Do you have

the next big idea?

The Startup Legal Guide

A handbook that will help you kick start your Idea!
 Index
Types of business entities 1

Evaluation of Different business structures 2

Documents needed to incorporate your start-up 3

Is shops & establishments act registration needed? 4

GST compliance requirements - Registration & invoice 5

GST alert - Types of GST returns, due dates, eligibility for composition scheme 6

Import/export guidelines 7

Funding options available for start ups - Self funding & equity funding 8

Funding options available for start ups - Loan funding 9

Loan programs & their eligibility 10

Trademark registration 11

Labor laws for business 12

Employee Provident Fund (EPF) 13

Employee State Insurance (ESI) 14

Employee Stock Ownership Plan (ESOP) 15

Winding up of a company 16

Forms for download 17

Contact us 18

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How do you want to incorporate your business?
Starting a business in India requires you to choose the right type of business entity. This selection depends upon
various factors such as cost, liability, taxation, compliances and even the exit strategy. The options available are:

Sole Proprietorship This form of business is owned and managed by an individual himself (the proprietor/owner).

It is an arrangement where two or more individuals come together to run a business and
Partnership
mutually agree upon how the profits and losses of the business will be shared amongst them.

This is a type of company which has only one person as a director and shareholder.
One Person Company
It combines the benefits of a sole proprietorship and private limited company.

Limited Liability Partnership An LLP is similar to a partnership, but this arrangement limits partners' personal liability.
(LLP)

In a private limited company shares are privately held and cannot be publicly traded nor
Private Limited Company transferred freely. The liability of the members of this company is limited to the value of
shares held by them

This is a company where the shares are traded in public and are freely transferable from one
Public Limited Company
person to another.

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Decide the best structure for you based on
this brief evaluation!

Basis of Sole One Person Private Limited Public Limited

Partnership LLP
evaluation Proprietorship Company Company Company

1 2-100 1 2 - No limit 2 - 50 7 - No limit

No of Participants

Based on Based on
All profits belong Based on Based on Based on
agreement agreement
to proprietor shares held shares held shares held
between partners between partners
Profit Share

Limited upto Limited to unpaid Limited upto

₹ Based on
Unlimited Unlimited unpaid amount amount on unpaid amount
agreement
on shares held shares held on shares held
Liability

The Partnership Companies Companies Companies

None LLP Act 2008
Act, 1932 Act 2013 Act 2013 Act 2013
Governing
Statute/Law

₹
Little Little Moderate Little Moderate Large
Ability to
raise money

Optional Optional Compulsory Compulsory Compulsory Compulsory

Registration

2 weeks to 10 to 15 days 15 to 20 days 10 to 15 days 15 to 20 days 15 to 20 days

6 months
Time for
registration

Small &
Medium Professional Medium - Large
Small Businesses Medium Large Businesses
Businesses Businesses Businesses
Suitability Businesses

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After you have selected the best structure that fits you,
keep these documents ready to incorporate your start-up.

Limited
Sole One Person Private Public
Partnership Liability
Proprietorship Company limited company limited company
Partnership

Aadhar card

(Of proposed
(Of all proposed
director and (Of partners)
directors)
PAN nominee director)

Bank A/C (Of partners

(With NOC)
and details and business)

Proof of
Registered office/
Place of Business/
Address proof

(Form 1)
Registration
form

Affidavit

Affidavit

MOA

MoA/ AoA

Declaration
from certifying
authorities

Copy of utility
bills, proposed
name approval
Partnership Consent Consent of
DSC letter, trademark
deed of Director Director
registration copy,
Other
directors DIN
documents
and ID proof

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Shops & Establishments act registration is a must!
It is compulsory to acquire a permit from the state government within 30 days of starting your business.
The registration certificate will help you to carry on business in a particular state freely. Every state in India
has a version of this act. The aspects regulated by this act are:

Hours of work Weekly holidays Dismissal

Interval for rest and meals Wages for holidays Cleanliness
Prohibition of employment of children Time of payment of wages Lighting and ventilation
Employment of young person/ women Condition of payment of wages Precautions against fire
Opening and closing hours Deductions from wages Accidents
Close days Leave policy Record keeping

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Applying for GST registration?
Here is a glimpse of what you should keep in mind.

