Legal guidelines required for starting a business in India:
A) Choose a Legal Business
A person who wishes to start a business is first and foremost required to check and see whether the business which he wishes to start is a lawful business with a lawful object in the eyes of law that is; it is not prohibited under any law that is in force. For example the following business is prohibited:
- Wagering Business i.e. betting or gambling is prohibited under law.
- Trade of prohibited items like animal skin.
- Sale of some animal skin specified under the Wildlife Act is also prohibited.
- B) Choose the Type of Business A person is secondly required to decide how he desires to operate his business whether he will be operating as a:
- firm of partners,
- A company either limited by shares or with unlimited liability, a public limited or private limited company.
- Limited Liability Partnership i.e. LLP.
- Proprietorship Firm: Proprietorship is a business entity that is owned and run by one person i.e. the Proprietor. There is no distinction between the proprietor and proprietorship in the eyes of laws. They are one and the same thing. Proprietorship does not require any registration with any government agency. In fact the PAN card of the Proprietor is used for filing income tax returns of the business i.e. Proprietorship. But the name of the proprietorship can be registered as a trade mark. A bank account can be opened in the business name and all indirect tax registrations can be done in the name of the proprietorship firm also.
- Partnership Firm: All partners who have entered partnership agreement are called as partners of the Firm. Under this category, the business is run by the partners. Partners are basically all those people who come together with the intention to carry out a business with the aim to gain profit and share profit and looses in case they are incurred. The partners should be including two or more persons who carry out business on behalf of each other and act for themselves and on behalf of other partners and thus act as agents of each other. These partners contribute to this business and share profits and losses, conduct business in accordance to the partnership agreement entered by them. Partnership Firm can be registered under Indian Partnership Act. A partnership Firm has unlimited liability of the partners.
- Private and Public Companies: A company is an association of people who have come together to carry out business with the aim of profit. The special feature about this association is that it has been given a separate and distinct legal identity/personality which makes this entity separate from its members. Company is basically a creation of statute that is Companies Act 1956. Company business is carried out by the Directors. Law has imputed a legal personality to this entity and this fact makes it different from proprietorship or firm. The company is governed by the provisions of Companies Act and not by any agreement as in case of firm. There is no agreement entered by the members of the company amongst themselves to carry out affairs of the company and if there is a contract to conduct affairs then, it is according to a contract with the company which has a legal personality or is a legal entity on its own. It has a personality of its own and members of the company have their individual identity. The affairs of the company are carried out in accordance to the documents of Memorandum of Association and Articles of Association that are filed at the time of formation of the company with Registrar of Companies.
It is important to understand the concept of shares before understanding entities called limited company or a public limited company. A company requires capital to run the business and this capital which is invested to carry out the said business activities is called the ‘share capital’. This capital of the company is divided into ‘shares’. ‘Shares’ basically means a share in the share capital of the company. The people who hold such shares are called shareholders.
- Limited Company: A limited company is a company whereby the liability of the shareholders towards company‘s creditors is limited to the capital that was originally invested by them.
In practice all companies are limited companies as under this category liability of shareholder is limited as contrast to a company with unlimited liability where liability of the shareholders towards the debts is unlimited. These companies where liability of shareholder is unlimited are generally not much found in the business world due to lack of their economic feasibility.
- Private Limited Company: Private Limited Company is a company where shares are held in private hand and transfer of shares is limited to the members or directors of the company and prohibits any invitation /deposits of capital from person other than members, directors of the company. The company is not allowed to invite general public to subscribe to the share or in simple words the general public cannot invest in the company through mode of buying shares. Under the Companies Act 1956, private limited company is a company with a minimum paid up capital of 1 lakh rupee. A public limited company is a company on the other hand with a minimum paid up capital of 5 lakhs rupees where shares can be bought by the general public i.e. general public is invited to subscribe to the shares of said company by issuing a prospectus.
