isn’t more than 120 days.

3. Mandatory filing of forms

• Appointment of Auditor (E-Form ADT-1)

The first Statutory Auditor should be appointed within 30 days of the company’s incorporation within the first board meeting. However, in an AGM the subsequent auditors may be appointed for five years.

An applicant would be required to file form ADT-1 in respect of a 5-year appointment of the auditor. After that, shareholders are required to endorse the auditor in AGM every year, however, there’s no requirement to file ADT-1.

• E-Form MGT-7

MGT-7 is basically an electronic form that is being issued to the companies by the Ministry of Corporate Affairs (MCA), in order to furnish their annual return details. Every private Ltd. must file the form MGT-7 each year.

• E-Form AOC-4

Form AOC-4 is required for filing the financial statements for every financial year with the ROC. It is commonly seen, that the primary mode of communication between the shareholders and the Board of Directors of a company takes place through the financial statements.

Hence, it is mandatory for every registered company to file form AOC-4.

• Directors’ Report

As per the Companies Act, 2013 every company is required to prepare a board report containing the main points of the state of the corporate, operations during the year, dividend declaration, net profit, corporate social responsibility standards, etc being in compliance with section 134 of the Companies Act 2013.

• Form MBP-1

The form MBP-1 is required to be filed by the directors of the corporate within the first meeting of the Board of Directors in every financial year where they would disclose their interest in other entities.

It is to be noted that a fresh Form MBP-1 is required to be filed, in case, there exists any change in the interest of the director from the earlier submitted MBP-1.

• Form DIR-8

Every director is required to file form DIR-8 every yr with the corporate Disclosure of non-disqualification.

• • Compulsory Maintenance of Certain Registers
  • Minutes Register; board meeting minutes book, and General meeting minutes book made out of any EGM, AGM, Creditors Meetings,
  • Debenture holders Meetings, and Postal Ballot.
  • Statutory Registers;
  • Books of Accounts or Financial Statements maintained in compliance with Section 44aa of the Companies Act, 2013.
  • Register of Directors Attendance at Board meetings or Committee.

TAXATION BASED COMPLIANCES FOR STARTUP

• Under Income Tax Act, 1961 – Filing of ITR, Tax Audit Reports, TDS Returns, Assessment of Tax Liability.
• GST Act, 2017 – Registration of establishment under GST Act, Filing of monthly, quarterly and annual returns, as applicable.

Apart from the legal compliance, start-ups may also avail various rebates available to new companies in India.

1. Three years tax holiday in seven years

Under section 80IAC of the Income Tax Act, any start-up that’s established after 1 April 2016 can avail 100% tax rebate on its profits for 3 years within a block of seven years.

However, if the Company’s annual turnover is more than Rs 100 crore, then the tax rebate isn’t available.

2. Tax exemption on long-term capital gains (LTCG)

As per Section 54EE of the Income Tax Act, start-ups have been exempted from LTCG tax. However, the same shall be applicable only if the capital gains that be invested in are a part of the fund notified by the govt of India within 6 months from the date of the asset’s actual transfer.

3. Tax exemptions on investments above the fair market price

If an eligible start-up does any investment, the govt exempts the tax on the investment above the fair value.

4. Tax exemptions to individual/HUF on LTCGs from equity shareholding

If an individual/HUF sells their property and then invests that money to take up a minimum of 50% or more of an existing start-up, then they’re exempted from tax on these LTCGs.

The said entity shall be incorporated as a small/medium, as per the specification provided under MSME’s Act 2006.

CONTRACTUAL COMPLIANCES FOR STARTUP

• The essence of any business contract is to make sure the smooth functioning of work. In cases recourse of non-fulfillment of work. Work contracts with employees or freelancers are one of the most crucial aspects to be looked into while starting a venture. one of the important contracts that start-ups might find useful to have is Non-Disclosure Agreements.
• Start-ups expose to risks just like the theft of ideas and other confidential business information which could be used against the business.
• Thus, in order to avoid such scenarios, NDAs be drafted and employed by start-ups while discussing critical business information with people outside the organization.

LABOUR LAW-BASED COMPLIANCE FOR STARTUP

India being a state has ensured strict measures to be taken for labor welfare and safety. A number of the key laws that require to be followed are:

• The Employee’s State Insurance Act, 1948: This act makes it mandatory for a few establishments to induce themselves to register with the State Insurance Corporation and contribute to the State Insurance Corporation Fund.
• Employee Provident Fund Scheme, 1952: This act makes it mandatory for the businesses to contribute towards the Provident Fund of the staff.
• Maternity Benefit Act, 1961: This act makes it mandatory for the corporate to provide the subsequent benefits:
• The harassment of Women at Workplace (Prevention, Prohibition, and Redressal) Act, 2013
• Payment of Wages 1936 /Minimum Wages Act 1948 to manage basic wages of the labor force
• Contract Labor (Regulation & Abolition) Act, 1970/ Interstate Migrant Workmen (Regulation of Employment And Conditions of Service) Act, 1979 to manage the utilization of labor hired on a contractual or migration basis.
• The Industrial Disputes Act, 1947 (the “ID Act”), enacted for the investigation and settlement of commercial disputes in any industrial establishment.
• Trade Union Act. 1926 – An Act to supply for the registration and regulation of Trade Unions

EVENT-BASED COMPLIANCES FOR STARTUP

• Some are events and industry-specific compliances like start-ups having FDI would accommodate FEMA; in cases principal Export the business entity would have to comply with Customs law.
• When the start-up is handling hazardous products or processes it would need Environmental law clearance, whereas when it deals in real estate it would need RERA sanction and other property law compliances.
• In cases of mergers and acquisitions or huge transactions having an appreciable adverse impact on Competition in India, it might need Competition law approval.

Popular blog:-

GST rollout Small Businesses need to file Return

How to name your business in India?