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Too many dates to remember?
Here are the dates you shouldn’t miss!

FAQ

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Does your business idea involve
import/export?
To avoid legal proceedings you must keep these import and export regulations in mind. The regulatory requirements in simplest
terms for importing or exporting to/from India are as follows:

Entity Creation Bank Accounts Get IEC

Formation of any business entity is
the first and foremost requirement for
import and export in India.
All the business entities need to open
a bank account that has international
banking access for any kind of import
or export.
Every entity needs to apply for an
import-export license also known as
Import-export code (IEC) number.
Before you start importing/exporting,
obtaining an IEC is a prerequisite.

GST registration Obtain RCMC ECGC Registration

Registering under GST is important to
claim the benefits of the taxes paid on
the exempted exported goods.
A Registration cum Membership
Certificate (RCMC) is required to enjoy
the benefits provided by current
export-import policy of India.
Exporting entities must register with
Export Credit and Guarantee
Corporation of India in order to
secure the export payments against
political and commercial risks.

Note: Only one IEC is granted against one Permanent account number (PAN)

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Money matters! Funding options we suggest
1 Self-funding & family/friends
Using your own money (self-funding) is ideal if the investment required is small. For larger requirements, family and friends may be
approached for investment. Though there are practically no legal requirements to raise funds by this method, your fundraising
capacity is largely limited.

2 Raising funds against equity

Another popular method for raising funds for your business is through equity. This method is only available to private and public limited
companies. Sole proprietors, partnership firms, OPCs, LLPs, and private limited companies cannot raise funds from the public through
issue of shares. You'll need to comply with various legal formalities for raising funds through the issuance of equity shares, such as:

Compliances with the companies act 2013 ₹

Compliance with SEBI regulations

Issuance of prospectus

Application of shares

Allotment of shares

Calls on shares and much more...

In comparison to self-funding, this method is proven to help raise more money. However, by raising funds through equity, control and
ownership in the company may get diluted (if equity shares are issued), as the shareholders get voting rights. Other kinds of shares you
can issue are preference shares, rights shares, sweat equity shares, and so on. There is no repayment obligation in case of shares, unless
shares issued are redeemable preference shares.

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 3 Raising funds through loan
Debt funding is another option available to start your business. Banks and financial institutions offer various types of loans
to businesses. In comparison to equity, loans do not dilute ownership and are available to all business entities.
These loans carry repayment obligations.

Different loan programs and schemes introduced by the Government for businesses are:

Loan Programs

The Credit Guarantee The MUDRA Start Up

Fund Scheme Loan Scheme India Scheme

The government is offering this
scheme in collaboration with the
Small Industries Development Bank
of India (SIDBI). Under this scheme,
unsecured loans of upto INR 1 crore
can be alloted to small businesses
based on their eligibility. You can
read more on this scheme here.
MUDRA or Micro Units Development
and Refinance Agency Ltd is an agency
launched by the Indian Government to
help provide corporate term loans to
small entrepreneurs. Small loans are
granted based on the stage of the
organisation - Example: Shishu,
Kishore, Tarun. You can read more on
this scheme here.
This is a Government scheme targeted to
empower entrepreneurs. It enables
startups to get 80% rebate on patent costs.
In addition to that, the government also
pays the facilitator’s fees to help obtain
the required patent. You can read more
here.