- Limited Liability Partnership: A LLP is a business enterprise that is hybrid of both partnership and company. It is an enterprise that consists of partners who conduct the business in accordance to an limited liability agreement with the view to gain profits and at same time LLP has a distinct personality of its own and capable of being sued in the name of LLP.
- C) Select The Name Of Business The third legal requirement for starting the business is naming the Business. The name of the Company or firm or proprietorship or LLP should not be prohibited under the Emblems and Names (Prevention of Improper use) Act, 1950 or State Emblem of India (Prohibition of Improper Use) Act, 2005 or any other law that is in force and places restrictions on naming the business respectively. The following are some of the basic requirements that should be kept in mind before naming businesses:
- A company or a firm should not use State Emblem prescribed under the Schedule of Emblems and Names (Prevention of Improper use) Act, 1950 or anything which gives an impression that the business is run or is under the patronage of the government of India in case it is not so that is, no written consent is made in favor of the respective business.
- Public Limited Company is required to be added in case of Public limited companies and in case of Private Limited Company the term Private Limited is to be added.
- The business name should not be same or similar to the trade name of other enterprise running similar or same line of business or should not be giving impression of running on the goodwill of well established business enterprise thereby violating the trade mark law or being accused of passing off under common law.
- For examples in case of eCommerce business i.e. online shopping, the owners of the said business should not name their business after any brands of goods that are being sold through their website or name the online shopping website after any well known company unless written permission has been taken on that behalf by the respective brand or they could found guilty of offenses under cyber law that is cyber squatting.
- A person can name his/her company after his own name. In case his organization name is similar to another company’s name then he can continue to run his business under the said name only if the name was used with honest and bonafide intention by him. In case any dispute arises in future then, the person is required to satisfy the test laid by the respective Act prohibiting the same like for instance under the Trade Mark Act 1999.
- A person can name his company in a manner that indicates the kind of business activity in which he is engaged.
- D) Legal Process Upon deciding the form in which the person wishes to operate his business and naming his business, the person may start the process which shall help him to operate the respective form.
- In case of a firm, the person is required to enter into a partnership agreement with all the terms, conditions mentioned and may choose to register the firm with the Registrar of Firms and in case the firm is a banking firm with more than 10 partners then it is obligatory to register the Firm.
- In case the person chooses to operate as a company then the respective person generally who is promoter is required to file an application in Form No 1 A along with the Memorandum of Association and Articles of Association with all the necessary details like Name Clause, Registered Office Clause, and Object Clause that are clearly defining line of business, place of activity that is registered office etc and the manner in which the business shall operate as prescribed by the Companies Act 1956 with Registrar of Companies. In case of public limited company, prospectus as prescribed by the Companies Act 1956 is required to be filed.
- In case of LLP, the person is required to register the incorporation document along with the statement by the Chartered Accountant, Company Secretary or Cost Accountant stating that all the requirements prescribed by the Limited Liability Partnership are complied with as prescribed by the respective Limited Liability Act with the Registrar of Companies where the business is situated.
- E) Other Requirements The person is required to thereafter to check whether his business requires any clearances from Government Authorities or licenses from the local licensing Authority to operate like in case of Restaurants, coaching institutions etc.
- In case of business of Export or Import of goods outside India or to India, a person is mandatorily required to apply for Import-Export number that is IEC to start import or export business.
- The person who is operating his business as a shop running essential commodities is required to check that commodities bought from wholesalers or sold from his shop are fulfilling the safety standards and are not adulterated and complying with food adulteration prevention acts respectively.
- In case the person is running factory then it is essential to get environmental clearance from respective Boards under Water and Air Pollution Prevention Acts and install safe disposal of harmful waste by converting it into to less toxic waste as prescribed by the respective Acts.
- In case of a public limited company, the business of the said company can commence only after the Registrar of Companies issues the certificate of commencement as prescribed by the Companies Act 1956.
