Compliance for startups in India is a huge pain point. The myriad of compliances and legal aspects continue to be a thorn in the ecosystem. The goal here is to pen down some of the key aspects pertaining to compliance and legality for a startup.
“A nation of sheep will beget a government of wolves.”
― Edward R. Murrow
No matter how innovative your idea might be, it needs to abide by the law of the land. Thereby the government does play a role in the survival of startups after all.
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Companies Act, 2013
Companies Act 2013 regulates the formation of a company, its responsibilities, directors, dissolution and overall functioning of a company. Additionally, it covers legal, acts and compliance for all companies including startups.
The following are the salient features of the Companies Act, 2013:
- The Companies Act, 2013 has introduced the concept of ‘Dormant Companies’. So, dormant companies are those companies that haven’t engaged in any business activity for over two years.
- It has introduced the National Company Law Tribunal or NCLT.
- It encourages self-regulation in terms of disclosure and transparency instead of a government approval based regime.
- Nowadays, documents are in electronic form.
- The procedure for mergers and amalgamations is faster and simpler.
- The concept of a one-person company(OPC) has introduced. Additionally, this is a new type of private company which may have only one director and one shareholder.
- The Act makes it mandatory for companies to form CSR committees, and formulate CSR policies.
- It offers more power to shareholders in that it provides for shareholders’ approval for many major transactions.
- The Act mandates at least 7 days of notice for calling board meetings.
- Also, the norms for accepting deposits from the public are stringent.
Companies Act governs the company formation process.
- 7 or more people can form a Public company.
- 1 or more person can form a private company.
- Any single person can form a Person Company (One Person Company Is considered to be a private company).
- Application for the availability of name for the company: According to the Companies Act, the name stated in the Memorandum of Association-
- Shall not be identical with or resemble the name of any existing company.
- It shall not be such that its use by the company constitutes an offence under any law.
- The name cannot be such that its use by the company is undesirable by the Central Government.
Note: A new web service called, ‘RUN’- Reserve Unique Name has replaced the provision of six names. Now only two names are to be provided in the order of preference, by filling the form RUN. Also, this is applicable for new as well as existing companies.
Memorandum of Association
Preparation of Memorandum and Articles: The Memorandum of Association (MOA) is the charter of a company. It defines the area within which the company can operate. Moreover, the Memorandum of Association (MOA) shall state the name, registered office, objects, the liability of members, share capital (in the case of a company having a share capital). Additionally, in the case of One Person Company(OPC), the name of the person who, in the event of the death of the subscriber, shall become the member of the company.
Filing Documents With Registrar
An application is to be made in form no. INC 32 along with the following documents, as per section 7(1), with the registrar. The jurisdiction of the firm lies with the same registrar.
- Memorandum and Articles: All subscribers must sign the MOA documents in a prescribed manner.
- Declaration by Advocate, C.A; An advocate, a chartered accountant, cost accountant or a company secretary in practice and by a person named in the articles as a director, manager or secretary of the company, should file the document ensuring that all the requirements of this Act and the rules made thereafter have been complied with.
On the other hand, the declaration should also contain that the person hasn’t been found guilty of any fraud or breach of duty to any company under this Act or any previous company law during the preceding five years.
It should also contain that all the documents filed with the Registrar for the registration of the company contain information that is correct and complete and true to the best of the person’s knowledge and belief.
- The address for communication must be given till the registered office is established. As per Section 12: The company should have a registered office within 30 days of incorporation.
- First Directors: The particulars of the interests of the persons mentioned in the articles as the first directors of the company in other firms or bodies corporate along with their consent to act as directors of the company in such form and manner as may be prescribed must be filed.
Note: Digital signature is to be used to file all documents electronically. More so, manual filing of documents is not allowed now. Therefore, a company can be registered only online.
Compliance for Startups during Registration
- Certificate of Incorporation by Registrar: Section 7(2) states that the Registrar on the basis of the documents and information filed under Section 7(1) shall register all the documents and information referred to In Section 7(1) in the register. Going forward, the registrar will issue a certificate of incorporation in the prescribed form. Such that the proposed company is incorporated under this Act.
