Legal requirements

Legal requirements for setting up a business

1. Establishment of a new unit Legal requirements for establishing a new unit

2. Introduction Establishing a new business unit is a complex and risky task. Entrepreneurs have to fulfil various legal formalities for  establishment of a new unit. Hence, the entrepreneur needs to be aware of any regulation that may affect the establishment of his new unit. Legal formations may be necessary at different stages of the start up. These formalities differ in relation to the form of enterprise adopted by the entrepreneur, such as sole  proprietorship, partnership firm and company.  The legal requirements also differ in reference to the size of the business unit, such as small scale, medium scale, or large scale enterprise. Moreover, consumer product enterprise and industrial product enterprise may attract different legal formalities.

3. Make the idea official Once the entrepreneur has decided to start a business, he should be clear of all legal aspects of the business and to stay out of troubles. The following points make it workable: The form of the business: sole proprietorship, partnership, company. Name of the business Registration of the business Tax structure Permits and licenses Bank account Trademarks, copyrights and patents.

4. Forms of business organization Four types of business organization: Sole Proprietorship Partnership Company Limited Liability Partnership

5. Legal requirements – sole proprietorship A sole proprietor structure can be used by a service provider, a manufacturer, a trader or a merchant. There is no minimum capital investment requirement, and the proprietor has full control and ownership over his business. He has to open current account in a bank to receive payments in the name of the business. What documents are required for proof of existence of the firm?

6. Registration of Sole Proprietorship The sole proprietorship business can be established only through: Opening a bank account in the name of the firm Obtaining licenses for conducting the business

7. By Opening an Account The most important step in opening an account is the submission of correct documents. Thereupon, any of the two documents from the list below can be used for this purpose License or certificate from Municipal Officials under Shop and Establishment act Property Registration document Rent Agreement along with utility bill License from registering Authority License for the concerned individual from central or state government IEC Code Income Tax return of the proprietor (Complete) Utility Bills

8. By Issuing License  Depending on the type of business, the license issued for registration varies. Few of them are: PAN Card for the Proprietor- Obtaining a PAN card is an absolute necessity in the business sector. Because, it aids in attaining license and certificates, company registrations, and filing the tax return for Sole Proprietorship. Emphasize that, the PAN remains the same for business and proprietor. Thereby, this is the first step while establishing a Sole Proprietorship. GST Registration– For manufacturing and trading businesses in India with expected turnover over Rs 40 Lakhs and Rs 20 Lakhs for special category states should get GST registration done. Further, all the businesses related to goods and services must possess a GST registration. Thereby, to attaining GST is a good license while trying to start a Sole Proprietorship. Shop and Establishment Act license- this acts as a proof of existence. Additionally, most businesses dealing with shops and factories issue this license MSME registration- easily attainable in most of the states in our country if the firm is acceptable under the MSME sector. Obtain Udyog Adhaar  Certificate.

9. Legal requirements – partnership business Partnership firms governed by partnership deed are strong forms of business structure that enables accurate division of profit among the partners. Contrary to a sole proprietorship, this establishment is headed by a group of volunteered individuals supporting a common business agenda. Thereby, the agreed terms and profit beneficiary ratio minimizes the compliance as opposed to companies.

10. Salient Features of a Partnership Firm Formed on mutual agreement called Partnership Deed Righteous business activity Apt shares of profits and loss between partners Liability between partners Clear and collective management Clear transfer ability clauses Registration (optional) Specified duration

11. Name of the firm The name can be chosen by the partners keeping two points in mind Name must not be too familiar or identical to any firm that is in existence. The name should not contain words (king, emperor, crown) that require government’s sanction.

12. Partnership Agreement The agreement among the partners of the firm that encompass rights, responsibilities, profit shares, along with all the necessary obligatory clauses is the Partnership Deed. Emphasize that, a deed must be written and signed (opposed to agreeing orally) to avoid future conflict. 

13. General details and Specific information Though partnership deed contains information as shown in sample image (in previous slide), partners may also mention additional clauses, as mentioned below: Name, address, nature of business, date of establishment, capital invested (separately by each partner), profit or loss division ratio. Interest-based on the capital investment OD each partner Salaries including all financial drawing by the partners Rights, Duties, and obligations of every partner specified by name Alignments in case of mishaps such as defaults or death of a partner All the clauses mutually decided among the partners

14. Registration of the Partnership Firm The registration of the partners is optional, thereby dividing the firms into a registered firm and non- registered firm. Despite that, the firm abiding the Indian Partnership act, 1932 governs the associates of the firm. Even though, registration is not mandatory it is advisable because The firm will not have a legal stand against the third party in any case In the case of misconduct or disagreement, a file can not be registered against the partner. The liability of an unregistered firm is less

15. Documents Necessary for Registration Any firm is not legally perceptible unless it is registered. Hence, these following document: Application form for registration-  Form 1 Sample of Affidavit  Partnership deed copy Address proof (for the place of business) Partners documents-  PAN card  and Address proof of each individual Firm documents- PAN card (specially generated for the firm) Supporting Documents-  GST registration  and  Current account  details

16. Registration Procedure A very simple process is used to register the Partnership firm. That is Initially, issue the  application form  Fill the form with adequate data and subsequently sign (by all partners) Further, submit the form to Registrar of Firms of the state where the business is located Finally, payment of fee Additionally, submit necessary documents Following that, the official analyses the documents for accuracy. Subsequently, if the documents are factual, the officials issue a Certificate of Registration in the name of the Partnership firm.

