This series of three articles is a step by step guide of what, why and how to establish a start-up, followed by its compliances as well as exemptions under Company Law, Intellectual Property Rights, Competition Law, and Labour Laws.
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यस्तु संचरते देशान् यस्तु सेवेत पण्डितान् । तस्य विस्तारिता बुद्धिस्तैलबिन्दुरिवाम्भसि[1] ॥
The intelligence of a person who travels in different countries and associates with scholars expands, just as a drop of oil expands in water.
The very Idea of Start-up has originated from the idea of capitalism coupled up with features of socialistic objectives of an economy. The essence is to have market economy with colour of socialistic pattern which reaches the door of self-reliant nation. On this note, Government of India introduced the plan and process to give structure and legalities to it considering the innovativeness of idea at hand.
At the threshold, it is very basic yet important to note that establishing a start-up is not an easy task and considerable time as well as effort goes into creating it. In the legal world, the start-up needs to comply with the various laws that apply to that particular establishment. For example, Environmental Law exemptions apply to start-ups in that field. Similarly, while compliances are necessary, start-ups are also equipped with the advantage of exemptions in various fields of law.
In many instances, structuring the correct set up for a start-up helps to prevent future complications, and mitigate regulatory and task risks at a future stage when the start-up is nearing maturity. What is the first step? The first step a start-up needs to take is to determine how it will be setup, from where the initial investment required to set up will be procured, and what sort of entity it would like to function as. For certain professions, this may be limited to partnerships through the preferred entity tends to be a company.
A start-up should ensure that the business that it has commenced is appropriately protected from specific risks faced by the sector in which it operates, for example, e-commerce start-ups should be cognizant of regulatory risks involved in carrying out financial services. If a start-up fails at a premature stage then it will have to wind up before it nears maturity.
SPECIAL CONSIDERATION -
Location
Start-ups must decide whether their business is conducted online, in an office/home office, or in a store. The location depends on the product or service being offered. For example, a technology start-up selling virtual reality hardware may need a physical storefront to give customers a face-to-face demonstration of the product's complex features.
Legal Structure
Start-ups need to consider what legal structure best fits their entity. A sole proprietorship is suited for a founder who is also the key employee of a business. Partnerships are a viable legal structure for businesses that consist of several people who have joint ownership, and they're also fairly straightforward to establish. Personal liability can be reduced by registering a start-up as a limited liability partnership (LLP).
Funding
Start-ups are often on the lookout for funding and investments play a huge role in fulfilling this. The concept of angel investors has become a prevalent dream in the start-up community wherein one with benevolent intentions, invests a huge sum of money in a promising start-up. This investment could kick start the start-up and put it on the map. Securing an adequate amount of funding is a necessity for a start-up’s operations.
WHY A START-UP? -
The role of start-ups in economic prosperity is enhancing in today’s world. One of the main advantages of start-ups is that it creates new jobs. As of now, many of the start-ups have introduced latest technologies like Internet of Things, Artificial Intelligence, and Robotics etc. Most of the technology giant companies outsource their tasks to start-ups nowadays but every start-up needs to deliver quality products and/or services to their consumers in order to sustain their business. This will escalate a start-up’s growth and eventual success. It is necessary to develop an entrepreneurship culture in India to cultivate innovation and to boost the economy.
A START-UP IN AN ECONOMY -
Start-ups will create more jobs
An entrepreneur establishing a start-up can, according to his/her requirements create employment. This would reduce the unemployment rates in India, boost the economy, and mitigate poverty. It is a win-win situation for the employer, the employee, and the host country.
Creation of wealth
Since entrepreneurs are attracting investors by investing their own resources, the people of the nation would get benefit when start-ups grow. In a trickle-down economy, the wealth that is created eventually reaches the society and results in collective benefit.
Increase in GDP
GDP (Gross Domestic Product) plays a vital role in enhancing the economic growth of a country. By supporting and encouraging more start-ups, it is possible to generate more revenue domestically and consumer’s capital will also flow around the Indian economy.
STARTING A START-UP: HOW TO REGISTER -
The Government of India launched a scheme called ‘Start-Up India’ for the promotion of innovation and a robust start-up ecosystem in the country. Registering with this initiative allows you to claim many benefits like tax exemptions that could help you boost your business in its initial stages.
After determining the type of entity a start-up chooses to be, and before commencing operations, it is important for you to register your start-up as a legitimate business. Depending on the kind of business you are setting up, you must follow the required registration procedure like obtaining a certificate of incorporation or partnership registration, as the case may be.
PROTECTING YOURSELF LEGALLY -
Various laws apply to a start-up and these are usually inclusive of labour laws that are uniformly applied to every start-up, competition law that governs the market and ensures that no start-up becomes a dominant player, company law that prescribes the differing requirements not just in terms of registration, but also operation and winding up, of various types of companies, and IPR that can protect the intellectual innovation and creativity that the start-ups have employed in making their logo, brand name, advertisements, etc.
Under the Start-up India initiative, there is also a scheme in place to provide financial support to Micro, Small, and Medium Enterprises (MSME) and technology start-up units in filing international patents. This aims to encourage innovation and recognise the value and capabilities of global intellectual property along with capturing growth opportunities in the Information Communication Technology and Electronics Sector (ICTE).
CONCLUSION: ROAD AHEAD? -
In this first part of a 3-part series that guides an entrepreneur toward legally protecting his/her start-up, the authors have aimed to provide an overview regarding the basics of a start-up. Before jumping into the technicalities of each law that apply to a start-up, it is important to understand the know-how of a start-up and the economic advantages that it entails, not just for the employer and the employees, but also the country. The technicalities of company law for purpose of start-up are essence of the second part of this series and will be covered accordingly.
[1] Subhashit Manjiri 11.89.
(Authored by Mr. Shubham Budhiraja, Ms. Akshita Goyal and Ms. Shivangi Chawla, all interns at S&D Legal Associates)