- Allotment of corporate identity number: Section 7(3) states that on and from the date mentioned in the certificate of incorporation issued under Section 7(2). The Registrar shall allot to the company a corporate identity number, which shall be the distinct identity for the company and which shall also be included in the certificate.
- Documents of incorporation to be preserved: Section 7(4) has a requirement that the company shall maintain and preserve office copies of all documents, at the registered office. Furthermore, any other information as originally filed under Section 7(1) till dissolution under this Act.
- Effect of Registration (Section 9): From the date of incorporation mentioned in the certificate of incorporation, such subscribers to the Memorandum and all other persons, as may, from time to time, become members of the company, shall be a body corporate by the name contained in the Memorandum.
- It is capable of exercising all the functions of an incorporated company under this Act.
- Also has perpetual succession and a common seal.
- It has the power to acquire, hold and dispose of property, both movable and immovable, tangible and intangible.
- Also is capable of entering into contracts. The company can sue and be sued, by the said name.
Incorporation or registration of a company is the most important step in the formation of a company. Companies can only register online.
Registration or incorporation of a company means the legal process used to form a company. So, after the completion of the process of incorporation, the company comes into existence having a separate corporate identity from its owners. Furthermore, MCA-21 is the e-governance programme of the Ministry of Corporate Affairs which has simplified the process of incorporation of a company.
The following steps need to be taken for online registration of a company:
Obtain Digital Signature Certificates
As per the Information Technology Act, 2000, Digital Signature means authentication of any electronic record by a subscriber by means of an electronic method or procedure in accordance with the provisions of Section 3.
For the registration of a company, the application for incorporation is to be signed electronically. So, digital signatures on the documents are used for electronic incorporation. This also ensures, the authenticity of the documents.
Thus the requirement comes under the MCA-21 e-governance programme of the Ministry of Corporate Affairs. A digital signature is used for every document to be filed with the registrar. Therefore, it is necessary to obtain a digital signature certificate for the signatories to the Memorandum and that of the proposed directors.
Obtain Director Identification Number
Director Identification Numbers (DIN) is a unique identification number. As per section 152(3), no person shall be appointed as a director of a company, unless he has been allotted a Director Identification Number. All or some of the subscribers to the memorandum can appoint themselves as first directors of the company.
Therefore, all directors must acquire the necessary DIN number.
- Role Check: This step verifies whether the digital signature affixed on the e-form belongs to the person concerned such as the proposed director, subscriber, etc. And if the Digital Signature is registered with the MCA portal. If the Role Check verification fails, the e-form will not be uploaded.
- Approval of the proposed company name; The person desirous of forming a company needs to select a suitable name.
- Only two names are needed with a preference for RUN.
- By filling the form RUN, along with the prescribed fee. The name is availed from the MCA.
- If a proposed name is not available, the applicant has to apply for a fresh name. After approval, the Registrar will issue the name availability letter. The Registrar may reserve the name for a period of twenty days from the date of approval in the case of a new company.
Form No. INC 1 32
- File Form No. INC 1 32: Along with necessary documents. Post the scrutiny of documents by the Registrar and Receipt Certificate of Incorporation. We have the approval of the name. Additionally, the applicants file an application in Form No. INC 32 for incorporation with the Registrar of Companies.
For this purpose, the company needs to prepare a memorandum of Association and Articles of Association, if it has not already. As per the Indian Stamps Act, stamping is completed. Besides that, the stamp duty can be paid electronically on the Ministry of Corporate Affairs portal. 7 members in the case of a public company, two in the case of a private company and one in the case of One Person Company sign the memorandum/articles.
Commencement of Business
10A. (1) A company incorporated after the commencement of Companies (Amendment) Ordinance, 2018 and having a share capital shall not commence any business or exercise any borrowing power unless-
- The director files a declaration within a period of 180 days of the date of incorporation of the company. This is done in form and the registrar verifies it. Moreover, it claims that every subscriber of the memorandum has paid the value of the shares agreed to be taken by him or her on the date of making such a declaration.
- Thereby, the company has filed with the Registrar a verification of its registered office as provided in subsection (2) of Section 12.
