This article has been written by Mr. Vedant Parakh, a 3rd year student of Institute of law, Nirma University college, Ahmedabad.

 

Abstract: – The country like India which aims to become 3rd largest economy of the world in upcoming future. To fulfil the goal to become 3rd largest economy Startups and small business are playing a vital role. Navigating the legal landscape can be daunting for any business, especially for young and agile startups and small businesses. Understanding and managing compliance with the Companies Act is crucial for operating within the law and fostering sustainable growth. These article gives a brief idea regarding flexibility, exemptions and guidelines provided by Companies Act and applicable laws govern in the territory of India to Startups and businesses in India.

Since, small businesses and startups are required to comply with similar compliance such as Registration and Filings, Maintenance of Records, Meetings and Governance, Labor and Environmental Regulations etc. however, there are some Differences in Compliance for Startups and Small Businesses such as Exemptions and Relaxed Compliances Complexity of Operations Audit Requirements Entity Type.

The word Small Businesses means, A business which functions on a small-scale level involves less capital investment, a smaller number of labour and fewer machines to operate is known as a small business. As per the latest Micro, Small and Medium Enterprises (MSME) Development Act, 2006 of India, small businesses are those businesses which have invested more than Rs.25 Lakhs and up to Rs.5 Crores in their all manufacturing and commercial activities and processes. Whereas, word Startup means, an entity which has completed 7 years from the date of its Registration/Corporation and working towards innovation, development, deployment or commercialization of new products, processes or services driven by technology or intellectual property and has not exceed turnover of Rupees 25 core in any financial year.

Introduction: –

 

Complying with the Companies Act of 2013 may appear onerous at first, but it is a critical investment in your company’s future. Understanding your duties, exploiting exemptions, and getting professional advice may help you turn compliance from a burden to a source of long-term success. Remember that a well-structured and compliant firm inspires trust in investors, partners, and consumers, paving the route to success.

Small Businesses are the business which functions on a small-scale level involves less capital investment, a smaller number of labour and fewer machines to operate is known as a small business whereas, Startups is not explicitly defined under Companies Act however, it is an entity incorporated under companies act and recognized as start-up in accordance with the notification issued by the Department of industrial Policy and Promotion, Ministry of Commerce and Industry and that entity shall completed 7 years from the date of its Registration/Corporation and working towards innovation, development, deployment or commercialization of new products, processes or services driven by technology or intellectual property and has not exceed turnover of Rupees 25 core in any financial year.

Compliance for Startups: –

 

1. Registration of Entity: –

The registration of an entity with the Registrar of Companies (RoC) is an important step in starting a business in India.

The Companies Act of 2013 and the Limited Liability Partnership (LLP) Act of 2008 govern registrations in India, requiring startups to provide various documents such as the Memorandum of Association (MoA), Articles of Association (AoA), LLP Agreement, Letter of Authority, proof of identity and address of directors/partners, and information about the registered office address. Registration is available online through the Ministry of Corporate Affairs (MCA) website. The applicant must register their entity as per Companies Act 2013 under following: –

• Private firm
• Private company
• One person company
• Limited Liability Partnership (LPP)

 

Only the company recognized above can be considered as Startup Recognition in India.

 

1. Acquisition of Necessary Registrations & Licenses: –

Based on the nature of the business, startups may need to obtain specific licenses and permits to operate legally. These licenses and permits are conferred by numerous regulatory bodies such as Municipal Corporations, State Departments, the Food Safety and Standards Authority of India (FSSAI), the Directorate General of Foreign Trade (DGFT), and the Department for Promotion of Industry and Internal Trade (DPIIT) upon successful application by the startups.

Some of the other license required by startups are: –

• Business Licenses.
• Fire department licenses (for flammable required things).
• Air and Water pollution control permit (for the wastage producing factory).
• Sign permits.
• Food Permits.
• Sales Tax license.
• State licenses.
• Country permits.

1. Creation of Essential Legal Agreements: –

To conduct day-to-day operations, startups must formalize relationships with suppliers, vendors, consumers, and other stakeholders through agreements such as vendor agreements, employment agreements, and service agreements.

These agreements protect firms from future liability or fraud. They also assist in limiting their responsibilities and commitments. Such agreements must be updated on a regular basis to ensure compliance with legal obligations.

• Compliance with Tax Regulations: –

All firms in India must follow tax laws. The Income Tax Department requires startups to get a Permanent Account Number (PAN) as well as a Tax Deduction and Collection Account Number (TAN). Additionally, registration for Goods and Services Tax (GST) is required if their revenue exceeds INR 20 Lakh or INR 40 Lakh, as applicable.

