BYOB - Dhruv Paul

LEGAL 101Dhruv Paul

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• Bird’s eye view of different types of entities• How to incorporate a private company?

• Getting your company up and running

• Crossing the Ts and dotting the Is• Basics of legal drafting• Key labour registrations

Agenda

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Types of entities suitable for start-ups

• SOLE PROPRIETORSHIP - the simplest form of business• An enterprise that is owned, managed and controlled by a single person who is

personally entitled to all profit and responsible for all losses• No minimum capital contribution requirement• Formation does not require any registration – no separate legal entity status

• PARTNERSHIP – LLPs are becoming an attractive option• Needs a minimum of 2 partners• No minimum capital contribution requirement• Relatively lesser corporate governance requirements• Key differences between a traditional partnership and an LLP include:

• There is no limit on liability of the partners in a traditional partnership, but there is a limit on the liability of the partners of an LLP (except for certain exceptions)

• There is a cap of 20 partners in a traditional partnership that does not apply to an LLP• The registration process of a traditional partnership is relatively simpler when compared to an

LLP which is similar to a private company

• Sole proprietorships and partnerships are not always the most appropriate vehicles to attract investments

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Types of entities suitable for start-ups

• PRIVATE COMPANY LIMITED BY SHARES – the common choice• Separate legal existence - liability limited to shareholding• Needs a minimum paid-up share capital of Rs. 100,000• Must have at least 2 members (individuals or bodies corporate) subject to a

maximum of 50• Must have at least 2 individuals as directors

• Directors are the agents of the company and act on its behalf on a day-to-day basis• Except for a few matters reserved for shareholders, substantially the entire

management of a company is conferred on the directors

• The affairs must be managed in accordance with the provisions contained in the Companies Act, 1956 and the memorandum and articles of association

• FDI and domestic investment is permitted, subject to caps and conditions• Possible to structure share instrument to give investors enhanced/superior dividend

rights while retaining management and control

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Headline tax considerations

• SOLE PROPRIETORSHIP – individual is taxed on his/her business income at the rate applicable to individual persons • Slab based with peak rate being 30.9% at present• No need for separate PAN/TAN registrations

• PARTNERSHIP AND LLP – partnership profits are taxed in the hands of the partnership • Need to apply for separate PAN/TAN registrations• Partner s’ shares are thereafter exempt from tax• Partnership can pay remuneration, interest , etc. to partners subject to

specified parameters which is deductible from partnership profits but taxable for the individual partners

• COMPANY – taxed at the rate applicable to domestic company – 32.45% (35% in case of revenue > Rs. 10 crores) • Dividend distribution tax @ 16.2226% (17% in case of annual dividend

> Rs. 10 crores)• Need to apply for separate PAN/TAN registrations

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• Obtaining a director identification number and digital signature certificate• Takes 1 day after collecting all documents

• Selecting a name and getting it approved• Should not be similar to an existing company’s name

or a registered trade mark• Ministry of Corporate Affairs and Indian Trademark Registry

have a free search service

• Finalize main objects of the company• Typically takes 4-5 working days to get an approval

Incorporating a private company

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• Finalize the charter documents• MoA governs the external dealings of the company

• Governs what the company can do and not do – important to draft it wide enough but not put everything under the sun

• Determines place of registered office and share capital structure

• The initial shareholders of the company sign the MoA in their hand - they are the first shareholders of the company and must pay Rs. 100,000 to the company

• AoA governs the internal management of the company• Process of holding board and shareholder meetings• Share transfer process

• Avoid having directors holding qualification shares and long winded procedures for day-to-day operation

• Keep it simple!


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• Finalize location of the registered office• Need to submit a proof of residence

• Stamp duty and statutory fees to be paid on charter documents and incorporation forms• Approximately Rs. 4,800 for a Rs. 100,000 company• Slabs linked to the authorized share capital

• Typically takes 2-3 weeks after obtaining name approval

• Certificate of incorporation is the end goal


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• Obtain a PAN and TAN in the name of the company• Typically takes 5-7 working days

• Open a bank account• Usually banks require a board resolution in the format provided by the

bank• PAN and TAN (or at least the submitted application) are prerequisites

• Issue board authorizations to individuals to sign documents and contracts for the company

• Depending on nature of business other tax registrations may become applicable• Service tax – service based companies• Excise – manufacturing• VAT – purchase and sale of products – process and registrations can

vary across states

• Obtain a shops and establishments registration

Getting your company up and running

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• Corporate compliance is a necessary evil!• Document physical board meetings every quarter• Always have at least 2 directors and 2 shareholders• File annual returns on time (typically done by 30 Sep)

• Don’t mess with the tax man…• If you are deducting TDS, please make timely payments to

the tax authority• Failure can lead to imprisonment and other unpleasantness

• Strive to maintain a complete set of company statutory registers and books of accounts from day 1• Sure this impinges on your precious time during the early

days, but may save you a lot of hassles later

Crossing the Ts and dotting the Is

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• Trade mark registration is not compulsory and the holder of an unregistered trade mark is also protected

• Still… Apply for registration of your trade mark• Statutory fee for registration of a trade mark is Rs. 2,500• Obtaining a registration can take up to 2-3 years, but it is

applicable retrospectively from the date of application• Better to get your foot into the door!