(2) If a company fails to comply with the requirements of this section, the company shall be liable to a penalty of Rs 50000. Furthermore, every officer who is in default shall be liable to a penalty of Rs 1000 for each day during which such default continues, though this amount does not exceed 1 lakh.
What is Startup Compliance ?
Compliance for startups covers everything from keeping track of meetings, to following the IRS Tax code. Moreover, it is an ongoing process and businesses need to comply. If a business fails to keep up with the laws and requirements, it may incur a variety of fines.
Annual Compliance Checklist for Startups
- Income Tax Filing: The financial year in India is from 1st April to 31st March. At the end of each financial year, all corporate bodies file for their Income Tax return. So, this is a mandatory exercise. Moreover, the Government has launched a scheme under the Startup India Program (2016), ‘Eligible Startup’. The following is the eligibility for the Startup India Program:
- The startup should be incorporated or registered in India for less than 7 years. For biotechnology startups, this number is 10 years from incorporation.
- Annual turnover not exceeding Rs 25 crores in any of the preceding financial years.
- Aims to work towards innovation, development, deployment or commercialisation of new products, processes or services driven by technology or intellectual property.
- The startup should not be a split or a reconstruction of existing business.
- Also, it must obtain certification from the Inter-Ministerial Board set-up for such a purpose.
- The startup is incorporated as a private limited company, registered partnership firm or a limited liability partnership.
Tax Exemptions For Startups
Following are the tax exemptions for eligible startups under the Startup India Program. But these come with additional compliance for those startups who avail these.
- 3 year Tax Holiday: Any startup incorporated after April 1, 2016, is eligible for getting a 100 % tax rebate on profit. This is valid for a period of three years in a block of seven years. And subject to annual turnover not exceeding Rs 25 crores in any financial year. This will help the startups to meet their working capital requirements during their initial years of operation.
- No Capital Gains Tax: A new section 54 EE has been inserted in the Income Tax Act. The long term capital gains are exempted if these gains are invested in funds. Though these funds are notified by the Central Government within six months from the date of transfer of the asset. Likewise, the maximum amount that can be invested is Rs 50 lakh and need to be invested for a period of 3 years.
- Tax Exemption on Investments: The tax levied on investments above the fair market value is exempted. Though only investments by a friend, family funds are eligible and not VC funds. Also, the investments made by incubators above fair market value is exempt.
- Carry Forward Losses; The losses can be carried forward. Though, this is only allowed if all shareholders with voting rights hold the stocks during the last day of the loss period. Furthermore, the period where the losses are getting carried forward needs to be true.
Good & Services Tax
Goods and Services Tax return filing; GST is an indirect tax that has replaced other taxes like Excise duty, Vat, Services tax, etc. It is levied on the supply of goods and services. Furthermore, it is a comprehensive, multi-stage tax that is levied on every value addition.
If a business has a turnover of more than Rs 20 Lakhs in a year, it has to get registered under GST. This limit is lower in certain states and can be as low as Rs 10 Lakhs in a year. GST registration is compulsory for e-commerce startups.
Due to GST, startups can now benefit from a tax credit on purchases. Furthermore, the process of registration and filing returns under GST is now online. Startups that are amidst a cash-crunch stand to gain financial benefits from GST.
License Compliance for Startups
License Compliance: With a much higher threshold for registration. Tax credits on purchases and ease of processes. GST has definitely brought relief to startups and smaller companies in India. Though, the license compliances can be carried out along with GST and other compliances.
- Renewal of Licenses: Every corporate body has to obtain a license within 30 days of commencing a business. In addition, the license varies according to the type of activity the startup involves in.
- Business Equipment Compliance: Businesses that acquire business equipment need to ensure that it is in proper condition and also need to maintain the acquired equipment.
- Internal Company Compliance: Every startup needs to adhere to internal company compliances. The following are the two main internal company compliances:
- Annual General Meeting (AGM); Every company/startup needs to have one AGM every year with a maximum gap of 15 months.
- Board Meetings; The first board meeting of the Board of Directors should be held within 30 days of the incorporation of the company. There should be a minimum of 2 meetings, one in each calendar year. There should also be a gap of 90 days between the 2 meetings.