In these times when you are trying to make a shift from your regular 9 to 5 jobs to an entrepreneurial journey, your imagination often takes you to a different world. In that world, you only focus on your product and how your efforts are going to make your dreams come true. While it is important to focus on your product, customers, and market but it is equally important to take care of the legal things we need to look at while starting our business.
When you set your foot on the entrepreneurial journey, you have to be aware and stay up to date on the basic laws that will govern your business. It is always better to hire a legal consultant for this task. However, in the starting, it is difficult to hire someone for this task as they will charge you money for it.
So it is better that you have a basic idea about these 5 basic legal things you need to take care of while starting a business so that you are not dependent on somebody else to get started. So let’s start with it –
1. Formalizing the Type of Business and Founders’ agreement
Type of Business is the first legal thing you need to take care of while starting a business. This is important because there are many things like taxation, filings, ownership, etc. depend on it. You have to be clear about it as it has both short-term and long-term impacts on business.
Following are the business types you can go for –
- Proprietorship – For this kind of business no formal registration is required. You will be personally responsible for all the liabilities as your business will not be treated as a separate entity. The income from the business will be taxed as the personal income of the proprietor.
- Partnership – Registration is optional for such businesses. Like Proprietorship here also you are personally responsible for all the liabilities as your business will not be treated as a separate entity. The difference is, in Proprietorship, there can only be a single person but here you require a minimum of two persons. Partnership profits are taxed as per the income tax slabs provided in the Income Tax Act with surcharge and cess as applicable.
- Limited Liability Company (LLP) – These types of businesses are required to be registered with the Ministry of Corporate Affairs under the LLP act 2008. They are considered as separate entities so you won’t be personally liable towards the LLP. A minimum of two persons is required to open an LLP. Here also the profits are taxed as per the income tax slabs provided in the Income Tax Act with surcharge and cess as applicable.
- Private Limited Company – It has to be registered with the Ministry of Corporate Affairs under the Companies Act 2013. They are considered as separate entities so you won’t be personally liable towards the company. A single person can open a Private Limited Company. Here also the profits are taxed as per the income tax slabs provided in the Income Tax Act with surcharge and cess as applicable.
Founders’ agreement
It is a legal document that states the roles, responsibilities, compensation, and exit details for the founding team. It is good to have it right in the beginning to avoid all sorts of confusion. Even if you are friends with the founding team we recommend that you make this agreement and enjoy confusion-free fortune with your friends.
2. Applying for Business License
If you are thinking about starting your business then you can’t go around this part. A Business License is one of the most important legal documents you need to have if you want to run your business swiftly over years.
Depending upon the type of business you want to go for there are different licenses you have to get. Having a license will keep you away from the lawsuits and heavy lawyer fees in case you get caught operating without a license. It is sort of permission that you get from the government/concerned authority to run your business.
Some of the most common licenses and registration businesses has to obtain are as follows –
GST Registration – If the turnover of your business crosses INR 20 Lakh (in most states) and INR 10 lakh (in special category states) then you need to have a GST number for your business. If you are supplying your products or goods to other states then also a GST registration is required irrespective of the turnover of your business. You have to obtain the GST number within 30 days of starting your business. There are other criteria for GST registration which you need to look at while starting a business.
For GST registration: https://reg.gst.gov.in/registration/
For other information on GST : https://www.gst.gov.in/
Udyog Aadhar Registration – You should get this registration if you want to operate micro, small and medium enterprises. Getting this registration depends upon the investment done in plant and machinery. After this registration, you are eligible to get various subsidies government provides to promote small businesses in India.
For detailed info- https://msme.gov.in/sites/default/files/Udyog_Aadhar_Booklet.pdf
FSSAI License – The Food Safety and Standard Authority of India (FSSAI) is responsible for setting the standards for food and related products all across the nation. FSSAI mark is the thing all the consumers look for on their food packets or containers. You have to get your products FSSAI certified if you want to enter this field.
