INTRODUCTION
A startup is a type of business that is engaged in developing and introducing new products, services, or technologies. These startups are driven by intellectual property or innovative ideas. In recent years, the startup ecosystem in India has witnessed rapid growth and has gained increased support in various aspects. Startups do not operate in isolation but are part of a broader business environment that aims to generate impactful solutions, contributing to socio-economic development and transformation. Startups create job opportunities by fostering novel innovations, leading to greater employment prospects. This, in turn, strengthens the economy, positively impacting the cities where startups are located.
Incorporating a startup in India is not just a formality, but a strategic move that holds significant importance for entrepreneurs. It is important that a legal entity is formed so that startups can unlock several benefits that contribute to their long-term growth and success. Incorporating a startup provides a separate legal identity and limited liability protection for founders and shareholders, safeguarding their assets and minimizing risk exposure in cases of financial liabilities or legal issues. Additionally, it enhances credibility, making the startup more attractive to investors and facilitating access to funding opportunities. The startups demonstrate their commitment to operating ethically and responsibly by complying with legal requirements, contributing to the overall development of the business ecosystem.
Team YLCC is here to bring you a comprehensive step-by-step guide on how you can incorporate your startup!
THE PRE-INCORPORATION STEPS
Identify the Type of Business Entity!
In India, startups can choose from different legal structures, each with its advantages and disadvantages. Choosing the most suitable structure depends on the startup’s specific requirements, such as the nature of the business, scalability, funding needs, and liability concerns. The following are the type of structures:
- Private Limited Company: Offers limited liability protection, allows for easy fundraising, has a separate legal identity, and enables the transfer of ownership. However, it involves more compliance requirements and has restrictions on share transfer.
- Limited Liability Partnership (LLP): Combines the benefits of a company and a partnership, providing limited liability to its partners. Moreover, it has fewer compliance requirements compared to a company but may not be suitable for businesses seeking significant external funding.
- Partnership Firm: Simple to set up and operate, with shared decision-making and responsibility among partners. However, the partners have unlimited liability, and the firm does not have a separate legal identity.
- Sole Proprietorship: Easiest and least expensive to set up, with complete control for the owner. However, the owner has unlimited liability, and the business does not have a separate legal identity.
Choose a Unique Business Name!
A unique name helps distinguish the startup from others and builds brand recognition. The key points to remember:
Criteria and Restrictions:
The Companies Act, 2013, sets certain criteria for selecting a company name. The name should not be identical or similar to existing companies, offensive, or violate any trademarks. It should align with the objectives of the business and should not be prohibited under any law.
Reserving a unique name for the company is a critical first step in the registration process. The Ministry of Corporate Affairs (MCA) handles this process, and Rule 8 of the Companies Incorporation Rules 2014 provides guidelines for name availability based on the Companies Act 2013.
When registering a company, entrepreneurs have two options for reserving a name, i.e., RUN and Spice forms. The RUN (Reserve Unique Name) (see here) system is an online form available on the MCA website which allows applicants to check the availability of their desired business name and submit a reservation request.
You can see this instruction kit, provided by the MCA (see here)
Secondly, is the Spice-32 form (see here). Although it allows for only one name option. If the provided name is rejected, all the documentation needs to be redone for a fresh submission. Therefore, it is crucial to carefully consider and ensure the availability of a unique and desirable name during the reservation process.
Conducting Name Availability Search:
To ensure the chosen name is available, entrepreneurs can conduct a name availability search on the Ministry of Corporate Affairs (MCA) website. This search verifies if the name is already registered or reserved by another entity.
Drafting MoA & AoA!
The Memorandum of Association (MoA) and Articles of Association (AoA) are essential documents for a company.
As per S. 4(6) of the Companies Act, 2013, the MoA should adhere to the specified formats outlined in Table A, B, C, D, and E of Schedule-I of the Act. Meanwhile, the AoA shall adhere to the formats outlined in tables F, G, H, I and J for different types of companies, under Schedule I of the Act.
The following are the key points to remember:
- The MoA outlines the company’s objectives, scope of activities, authorized share capital, and details about its members. The AoA defines the rules and regulations for the internal governance, management, and operations of the company.