• Need to decide whether to register the trade mark in your personal capacity or in the name of the company

• Should be decided on a case to case basis• Investors and future partners would prefer that the trade mark vests in

the company – but this can be achieved through a deed of assignment as well


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• Any expression of an original work has a copyright from the time it is made known to a third party• The idea is not copyrightable, it is the manifestation of

the idea that is copyrightable

• No compulsory registration of copyrights• Use the (C) symbol in all original works,

including internal policies and procedures• Create your company’s unique IPR footprint


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• Document the terms of engagement for employees and consultants• Ensure that all IPR in their work belongs to the company• Terms of engagement should meet minimum standards

• 27 days of leave in case of continuous employment of 12 months, which includes privilege leave of not less than 15 days and sick/casual leave of 12 days

• Get the terms signed by the individuals• Depending on your business model, non-compete and

non-solicitation clauses can be quite important• Employees to adhere to company policy which may

evolve over time• Try to clearly demarcate roles and responsibilities


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• The devil is in the details• Use simple, clear and short sentences but record the

commercial understanding threadbare• All amendments/deviations should be documented and

signed by all relevant parties

• Clauses to be wary of• Representations, warranties and indemnities• Exclusivity and non-compete• Always look to limit your liability

• It is all about what you will do, what the other party will do and what is the underlying consideration

Basics of legal drafting

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• Getting a contract signed• Board resolution authorizing the signatories• Stamp duty• Ensure all corporate details are accurate• Ensure that the contract has a start date• Witnesses not necessary but good to haves• Initial each page of all copies of the contract

Basics of legal drafting

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APPLICABILITY OF LABOUR LEGISLATIONS

S. No. Act/Legislation Applicability

1. Building and Other Construction Workers' (Regulation of Employment and Conditions of Service) Act, 1996

Every establishment which employs or had employed on any day of the preceding 12 months, 10 or more building workers in any building or other construction work

2. Contract Labour (Regulation and Abolition) Act, 1970

Every establishment or contractor wherein 20 or more workmen are or were employed on any day of the preceding 12 months as 'contract labour'

3. Employees' Provident Fund and Miscellaneous Provisions Act, 1952

Every establishment employing 20 or more employees engaged in various activities which includes establishments engaged in providing expert services such as supplying of personnel, etc.

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4. Employees' State Insurance Act, 1948

Establishments employing 20 or more persons and consists of:(a) all categories of employees including those

directly employed by the principal employer or an immediate employer;

(b) an employee whose services are temporarily lent or let on hire to the principal employer under a contract of service; and

(c) employees performing administrative duties

5. Factories Act, 1948 (a) Premises where manufacturing process is being carried with the aid of power and where 10 or more workers are working, or were working on any day of the preceding 12 months; or

(b) Premises where manufacturing process is being carried without the aid of power and where 20 or more workers are working, or were working on any day of the preceding 12 months

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6. Maternity Benefit Act, 1961

Every shop or establishment employing 10 or more persons on any day of the preceding 12 months

7. Minimum Wages Act, 1948

Every shop and commercial establishment.

8. Payment of Bonus Act, 1965

Every establishment employing 20 or more workmen on any day during an accounting year

9. Payment of Gratuity Act, 1972

Every establishment wherein 10 or more persons were employed on any day of the preceding 12 months

10. Payment of Wages Act, 1936

Every establishment to which the relevant shops and establishments act would be applicable

11. Shops and Establishments legislation (state specific)

Every shop and commercial establishment in the relevant state. A 'commercial establishment' means any premises wherein any trade, business or profession or any work in connection with or incidental or ancillary thereto is carried on

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12. Workmen's Compensation Act, 1923 (now known as Employee's Compensation Act, 1923)

Every employee including those employed through a contractor except casual employees

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To the extent possible, seek the help of professionals on legal and tax matters

Things can get nasty at times

Thank you!

Dhruv Paul | [email protected]

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BYOB - Dhruv Paul