17. LEGAL REQUIREMENTS – COMPANY Setting up a company involves the following stages: Promotion Incorporation Capital subscription Commencement

18. 1. Promotion It involves taking preliminary steps for formation of a company. It begin with the conception of an idea to form a company and its detailed investigation about testing the profitability of the idea. If the idea appears feasible, it involves assembly of resources, to launch the business enterprise. Process of Promotion is: Explore the business opportunities Assemble resources Provide finance

19. PROMOTOR Promotor is an individual, association, partnership or a company that carries out the process of promotion. The Securities Exchange Commission of USA defines promotor as a ”person who, acting alone or in conjunction with other persons directly or indirectly takes the initiative in founding or organizing the business enterprise.” According to Sec. 2(69) of the Companies Act 2013, Promotor means a person: who has been named as such in a prospectus or is identified by the company in the annual return referred to in section 92; or who has control over the affairs of the company, directly or indirectly whether as a shareholder, director or otherwise; or in accordance with whose advice, directions or instructions the Board of Directors of the company is accustomed to act: Provided  that nothing in sub-clause ( c ) shall apply to a person who is acting merely in a professional capacity

20. 2. registration Registration incorporates a company as an entity, separate and distinct from owners. It results in formation of legal body corporate. To form a company, promotors have to get together seven in case of a public limited company and two in case of a private company to act as signatories to memorandum of association. According to Sec 3 of the Companies Act 2013, a company may be formed for any lawful purpose by: Seven or more persons, where the company to be formed is to be a public company; Two or more persons, where the company to be formed is to be a private company; or One person, where the company is to be One Person Company that is to say, a private company. By subscribing their names or his name to memorandum of association and complying with the requirements of this Act in respect of registration.

21. Procedure for registration Promotors follow the following steps for registration of a company: 1. Application for Availability of Name of company As per section 4(4) a person may make an application, in such form and manner and accompanied by such fee, as may be prescribed, to the Registrar for the reservation of a name set out in the application as— (a) the name of the proposed company; or (b) the name to which the company proposes to change its name. According to section 4(2), the name stated in the memorandum of association shall not— be identical with or resemble too nearly to the name of an existing company registered under this Act or any previous company law; or be such that its use by the company— ( i ) will constitute an offence under any law for the time being in force; or (ii) is undesirable in the opinion of the Central Government.

22. 2. Preparation of Memorandum and Articles of Association Memorandum of Association The Memorandum of Association is the charter of a company. It is a document, which amongst other things, defines the area within which the company can operate. It contains the foundation of the company. It defines the name, object, capital , liability of members and the state where the registered office will be located. Articles of Association It contains the rules and regulations that govern the company’s internal operations. In case of the OPC, name of the persons who shall become members of the company, in event of death of the subscriber, shall be stated.

23. 3. Printing and Signing of M/A and A/A The memorandum and articles of association are printed and signed by the subscribers. They are also stamped as per provisions of the Stamp Act of the State where the company is proposed to be incorporated. The memorandum shall: be printed, Be divided into paragraphs numbered consecutively, and Be signed by each subscriber, in the presence of at least one witness who shall attest the signature and shall likewise add his address, description and occupation, if any.

24. 4. Filing of other documents According to Sec 7(1) of the Act, there shall be filled with the registrar within whose jurisdiction the registered office of a company is proposed to be situated, the following documents and information for registration, namely: MOA and AOA duly signed by all the subscribers A declaration in the prescribed form by an advocate, charted accountant, cost accountant who is engaged in formation of the company A declaration from each of the subscribers to the memorandum and from persons named as the first directors The address for correspondence till its registered office is established The particulars of name, including surname, residential address, nationality of each subscribers with proof of identity The particulars of persons mentioned in the articles as the first directors of the company, their names, address and such other particulars The particulars of the interests of the persons mentioned in the articles as the first directors of the company in other firms or bodies along with their consent to act as directors of the company.

25. 5. Grant of Certificate of registration If the registrar is satisfied with the respect to the documents filed, payment of registration and filing fee and conformity to other legal requirements, he will enter the name in the Register of Companies and issue a ‘Certificate of Incorporation’. With the date mentioned in the certificate the company will be incorporated as a body corporate and subscribers to the memorandum and other members carry out the function of an incorporated company.