Points to consider before taking a loan:

Eligibility criteria

Interest rates

Fees and charges

Term or tenure of loan

Repayment ability

Down payment applicability

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Different loan programs have different eligibility criterias.
Eligibility for loan programs

The Credit Guarantee

Manufacturing, Trading and Services sector (including allied agricultural activities)
Fund Scheme

Micro and Small enterprises into:

Manufacturing
The MUDRA Trading and
Loan Scheme
Services sector (including

allied agricultural activities)

A company that has not yet completed a period of seven years from the date of

incorporation or registration (this has been increased to ten years in case of the

Biotech sector)

An enterprise that is a private limited company or registered as a partnership firm or

a limited liability partnership

Start Up
India Scheme That has an annual turnover not exceeding INR 25 crore for any of the financial years

since incorporation or registration

And Is working towards innovation, development or improvement of products or

processes or services, or if it is a scalable business model with a high potential of

employment generation or wealth creation

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To Trademark or not to Trademark?
Trademark is an Intellectual property (IP). Intellectual Property includes the creations of human intellect.
In other words, IP refers to works of human creativity, some examples of which are:

Inventions Literary works Artistic works Designs

Logos Symbols Images Text

A trademark is a sign or symbol capable of differentiating your goods or services from those of other enterprises. They may depict images of
animals, humans, signatures, numbers, letters or a combination of these.

The very moment your company undergoes a trademark registration, you get the exclusive right to use the trademark nationwide and for every
product listed under it. The best part is, a trademark is protected by law and you can take necessary legal actions against people who try
infringing your trademark. Upon registration of trademark, it becomes easier to establish your brand and earn goodwill. You can easily get
your trademark registered in 5-10 days, for more information click here.

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Labor laws and concessions to businesses
Labour law is the body of law which deals with matters related to employment, remuneration, work condition,
trade unions and industrial relations. These laws talk about basic employment standards for the minimum socially acceptable
conditions under which employees or contractors are allowed to work.

With regard to the labour laws in the country, startups enjoy a few concessions which are:

Startups shall be allowed to self-certify with nine labour and environment laws
No inspections will be conducted for a period of three years
Under the scheme for startups these are the Labour laws from which exemption is provided for:

The Building and Other Constructions Workers’ (Regulation of Employment & Conditions of Service) Act, 1996
The Inter-State Migrant Workmen (Regulation of Employment & Conditions of Service) Act, 1979
The Payment of Gratuity Act, 1972
The Contract Labour (Regulation and Abolition) Act, 1970
The Employees’ Provident Funds and Miscellaneous Provisions Act, 1952
The Employees’ State Insurance Act, 1948

However, with benefits comes responsibilities. Be sure to provide your employees with the right benefits to facilitate
a healthy work environment.

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Employee Provident Fund
Employee Provident Fund is a retirement planning scheme that forms a part of the employees' salary structure.
Under this, a fixed amount gets deducted from your employees' salary on a periodic basis, usually monthly, and should be deposited by you,
the employer into the PF account of the employee. Along with this, employers share of EPF for the employee should be deposited to the
employee account.

Did you know?

EPF registration is mandatory for: An employee can make a contribution
in excess of 12% too!!!
All establishments which are factories engaged in any An employee is free to contribute in
industry having 20 or more persons, excess of 12% and such excess contribution

Any other establishment/class of establishments employing is called ‘voluntary contribution’. The employer

20 or more persons which the Central Government may notify is in no obligation to contribute
because of this.

The employer’s contribution will be 12% of the basic pay. That is to say, the employer contributes 8.33% towards the employee’s pension
scheme and 3.67% to the EPF itself which totals to 12%.

FAQ
Is it mandatory to contribute towards EPF?
Contribution to EPF is not mandatory for all employees. It is mandatory only for those who have a basic pay upto INR 15,000. However, even
those who have a basic pay of more than INR 15,000 can contribute to EPF. This serves as an excellent avenue to build one's
retirement corpus.

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Employee State Insurance
This is a scheme for Indian workers. The workers are provided with a variety of medical, monetary and other benefits by the employer.

If you have more than 10 employees (in some states it is 20 employees) who have a salary of INR 15000/- then, you have to mandatorily register
your entity with the ESIC (Employee State Insurance Corporation).

