Legal requirements for a startup

    10th Aug 2017
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    TEN LEGAL REQURIMENT FOR STARTUP Before one starts a business venture and also during its operations, it is imperative to know the External Business Environment where it operates. External Business Environment consists of Political, Economic, Technological, Legal and Ecological Environment which encompass aspects of government policy to tax holidays. All these are out of control of the Business but have a major impact on the everyday operations as well as the overall functioning and growth of the Business. In the Startup Business Environment in India, a startup needs to keep track of the Regulatory Environment, Tax Regimes, Legal Issues, and necessary Compliances to be met which would ensure the smooth running and allow startups to avail all the benefits that the Government is offering to make startups in India a success.


    According to the Startup Action Plan launched by the PM on January 16th, 2016:

    A startup is an entity registered in India; it may be a Private Limited Company, Limited Liability Partnership or a Partnership and is deemed to be a startup when:

    Less than 5 years of existence

    Turnover not exceeding more than 25 Crores

    Involved in innovation, development, deployment, or commercialization of new product

    and services are driven by technology or Intellectual Property

    Working on a new product or service

    Significantly improves an existing product, service or process that will create and all value

    for customers of the workflow.


    To be accorded the status of a startup, and to enjoy the legal rights and avail the benefits of the same, the Business needs to acquire a certification from the Inter-Ministerial Board of Certification which comprises of the Joint Secretary, Department of Industrial Policy and Promotion(DIPP) and Representatives of the Department of Science and Technology and Department of Biotechnology. For the same, an application needs to be made with the following documents:

    In the prescribed format by DIPP, a RECOMMENDATION needs to be obtained by the startup from any incubator established in a post-grad college in India, Or, From an incubator which is funded by the Government as a means to give impetus to innovation, a LETTER OF SUPPORT needs to be obtained, Or, In the prescribed format by DIPP, a RECOMMENDATION needs to be obtained by the startup from any incubator recognized by the Government of India, Or, A LETTER OF FUNDING from an SEBI-recognized Incubation Fund/ Angel Network/ Private Equity Fund/ Accelerator/ Angel Fund of not less than 20% in Equity appreciating the innovative streak in the business, OR,

    A LETTER OF FUNDING from the Central or State Government under a scheme promoting innovation, Or, A patent filed and published in the Journal by the Indian Patent Office in the section related to the industry wherein the business operates. Upon successful submission of the application, a real-time recognition number and a Certificate of Recognition would be issued to the Applicant which would rest in the entity all the rights and liabilities of a Startup.











    In order to encourage startups, and to support startups to grow, the Government of India has provided tax exemptions to startups. 100% profits are to be deducted while calculating the income of the Startups. The Startup can claim this exemption for three consecutive years out of the initial five years, however, the Minimum Alternate Tax is still applicable and this qualifies the Startups to pay a tax.

    Capital raised from the sale of long-term assets is exempted from tax if such capital is invested in other funds o used to purchase computers or computer software. Furthermore, tax exemptions have also been provided by investments made by resident investors. A patent developed and registered in India is charged at a discounted rate of 10% at the income it generates worldwide.


    In order to save the startups from being caught up in the net of various compliances required with a business venture, the Government has proposed that for the initial three years of the existence of a startup, there would be no inspections unless there is a complaint and the startups can self-certify themselves on the mobile app and web portal created for the purpose. These compliances encompass the following laws:

    The Building and Other Construction Workers (Regulation of Employment & Conditions of Ser­vice) Act, 1996

    Inter – State Migrant Workmen (Regulation of Employment & Conditions of Service) Act, 1979

    Payment of Gratuity Act, 1972

    Contract Labour (Regulation and Abolition) Act, 1970

    Employees’ Provident Fund and Miscellaneous Provisions act, 1952

    Employees’ State Insurance Act, 1948

    Water (Prevention & Control of Pollution) Act, 1974

    Water (Prevention & Control of Pollution) Cess (Amendment) Act, 2003

    Air (Prevention & Control of Pollution) Act, 1981



    The Patent Regime under the Government of India has been tweaked and modified to adjust to the needs of the Startups: fast trackedPatent Applications by Start up fast-tracked to ensure quick disposal;

    Facilitators are to be entrusted responsibility for providing startups

    (a) general advisory on intellectual prop­erty rights;

    (b) filing and disposal of applications dealing with patents, trademark and design.

    Filing of Patents by a Startup would be charged at a 80% discounted rate.


    It is advisable to the Employer of Startups to include other agreements and contracts along with the offer letter to the employees defining in a clear and precise manner the rules and regulations which are to govern employer-employee relationship:

    Employment Contract

    Non-Competition And Non-Solicitation Agreements

    Con­fidentiality And Invention Assignment Agreement

    Anti-Sexual Harassment Policy

    Employee Handbook

    INTELLECTUAL PROPERTY RIGHTS: The Startup should be clear regarding the laws relating to these provisions as the works of indigenous innovation and development needs to be protected:






    Startup are as the name suggests starting just yet and in this situation the cash flow situation needs to be improved unless they are in a comfortable position with a steady cash inflow situation. In these circumstances Startups can control their costs by substituting cash benefits with ESOPs. However, with ESOPs, a concrete approval of the investors and shareholders and adequate information to the employees to avoid any shortcomings arising out of this move.


    Startups in order to function smoothly needs to be aware of and enter into these various third party contracts at various stages of the Business Cycle:

    Software License Agreement

    Software Development/Services

    Work for Hire Agreement

    Equipment/ Technology Lease

    Online Agreements

    Strategic Alliance Agreements

    Outsourcing Agreements

    Customer Contracts

    Distribution Agreements

    Vendor/ Supplier Contracts

    Contractor Agreements


    Insurance Agreements

    Want to make your startup journey smooth? YS Education brings a comprehensive Funding Course, where you also get a chance to pitch your business plan to top investors. Click here to know more.

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