26. Online registration of a New Company Under MCA -21 e- Governance programme, a company can apply for registration online. This acquires the following steps: Acquire Director Identification Number (DIN) Acquire Digital Signature Certificate (DSC) File an E-form or new user registration Incorporate the company Link: http://www.mca.gov.in/MinistryV2/incorporation_company.html

27. 3. CAPITAL SUBSCRIPTION Under this stage, capital is raised by the company. Private company having share capital is prohibited by its articles, to invite public to subscribe to its securities. Thus, it need not pass through capital subscription stage. It can offer securities privately to a selected group of people through ‘private placement.’ As per SEBI regulations , 2009, the following procedure is followed for raising capital: Directors file a copy of prospectus with the registrar. Prospectus is circulated in public to invite them to subscribe for share through company’s bankers. At least 90% subscription must be received within 30 days from the date of issue of prospectus so that Directors can proceed with allotment. Once the formal resolution of allotment is passed: Allotment letters are posted Return of allotment is filed with registrar Share certificates are issued in exchange of allotment letters. If minimum subscription is not received within 30 days from the date of issue of prospectus or such period as may be specified be SEBI, application money shall be refunded to the applicants within such time and manner as may be prescribed.

28. 4. Commencement of business Need to obtain certificate of commencement arises for both public and private companies, having share capital. Provisions of Section 10A explain the certificate of commencement. 1. Section 10(A)1: A company incorporated after the commencement of the companies second ordinance, 2019 and having a share capital shall not commencement any business or exercise any borrowing powers unless: A declaration is filed by a director within a period of 180 days of the date of incorporation of the company. The company has filed with the registrar a verification of its registered office as provided in Sec 12(2) in form no. INC – 22. 2. Section 10(A)3: where no declaration has been filed with the registrar under clause (a) of a sub-section (1) within a period of 180 days of the date on incorporation of the company and the registrar has reasonable cause to believe that the company is not carrying on any business or operations, he may initiate action for the removal of the name of the company from registrar of companies.

29. Legal requirements – limited liability partnership A limited liability partnership is incorporated as per the following procedure: User Registration The LLP must register itself on the website of Ministry of Corporate Affairs. It should fill in the registration form. Upload digital signature certificate On successful registration, system will give a message that LLP has been successfully registered. Digital Signature Certificate Partner/ Designated partner of LLP/ Proposed LLP, whose signatures are to be affixed on the e-forms has to obtain Digital Signature Certificate from any authorized certifying agency Obtaining DSC for all the designated partners proposed in LLP is necessary because all the documents are filed online and are required to be digitally signed.

30. 2. Obtain designated partners identification number (DPIN) All designated partners of the proposed LLP shall obtain “Designated Partner Identification Number” (DPIN)/ Director Identification Number (DIN). To obtain DPIN/DIN, it has to use the scanned copy of specified documents namely Aadhar and PAN. The form has to be signed by the full time director of the company.

31. 3. Reservation of Name Though e-forms are available on the LLP portal, it will open form – 1 for reservation of name and fill in the details. It will select name of the proposed LLP. Any partner or designated partner in the proposed LLP may submit Form – 1. it has to append digital signatures and submit e-form. It has to pay the necessary fee by credit card. The system will provide the list of similar/closely resembling names of existing companies/LLPs based on the search criteria filled up. Details of minimum two designated partners of the proposed LLP are required to be filled in the application for the reservation of the name. The registrar will approve the name only if the name is not undesirable or does not resemble the name of any existing partnership, LLP or a trademark.

32. 4. Incorporation of LLP If the name applied for is approved, then this approved and reserved name shall be filled as the proposed name for LLP. Once the name is approved and reserved by the Registrar, it will log on to the portal and fill up the form – 2, “Incorporation Document and Statement” Pay the prescribed registration fee as per Annexure A of the LLP Rules 2009. Statement in the e-form is to be digitally signed by a person named in the incorporation document and also by the advocate/CS/CA in practice. On submission of complete documents, if the registrar is satisfied about compliance with relevant provisions, he will register the LLP, maximum within 14 days. He will issue a certificate of incorporation in form – 16.

33. 5. Filling of LLP Agreement (Form - 3) and Partners Details (Form – 4) LLP agreement governs the mutual rights and duties amongst the partners. LLP agreement must be filed online in form – 3 on MCA Portal along with form – 4. Form – 3 relates to information with regard to LLP agreement and changes, if any made therein. There must be filed with the prescribed fee simultaneously at the time of filing form – 2 or within 30 days of the date of incorporation or within 30 days of such subsequent changes. LINK: http://www.mca.gov.in/MinistryV2/incorporation.html