• Compliance with labor and employment legislation is essential for establishing a well-structured workplace environment, outlining responsibilities for both employees and employers, and providing guidelines for resolving workplace disputes. It encompasses various obligations, including adhering to minimum wage requirements, maintaining accurate personnel documentation, and adhering to registration mandates under applicable labor laws like ESI. Additionally, organizations must develop comprehensive policies and manuals to regulate working conditions, such as those addressing Prevention of Sexual Harassment at Workplace (POSH) and an Employee Handbook.

1. Safeguarding intellectual property (IP) is paramount as it safeguards innovative concepts and creations from unauthorized use. In India, entrepreneurs can secure their intellectual property through the registration of patents, trademarks, and copyrights. These rights are granted by the Controller General of Patents, Designs, and Trademarks following a thorough evaluation of the startup’s application. Prior to filing for protection, it is advisable for entrepreneurs to conduct thorough research to ensure that their intellectual property is not already protected by existing rights.
2. Maintain Accurate Accounting Records: –

The Companies Act of 2013 requires startups to keep accurate and fair financial records, such as balance sheets, profit and loss statements, and cash flow statements (together referred to as “records”).These documents must be kept for at least eight years from the end of the relevant fiscal year. Startups must file their income tax filings and yearly returns under the Companies Act 2013 on time and have correct financial records.

 

Benefits available to Starups: –

1. Not including of Financial Statement: –

According to the section 2(40) of Companies Act: -The financial statement, with respect to one person company, small company, dormant company private company (if such private company is a start-up) may not include the cash flow statement.

1. Section 73(2)– Prohibition on Acceptance of Deposits from Public of the companies act:- Sections (a) to (e) of Section 73 (2) do not apply to a Private Company
   • which accepts from its members monies not exceeding 100 % of aggregate of the paid up share capital, free reserves and securities premium account;
   • which is a start-up, for 5 years from the date of its incorporation;
   • which fulfils all of the following conditions, namely:
     • which is not an associate or a subsidiary company of any other company;
     • if the borrowings of such a company from banks or financial institutions or any body corporate is less than twice of its paid up share capital or 50 Cr. rupees, whichever is lower

• such a company has not defaulted in the repayment of such borrowings subsisting at the time of accepting deposits under this section

1. Exemptions under Labour Laws for Start-ups:-
   

Startups  are  permitted  to  self-certify  compliance  with  nine  labour  and  environmental  rules. No inspections will be done under labour legislation. For three years. Startups can be inspected upon receiving a credible and verified report of a violation, which must be made in writing and endorsed by at least one senior official.

 

• Labour laws from which exemption is provided under the current scheme:

• 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

1. Exemption for Startups under Environmental Law:-

In the case of environment laws, Startups which fall under the ‘white category’ (as defined by the Central Pollution Control Board (CPCB)) would be able to self-certify compliance, and only random checks would be carried out in such cases

 

• Environmental laws from which exemption is provided: –

• The Water (Prevention & Control of Pollution) Act, 1974.
• The Water (Prevention & Control of Pollution) Cess (Amendment) Act, 2003.
• The Air (Prevention & Control of Pollution) Act, 1981

1. Tax benefits to Startups:-
   • Three year tax holiday in a block of seven years:- Startups founded between April 1, 2016, and March 31, 2021 were eligible under this initiative. Budget 2021 has extended eligibility till March 31, 2022. Such firms would be entitled for a 100% tax credit on profits for three years out of seven years, as long as their annual revenue does not exceed Rs.25 crores in any given fiscal year. This will assist companies satisfy their working capital requirements throughout their first years of operation.
   • Exemption from tax on Long-term capital gains:- A new section 54 EE has been added to the Income Tax Act to allow eligible startups to exempt their tax on a long-term capital gain if such gain or a portion of it is invested in a fund notified by the Central Government within six months of the asset transfer date. The maximum investment amount for the long-term defined asset is Rs 50 lakh. Such sum shall be invested in the selected fund for a period of three years. If the money is removed before the three- year period, the exemption is revoked in the year of withdrawal.
   • Tax exemption to Individual/HUF on investment of long-term capital gain in equity shares of Eligible Startups u/s 54GB:- Section 54GB of the current rules exempts long-term capital gains on the sale of a residential property from taxation if such profits are invested in small or medium firms as defined by the Micro, Small, and Medium firms Act of 2006. However, this clause has been changed to offer an
     

exemption for capital gains invested in qualifying start-ups as well. Thus, if an individual or HUF sells a residential property and uses the capital gains to purchase 50% or more equity shares in an eligible startup, the tax on long-term capital will be exempt as long as the shares are not sold or transferred within 5 years of their acquisition. Startups must also use the funds invested to acquire assets and not transfer them within five years of acquisition. This exemption will increase investment in qualifying businesses, promoting their growth and development.