As per a government notification these entities are covered under the ESI Act:

Restaurants or Hotels only

Shops Cinemas
engaged in sales

Newspaper establishments
Road Motor Transport
(which is not covered under Private Educational Institutions
Establishments
the factory act)

As far as the contribution is concerned, the employer has to contribute 4.75% of the total monthly salary payable to the employee.
However, only 1.75% can be deducted as employees contribution from the full monthly salary of the employee.

FAQ
How is the ESI Scheme funded?
The ESI scheme is a self-financing scheme. The funds are majorly built on monthly contributions from employers and employees at a
fixed percentage of wages. The State Government also contributes to one-eighth share of the cost of the medical benefit.

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Want to make your employees feel at home?
ESOP can help you!
An ESOP (Employee stock ownership plan) is a benefit given to the employees. All Companies, whether private or public, listed or not-listed
can issue ESOPs subject to certain conditions. Employee stock ownership plans are issued as direct stock, profit-sharing plans or bonuses.
These are options that can be purchased at a specified price before they are offered to the public. There are definite rules and regulations
laid out in the Companies act which employers need to follow for granting of Employee stock ownership plans to their employees.

To offer ESOPs to your employees an approval from the shareholders of the company has to be passed by a special
resolution. This resolution should be accompanied with various details like:

The class of employees to whom the stock option is granted

Number of stock options granted
Details regarding the process of selection and approval of the employees who are selected for the stock option
Details regarding the vesting period and related matters along with lock-in period details if any. There shall be a minimum period of one
year between the grant of options and vesting of option.
Price of the option
Time available to to exercise the option
Other details regarding the option, accounting standards followed etc.
The company should maintain a Register of Employee Stock Options in Form No. SH.6 and also about the particulars of options granted.

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In an unforeseen event, if you have to wind up,
you’ll need this :
Winding up of a company is the process whereby the company's life ends and it’s property is distributed for the benefit of company’s members
and creditors. An Administrator, called a liquidator is appointed and he takes control of the company, collects its assets, pays its debts and
finally distributes any surplus among the members in accordance with their rights.

Once your company has stopped operations, it is essential to end its operations permanently. The company will have to satisfy its creditors,
and for this purpose, the assets of the company are liquidated. Winding up happen in two forms:

Types of winding up

Compulsory Winding up Voluntary Winding up

This happens when the court orders a company to appoint a
liquidator who sells the assets and distributes the proceeds
to creditors. This may be triggered by the company’s creditors or
the court itself if it finds the company guilty of mismanagement.
Shareholders or partners may trigger a voluntary winding up.
Voluntary liquidation is usually brought about through a
resolution. The company may or may not be insolvent.
If solvent, the reason for winding up may be that the
shareholders feel their objectives were met/completed and
it is time to close the operations.

Winding up of a company is a decision either taken by the court or the company’s shareholders. Once a liquidator is appointed he will ensure
that the company's assets are dissolved and distributed to the creditors. If the company is not carrying on any business or operation

For a period of 2 immediately preceding financial years

Has not made any application within these 2 years for obtaining the status of a dormant company

the name of the company will be removed for the register of records.

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Sample of documents you will surely need

Articles of Association (AOA) Loan Agreement

No Objection Certificate Appointment Letter

Memorandum of Association
(NOC) Format for Startups

Board Minutes Non-Disclosure Agreement Indemnity Agreement

Consultancy Agreement Partnership Deed Freelancer Contract

Contractor Agreement Purchase Order Relieving Letter

Employment Contract Rental Agreement Salary Slip

Employee Offer Letter Shareholder’s Agreement Delivery Challan

Letter of Intent Sales Agency Agreement Encumbrance Certificate

Letter Proposing Payments Services - Terms and

Letter of Credit
in Installments Conditions

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Talk to us today for any help!
Email : services@cleartax.in
Website: cleartax.in