FSSAI registration is divided in three categories –
a. FSSAI Central License – You should apply for this license if your turnover is more than INR 20 crores.
b. FSSAI State License – Operation of businesses with turnover ranging between INR 12 Lakhs and INR 20 Crores requires this license.
c. FSSAI State Registration – You should get this license if the turnover of your business is less than INR 12 lakhs.
Import Export Code – If you want to jump into the field of import-export then you must get the Import-Export code from the Director-General of the Foreign Trade Department. For this code, the prerequisite is having a PAN card and current Bank account.
For other details on the Import-Export code click here
Shop and Establishment act– This act covers various aspects like hours of work, child labor, payment of wages, and the general health of workers. The State Government issues it and hence varies from state to state. You have to get registered under it within 30 days from the commencement of work. This is a basic license that is required to get any other specific license. Banks also ask for this license if you want to open a current account for your business.
3. Understanding Taxation and Accounting laws
No matter what kind of business you are in, Taxation and Accounting are going to be a part of it. Understanding the Tax laws can be beneficial if you want to run your business hassle-free.
For that, you should get PAN, TIN and TAN for your company, which are described below –
PAN (Permanent Account Number) – Unique 10 digit alpha-numeric code allotted to every taxpayer.
TIN (Taxpayer Identification Number) – 11 digits numeric code. It is mandatory for traders or dealers who make transactions that have VAT (Value-added Tax) in them.
TAN (Tax Deduction and Collection Account Number) – 10 digits alphanumeric code. It is mandatory for the entities who deduct or collect the tax at the source to have it.
You can also register your business under the “Startup India” initiative and enjoy tax exemptions for 3 yrs if you satisfy the eligibility criteria.
Maintaining your accounts is a good ritual that you should follow even if your business has just started because you can’t run away from it for a long time. Also in the starting, it will be easier to learn Accounting as you will have fewer transactions to track. Therefore, the starting phase is a good time to learn Accounting.
For more information on accounting read our article on the book “The Accounting Game”. Click here to read
4. Adhering to Labor laws and effective Contract Management
When you start a company then maybe in the beginning you will work alone but after a while, you will hire people to take your business to the next level. And as soon as you hire people, you have to adhere to the labor laws. These include laws related to wages, working hours, holidays, leaves, and other benefits.
However, it is always best to consult an expert for such things as a violation of labor laws can lead to serious implications. The expert can guide you regarding which laws are applicable to your business. If you are registered under the Startup India initiative then you can be exempted from labor inspection for a year. This happens if you give a self-declaration regarding the same.
Contract Management – Contracts are a very important part of a business as they set the boundaries and expectations very clearly. When you start hiring, you first hire your close inner circle. Make a contract with even your first employee because it reduces the probable confusion which can arrive later. It might seem awkward signing a contract even with your close ones but we recommend that you go for it.
5. Ensuring protection of Intellectual Property Rights
The idea of the business is its soul. And if someone steals it then we are sorry but your business isn’t yours anymore. Always protect your product, your creation like you protect your life. Now depending upon the type of your product or business different IPR is applicable to them.
Trademark – It covers Words, phrases, slogans, brand, logo, etc. that help identify the public with the brand.
Copyright – Works covered by copyright are books, music, paintings, sculpture, films, computer programs, advertisements, maps, technical drawings, etc.
Patent – It covers products or processes of most biotechnical and pharma companies.
Trade Secret – It covers confidential information which may be sold or licensed or the things usually people enter non-disclosure agreements for.
You can use the ‘Scheme for Startups Intellectual Property Protection (SIPP)’ under the Startup India initiative. The government provides facilitators to start-ups for filing and processing their applications for patents, designs, and trademarks. The Government reimburses the fee of the facilitator.
Note – This is the most critical legal thing that you should take care of while starting a business, otherwise you might lose your rights to run the business legally.
So folks these are the 5 basic legal things you should take care of while starting a new business for hassle-free operations. If you like what you read please share the article among your peers. You can also give your thoughts in the comment section below.
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