Compliance for Small Businesses: –

 

1. Choose a Business Structure: – A business structure is a legal structure that determines important components of business such as how to pay taxes, if and how to raise capital, who owns the company, and how profits are distributed. Four business structure options to consider when starting a small business:

 

• Sole Proprietor: – Many independents get their start as solo owners. Sole proprietors are typically taxed using their personal Social Security number, but you can file for a Taxpayer Identification Number (TIN) for your firm instead. This company structure involves minimum paperwork and provides flexibility if you choose to freelance part-time.

 

• Limited Liability Company (LLC): – A limited Liability Company (LLC) is a company form that bridges the gap between operating a corporation and a sole proprietorship: it allows for the pass-through taxation of a sole proprietorship while simultaneously giving the restricted liability of a corporation. LLCs are popular because they are simple to set up and provide the same strong legal protections as corporations, shielding personal assets. Consider it as the next step above a solo proprietorship.

 

• S Corporation: – Profits and losses from a S Corporation, or S-Corp, are passed through to the shareholder’s personal tax return, resulting in no taxation on the firm itself. The shareholder must be compensated at fair market value, but any excess profit is not subject to self-employment tax.

 

• C Corporation: – With a C Corporation, or C-Corp, you are the primary stakeholder in your firm. This business structure offers reduced liability by segregating your personal and professional assets. While this structure is one of the most complicated company arrangements accessible, it is also the most sophisticated, making it an appealing alternative for independent contractors.

1. Data protection: – The General Data Protection Regulation (GDPR) is a comprehensive piece of law that establishes tight guidelines for how corporations acquire, retain, and utilise personal information. It is critical that customers trust you to secure and not misuse their personal information. Fines are determined by the severity of the crime and the number of people affected. As a result, a single error that affects a large number of consumers might result in a significant consequence. Furthermore, many small businesses accept card payments, therefore PCI DSS compliance is critical. If your company isn’t compliant and there’s a data breach, your bank provider might transfer these fines
   

onto you or terminate your business bank account completely, because you’re considered as creating a major danger of exposing client data.

1. Registration of business in the particular state:- Business registration with the state is required for LLCs and corporations. Both legal entities provide benefits such as personal asset protection, tax advantages, and increased commercial credibility. To incorporate an LLC or corporation, file a formation document with the Secretary of State’s office (or a similar body that handles business entity formation).Sole proprietorships and general partnerships are often not required to file formal documentation in order to begin or continue operations legally.
2. Obtaining an EIN:- Almost all businesses, including LLCs, corporations, and those with workers, need an Employer Identification Number (EIN), often known as a Federal Employer Identification Number (or FEIN). The IRS issues EINs. It must be used to identify your company on tax filings and associated papers, similar to a Social Security number. Banks and financial institutions, as well as corporate credit card issuers and merchants, also demand it. For further information, please visit the IRS website.

Conclusion: –

 

In conclusion the compliances for small businesses and startups are have to comply in common however the startups are provided with some exemption and flexibilities under companies act and other governing laws in the territory of India.

The startups are exempted from various laws such as Taxation, Labour Law, Environmental Law and Provisions of Company Act however on the other side the Small Business are not given any such exemption and obligated to adhere with the guidelines.

 

References:-

https://www.ahlawatassociates.com/blog/legal-requirements-for-starting-a-business-in-india

https://www.indiafilings.com/learn/a-comprehensive-guide-to-startup-india-registration-eligibility-benefits-and- procedure/#:~:text=Eligibility%20Criteria%20for%20Startup%20India%20Registration&text=Age%20of%20the%20Fir m%3A%20The,Limited%20Liability%20Partnership%20(LLP).

https://www.professionalutilities.com/eligibility-for-startup-india-registration.php

https://www.legalraasta.com/blog/registration-licenses-required-startups/

https://cleartax.in/s/startup-india-tax-exemptions-eligibility

 

https://blog.relativity.co.in/statutory-compliance-for-startups-small-businesses/