- F) Memberships The person may choose to register its organization with chamber of commerce or any statutory organization where registration of his business is mandatorily required. The person is also required to check whether the business which he wishes to operate is coming under any Social Security Scheme like Public Liability Insurance, Workmen Compensation Act 1948 (in case the business includes factories mentioned in the Schedule of the respective Acts) where it mandatory to register the organization with the respective government agency. The following are some of the examples:
- In case of business run by an enterprise consisting of more than 20 employee then it is governed by Employee Provident Fund Act and the person is mandatorily required to register with Employee Provident Fund Organization in the prescribed form for the allotment of establishment code number and provide all the information to respective office as prescribed by the respective Act.
- In case of business is consisting of running factories or mines, the person who is running the respective factory is required to see that the factory premises or working conditions are fulfilling the health and safety norms as prescribed by the Factories Act or the Mines Act 1952 respectively.
- The person is also required to check whether its organization is coming under Employment State Insurance Scheme and in case it does, then register its organization with the respective government agency as prescribed by Act and apply and get the ESI number. This scheme is generally for factories that are non seasonal and are either run by power or are not run by power employing 10 or more employees providing insurance cover in case of accident, injury, occupation disease, etc in the course of their employment.
- G) Tax Registrations The person is there after required to apply to respective government authorities for future taxation purposes. For example in case the business is being operated as a company then it is required to apply in form 49 A for PAN card which is required for filing income tax returns and file Form 49B for TAN that is Tax Deduction Account Number either online through NSDC website or Tax Information Network Centre for deduction of tax at the source so that in future there are no problems in TDS/ other Tax filing. The proprietor of proprietorship can use his personal PAN card number for paying the income tax on the generated income. The directors of the company may apply for Director Identification numbers by applying in form DIN-1 and this is mandatory for those directors who are not citizen of India but are directors of Indian companies.
A person running trading business is required to apply for VAT registration to the local Sales Tax department in prescribed forms along with specified fees and necessary document as prescribed by the respective Act in this regard. Tax Identification Number that is TIN is granted on completion of above said formalities. This is essential as it is mandatory to take Value added Tax that is VAT on sale transaction as prescribed by the respective Act. Failure to comply with the above mentioned attracts penal action.
- H) The person is required to thereafter to get service tax number in case the person feels that revenue that will be generated during the financial year will be more than 10 lakhs though person may apply for it voluntary in case business revenue is less than 10 lakhs. Application for this number is only for those businesses that come under category of services whereby the service tax is to be imposed under the respective Act. The person is therefore required to check with a lawyer or any other authority to see and whether any levies are to be imposed in course of the business. The following are some examples:
- The person is required to see in case of manufacture of goods to include excise duty on manufacture of goods at the place of manufacture.
- The person is required in case of restaurants or sale of commodities like cloth; basic utility items etc take Value Added Tax i.e. VAT from the consumers on the sale of the respective commodities.
- I) Accommodation Issues: In case the business is being run through an office, it is essential to check whether the office premises can be used for the respective business and this is fulfilling the Rules and Regulation of Master Plan of the city where the office is situated and in case the office premises is acquired through sale deed then, it is essential to get sale deed registered and pay the stamp duty and all other taxes if any in this regard. The following are some of the examples which are required to be kept in mind regarding office premises:
- Factories releasing toxic waste or dealing with extremely dangerous substances cannot be run close to residential complexes according municipal rules of State.
- Alcohol selling shops cannot be situated near schools or temples as prescribed under municipal rules of State.
- Only professional Chartered Accountant or Lawyers or doctors can work from residential colonies and can operates their offices or clinics respectively from residential premises under State municipal Laws.
- J) Bank Accounts The person can open bank accounts in banks in the name of proprietorship, company, firm or LLP for transactions of the respective organizations and acquire check books in this regard. The person is required to maintain books of accounts and work according to the guidelines prescribed for the business and pay taxes and conduct affairs of the business with due regard to law of the country or state where the business is established. The person may chose to adopt any official seal of the respective organization as identifying mark of his respective organizations to be used in documents in futures and there after start the business which he wishes to pursue.