- The MoA and AoA should include clauses related to the company’s name, registered office, objectives, share capital, liability of members, board of directors, voting rights, and dispute resolution mechanisms.
- Drafting the MoA and AoA accurately is crucial to avoid legal complications. It is recommended to seek professional legal assistance or consult a company secretary to ensure compliance and clarity.
THE INCORPORATION PROCESS
Obtain a DSC!
A Digital Signature Certificate (DSC) holds significant importance for the online filing of incorporation documents.
The key points:
- The DSC ensures the authenticity and security of electronic documents submitted to the MCA. It enables directors and other authorized individuals to digitally sign the incorporation documents.
- To obtain a DSC, individuals must apply to a Certifying Authority (CA) authorized by the MCA. The application typically requires submitting identity and address proof documents as per the CA’s requirements. Once approved, the CA issues the DSC. There are other designated authorities as well (see here).
For detailed information, visit here (see here).
Obtain a DIN!
A Director Identification Number (DIN) is a prerequisite for all directors of a company. The key points:
- The Companies Act mandates that every director must have a unique DIN. It serves as an identification number for directors and is used for various regulatory filings and compliance purposes.
- To apply for DIN, individuals can visit the MCA website and fill out the DIN application form. The form requires personal details, identity proof, and address proof documents. After verification, the MCA will issue the DIN.
The filing of corporation documents under Registrar Form DIR-3 (see here) is only possible once the DIN has been approved.
Pay Incorporation Fees and Stamp Duty!
Incorporating a startup requires payment of fees and stamp duty.
The key points:
- The MCA has prescribed a fee structure based on the authorized capital of the company. The fee amount varies accordingly, and it is important to determine the applicable fees before making the payment.
- Stamp duty is a tax levied on certain documents, including incorporation documents. The amount of stamp duty varies based on the state where the registered office of the company is located.
- Use the online payment gateway available on the MCA portal to pay the incorporation fees and stamp duty. Follow the instructions provided, ensuring accurate payment of the required amount.
- For detailed information, visit here (see here)
THE POST-INCORPORATION COMPLIANCE
Obtain PAN & TAN!
A Permanent Account Number (PAN) is a unique identification number for tax purposes, while Tax Deduction Account Number (TAN) is required for deducting and remitting taxes on behalf of employees or vendors and both are crucial for proper tax compliance and financial operations.
The application process for PAN and TAN can be completed online through the portal of the Income Tax Department. You can follow the instructions provided, submit the necessary documents, and complete the verification process to obtain PAN and TAN respectively.
Register for GST!
For startups, registering under the Goods and Services Tax (GST) regime is mandatory based on turnover thresholds.
The following are the key points to remember:
- Startups need to assess their turnover to determine if they meet the threshold for GST registration. Once the threshold is crossed, registration becomes compulsory.
- The registration process can be completed online through the GST portal. You can provide the necessary details, upload the required documents, and follow the step-by-step instructions to successfully register for GST.
Open Bank Account and Register for Statutory Obligations!
It is essential to open a bank account in the name of the company after incorporation. Additionally, there are other statutory registrations to consider. Opening a bank account in the company’s name allows for proper financial management, fund transactions, and compliance with banking regulations. Depending on the nature of the business and the number of employees, startups may need to register for other statutory obligations such as the Employees’ Provident Fund (EPF), Employees’ State Insurance Corporation (ESIC), and Professional Tax.
CONCLUSION
Incorporating a startup in India involves several key steps that are crucial for long-term success and compliance. It is essential to summarize the process and highlight the significance of legal requirements. Through this step-by-step guide, entrepreneurs can establish a strong legal foundation for their business. Adhering to these requirements not only ensures limited liability protection and access to funding but also enhances credibility and trust among stakeholders. However, to navigate the complexities of the incorporation process effectively, startups should seek professional guidance. Legal experts can provide valuable assistance in understanding and fulfilling the legal formalities accurately and promptly and by incorporating your startup in compliance with legal requirements, you set the stage for sustainable growth, minimize risks, and contribute to the overall development of the Indian business ecosystem. Remember, adhering to the legal framework is not only a legal obligation but also a strategic decision that can pave the way for your startup’s long-term success!
This article has been written by Team YLCC. For any other queries, reach out to us at: queries.ylcc@gmail.com
