Your step-by-step guide to entering the startup world

ENTREPRENEURSHIP 101

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As the central and state governments seek to boost startups and create a startup culture, there has been a spurt in young entrepreneurs experimenting with innovative ideas that will become the next unicorn. In 2019 alone, over 1300 startups were registered in the country. India currently has around 8900 startups in the technology domain alone.

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While a good number of new ventures are centred around technologies like artificial intelligence, other fields too are seeing a host of startups, some examples being YourStory, a startup about startups, legal-tech startups such as Leegality and startups focusing on social issues like Think Niti, which focuses on road safety issues. As Nishant Bhaskar, the founder of ThinkNiti said, “It has been a tough journey but an extremely rewarding experience. Being in this field for five years now has taught me things, which a 9-5 job would never have.”

But the thrill and excitement from starting a new company needs to be tempered with a clear understanding of the pertinent legal processes necessary for the creation of a startup. This article explains the steps that need to be taken for creating a startup and the legal compliances required.

The first step is to choose the form of legal entity that one wants to incorporate. The options available:

1. Registration: You will need to incorporate/register your company with the Ministry of Corporate Affairs MCA). A single Simplified Proforma for Incorporating Companies Electronically or SPICe form, as it is commonly called, is required to register a company. Typically, the registration process takes around 7-15 days. Many online service providers provide such registration and incorporation services.

2. Partnership firm: A partnership firm can be set up if there are two or more co-founders. It is not mandatory to register a partnership firm, but it is advisable to do so, as a registered firm will give better protection of partners’ rights. A partnership firm may be registered at the time of its commencement or at any subsequent time. In order to get such a firm registered, an application needs to be made to the registrar of firms of the region where the business is located. Typically, a fee of Rs10,000-15,000 is charged along with the stamp duty for registration as a partnership firm.

3. Limited Liability Partnership: A limited liability partnership or a LLP is a combination of a company and a partnership firm. It has the characteristics of both entities. Registration of an LLP is fairly simple. You need to sign in at the MCA website, fill in the registration form and upload a digital signature certificate. All designated partners shall receive a Director Identification Number upon registration. Once registration is done, you need to reserve the name of the LLP, which can be done by logging in to the LLP portal at the MCA website. A free name search facility is also provided therein. Once the name is reserved, the incorporation form or Form-2 needs to be filled. Prescribed fees need to be paid. Upon the submission of all the documents (these typically include photo ID proof of directors, address proof of partners, specimen signature, ownership proof etc.), the incorporation is completed within two weeks.

 4. Sole proprietorship: A sole proprietorship is a business where there is no partner and a single individual runs the business. No government registration or compliances are required for a sole proprietorship. In order to start a sole proprietorship, you need to choose a business name and the location where you will be conducting your business. Plus, you need to open a current bank account in your business’s name.

Compliance required

Compliances are triggered depending upon the entity one chooses to register/incorporate. We give below, in brief, the various compliances, you may need to undertake, associated with each of the aforementioned entities.

Choice of Entity Required compliance
Registering a Company
  • Appointment of Auditor (Form ADT-1)
  • First Board meeting needs to be held within 30 days of incorporation. Thereafter, minimum 2 board meetings per year
  • One annual AGM
  • Filings required (to the Registrar of Companies)
  • Annual return within 60 days of holding of AGM
  • Filing of balance sheet and profit and loss statements
  • Disclosure of directors’ interest in other entities
  • Disclosure of non-disqualification by directors
  • Filing of Directors’ Report
  • Maintenance of statutorily prescribed registers and books of accounts
  • Tax related compliances such as tax audits, filing of GST, TDS and income tax returns, GST registration etc
  • Regulatory assessment of business
Partnership Firm A partnership firm is not subject to a lot of compliances. All they are required to do is to file their tax returns on time and comply with GST/TDS –related regulations.
Limited Liability Partnership
  • Statements of Accounts and Solvency need to be filed in Form 8
  • Annual Returns need to be filed in Form 11 by May 30 every year
  • LLPs with turnover exceeding INR 40 lakh need to get their books

Conclusion

Setting up a startup is not that difficult from a legal and regulatory point of view. You can register your startup at the Startup India website to avail of a number of benefits which the government is offering such nascent entities.

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