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I want to Start a Web-based Business in India. What does the Law require me to do?

Team YS
20th Sep 2011
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Vakil Search

Lawyers from VakilSearch AnswerLegal Series, Part 1

The last decade has witnessed the very healthy phenomenon of people turning to entrepreneurship and starting businesses of their own, particularly in the online space. Businesses create employment and wealth, and are vital to our young and growing economy. Let’s take a quick look at the things you need to keep in mind as you start, from a legal point of view.

Taxes

Whether you are receiving money through a payment gateway or a brick and mortar payment system like Cash on Delivery, you need to comply with any and all tax liabilities.

Typically, a web based business is either involved in providing content or a service. A classic example of content based website is yourstory.in and a classic example of service based one would be vakilsearch.com.

A content based site needs to pay income tax on the revenues it makes out of advertising, but does not need to pay service tax. Until the Goods and Services Tax regime comes into force in India, service providers in many sectors will have to pay tax on the services rendered by them. You will have to naturally check whether your service is taxable or not.

The Government of India has been planning to come up with a ‘negative list’ of services for some time now, where the services on that list are not subject to tax; i.e. all other services are. That will really simplify the process of finding out whether you have to pay service tax or not. As of today, that has not happened and we have 119 notified services.

Apart from income and service tax, many states have other state-specific taxes that you will have to pay, like Profession Tax in states like Karnataka.

Intellectual Property Protection

Secondly, if you are providing content or using a logo/design, get the necessary Intellectual Property rights protection. It is very easy to copy a logo from a website, and unless you take precautions, you will have no effective remedy if someone copies it later.

If you have a catchy logo or name, get trademark protection for it. You get a copyright the moment you publish something, but remember to add © <Your website name> 2011 at the bottom of each page (include it in the footer).

Patent protection is the most expensive and time consuming kind of Intellectual Property Protection, so you must evaluate whether you actually need it first. If you are convinced that you need it, you need to draft and file a Patent Application.

People and Agreements

Thirdly, even if the business exists in cyber space, the people who run it are very real. So you need to decide a suitable structure for your business. A Partnership is easier to start, needing only a partnership deed, but your liability is unlimited. A private limited company form is advisable if you are investing large amounts of capital at the outset, and if the numbers (monetary) involved are high.

Alternatively, and this is a very sound approach too, start as a Partnership and switch to a Company as your business begins to take off.

To form a company, you need to prepare necessary documentation, like the Memorandum and Articles of Association of the Company, among other formalities.

Typically, your web based business may involve one ‘technical’ person, and one ‘marketing’ person, and the technical person may only bring his technical expertise to the firm and no capital. This arrangement, if it applies to you, must be stated very clearly in writing at the outset (especially if you are forming a Partnership, state it in the Partnership Deed).

Since 2009, another form of starting an enterprise has come into existence, called a ‘Limited Liability Partnership’. Here, you can enter into a Partnership, but still suffer only limited liability. If something goes wrong, only your capital contribution to the partnership will be affected. This is an interesting animal, and you must definitely explore this option. The disadvantage is that expanding such an enterprise when business grows is a little more difficult than in a private limited company. In the latter, you can offer equity to investors and bring in funds, or ‘go public’ which means offering shares to the general public.

If you are starting the business alone, you do not initially have to incorporate a company. A proprietorship is very easy to start, and only requires you to open a (current) bank account. Filing personal income tax returns and getting intellectual property rights protection is necessary, however.

This was just a brief outline…

This, it must be remembered, is just a broad outline of the process. No general prescription can be made since every case is unique, so have your situation studied by an expert before deciding the best course of action. Writing sound software code is just part of the process, your understanding and application of the legal code has to be sound, too.

This piece was brought to you by VakilSearch

VakilSearch is India’s leading online legal services provider for businesses and individuals. As the official partner of the Confederation of Indian Industry (CII) and knowledge contributor to Sulekha.com, the Hindu Business Line, Entrepreneur Magazine and the All India Rubber Association, VakilSearch reaches out to thousands of businesses, entrepreneurs and individuals on a regular basis. So when you visit vakilsearch.com, you can be assured of quality legal guidance and comprehensive documentation for your business and personal needs, at affordable prices.

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